<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from _______________ TO _______________.
333-44747
-------------------------
(Commission File Numbers)
ROSEDALE DECORATIVE PRODUCTS LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ontario, Canada 5110
- ------------------------------- ----------------------------
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
731 Millway Avenue
Concord, Ontario
Canada L4K 3S8
----------------------------------------
(Address of principal executive offices)
(619) 794-2602
----------------------------------------------------
(Registrants' telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES [ ] NO [ X ]
As of August 14, 1998, 2,765,000 shares of Common Stock, par value $.01
per share, of Rosedale Decorative Products Ltd. were issued and outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
TABLE OF CONTENTS
Interim Balance Sheet as of June 30, 1998 and December 31, 1997 2 - 3
Interim Statement of Income for the three months ended June 30, 1998 4
Interim Statement of Income for the six months ended June 30, 1998 5
Interim Statement of Cash Flows for the period ended June 30, 1998 6 - 7
Interim Statement of Stockholders' Equity for the period ended
June 30, 1998 8
Notes to Interim Financial Statements 9 - 24
2
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Balance Sheet
As of June 30, 1998 and December 31, 1997
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash 4,806,036 442,655
Accounts receivable (note 2) 5,226,585 4,683,912
Inventory (note 3) 6,879,294 7,193,831
Prepaid expenses and sundry assets 312,752 180,096
---------- ----------
17,224,668 12,500,494
LOANS RECEIVABLE FROM AFFILIATED COMPANIES (note 4) 2,019 36,884
DEFERRED PRODUCT COSTS (note 5) 199,922 641,028
DEFERRED POLICY COSTS (note 6) 178,226 182,873
MORTGAGES RECEIVABLE (note 7) 336,203 402,684
PROPERTY, PLANT AND EQUIPMENT (note 8) 2,168,602 1,930,869
---------- ----------
20,109,640 15,694,832
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Balance Sheet
As of June 30, 1998 and December 31, 1997
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 9) 3,388,338 3,970,943
Accounts payable and accrued expenses
(note 10) 6,512,540 6,741,431
Income taxes payable 629,410 172,538
Current portion of long-term debt (note 11) 80,521 82,616
---------- ----------
10,610,809 10,967,528
LONG-TERM DEBT (note 11) 931,383 996,981
LOANS PAYABLE TO STOCKHOLDERS 694,315 238,945
ADVANCES FROM DIRECTORS (note 13) 858,784 1,539,791
DEFERRED INCOME TAXES 185,720 190,564
---------- ----------
13,112,851 13,933,809
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 14) 4,306,778 163
CUMULATIVE TRANSLATION ADJUSTMENT (211,047) (175,205)
RETAINED EARNINGS 2,732,898 1,936,065
---------- ----------
6,828,629 1,761,023
---------- ----------
20,109,640 15,694,832
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Combined Statement of Income
For the three-months ended June 30,
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three-months Three-months
June 30, June 30,
1998 1997
$ $
<S> <C> <C>
SALES 4,244,876 6,033,457
COST OF SALES 2,224,517 4,038,647
--------- ---------
GROSS PROFIT 2,020,359 1,994,810
--------- ---------
OPERATING EXPENSES
General and administrative 526,546 632,732
Selling 532,732 629,043
Design studio 190,335 128,606
Book development costs 30,370 102,993
Amortization 150,770 183,188
--------- ---------
TOTAL OPERATING EXPENSES 1,430,753 1,676,562
--------- ---------
OPERATING INCOME 589,606 318,249
Interest expense 137,384 79,752
--------- ---------
INCOME BEFORE INCOME TAXES 452,223 238,497
Income taxes (note 15) 184,539 103,422
--------- ---------
NET INCOME 267,683 135,074
--------- ---------
--------- ---------
Pro Forma Earnings Per Share (note 14) 0.10 0.05
--------- ---------
--------- ---------
Fully Diluted Earnings per Share 0.07 0.04
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Combined Statement of Income
For the six-months ended June 30,
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six-months Six-months
June 30, June 30,
1998 1997
$ $
<S> <C> <C>
SALES 10,751,465 10,958,637
COST OF SALES 6,302,625 6,959,616
---------- ----------
GROSS PROFIT 4,448,840 3,999,021
---------- ----------
OPERATING EXPENSES
General and administrative 1,096,921 1,010,659
Selling 1,042,976 1,129,125
Design studio 364,195 397,122
Book development costs 81,262 205,407
Amortization 308,562 365,346
---------- ----------
TOTAL OPERATING EXPENSES 2,893,915 3,107,660
---------- ----------
OPERATING INCOME 1,554,925 891,361
Interest expense 220,553 134,708
---------- ----------
INCOME BEFORE INCOME TAXES 1,334,373 756,653
Income taxes (note 15) 537,539 302,064
---------- ----------
NET INCOME 796,833 454,589
---------- ----------
---------- ----------
Pro Forma Earnings Per Share (note 14) 0.31 0.17
---------- ----------
---------- ----------
Fully Diluted Earnings per Share 0.22 0.12
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Statements of Cash Flows
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six-months Six-months
June 30 June 30,
1998 1997
$ $
<S> <C> <C>
Cash flows from operating activities:
Net income 796,833 454,589
--------- -------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 308,562 365,346
(Increase) decrease in deferred product costs 441,106 (207,901)
(Increase) decrease in accounts receivable (542,672) (1,082,088)
(Increase) decrease in inventory 314,537 170,698
(Increase) decrease in prepaid expenses and sundry assets (132,655) 37,804
Increase (decrease) in accounts payable and accrued expenses (228,891) 232,360
Increase (decrease) in income taxes payable 456,872 105,733
Increase (decrease) in deferred income taxes (4,843) 113,518
--------- -------
Total adjustments 612,016 (264,530)
--------- -------
Net cash provided by (used in) operating activities 1,408,849 190,059
--------- -------
Cash flows from investing activities:
(Increase) decrease in deferred policy costs 4,647 907
Purchases of property, plant and equipment (546,296) (313,420)
(Increase) decrease in mortgages receivable 66,481 (381,368)
--------- -------
Net cash used in investing activities (475,168) (693,881)
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Statements of Cash Flows
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six-months Six-months
June 30, June 30,
1998 1997
$ $
<S> <C> <C>
Cash flows from financing activities:
Proceeds from share capital 4,306,615 0
Proceeds from (repayment of) bank indebtedness (582,605) (43,561)
(Repayment of) proceeds from loans with affiliated companies 34,865 2,356
Proceeds from (repayment of) long-term debt (67,693) (82,838)
Proceeds from (repayment of) stockholders' loans 455,370 (1,809)
Proceeds from (repayment of) loans with directors (681,008) 164,763
--------- ---------
Net cash provided by financing activities 3,465,544 38,911
--------- ---------
Effect of foreign currency exchange rate changes (35,844) 128,173
--------- ---------
Net (decrease) increase in cash and cash equivalents 4,363,381 (336,738)
Cash and cash equivalents, January 1 442,655 1,079,823
--------- ---------
End of six month period ended June 30 4,806,036 743,085
--------- ---------
--------- ---------
Income taxes paid 38,428 196,331
--------- ---------
--------- ---------
Interest paid 163,311 134,708
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Statements of Stockholders' Equity
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Common
Class A Stock Cumulative
Number of Number of Retained Translation
Shares Shares Amount Earnings Adjustments
---------- ---------- ---------- ----------- -----------
$ $ $
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 20 220 163 1,136,237 (106,297)
Foreign currency translation -- -- -- --
128,173
Net income for the six-month period to
June 30, 1997 -- -- -- 454,589 --
---------- ---------- ---------- ---------- -----------
Balance as of June 30, 1997 20 220 163 1,590,826 21,876
Balance as of December 31, 1997 20 220 163 1,936,065 (175,203)
Capital stock redeemed (20) (220)
Capital stock issued 0 2,600,000 4,306,615
Foreign currency translation -- -- -- -- (-35,844)
Net income for the three-month period to
June 30, 1998 -- -- -- 796,833 --
---------- ---------- ---------- ---------- -----------
Balance as of June 30, 1998 0 2,600,000 4,306,778 2,732,898 (211,047)
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
These financial statements combine the accounts of the following
companies as at the respective interim fiscal periods:
Ontario Paint & Wallpaper Limited June 30, 1998 and 1997
Rosedale Wallcoverings and Fabrics Inc. June 30, 1998 and 1997
All material inter-company accounts and transactions have been
eliminated. (see note 14)
b) Principal Activities
The companies, Ontario Paint and Wallpaper Limited and Rosedale
Wallcoverings and Fabrics Inc. were incorporated in Canada on
December 3, 1971 and April 7, 1981 respectively. The companies are
principally engaged in the designing, manufacturing and marketing of
wallpapers and decorative fabrics in Canada, U.S. and Europe.
c) Deferred Product costs
Expenditures relating to the design and distribution of wallpaper
and fabric sample books consisting book development and design costs
relating to collections that have not been launched are deferred and
amortized over a three-year period on a straight-line basis.
Proceeds from the sale of sample books are offset against the book
development costs when received.
d) Cash and Cash Equivalents (Bank Indebtedness)
Cash and cash equivalents (bank indebtedness) includes cash on hand,
amounts due from and to banks, and any other highly liquid
investments purchased with a maturity of three months or less. The
carrying amounts approximate fair values because of the short
maturity of those instruments.
e) Other Current Financial Instruments
The carrying amount of the companies' accounts receivable and
payable approximates fair value because of the short maturity of
these instruments.
10
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
f) Long-term Financial Instruments
The fair value of each of the companies' long-term financial assets
and debt instruments is based on the amount of future cash flows
associated with each instrument discounted using an estimate of what
the companies' current borrowing rate for similar instruments of
comparable maturity would be.
g) Inventory
Inventory is valued at the lower of cost and fair market value. Cost
is determined on the first-in, first-out basis.
h) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are amortized
on the basis of their estimated useful lives at the undernoted rates
and methods:
<TABLE>
<S> <C> <C>
Leasehold improvements 10% Straight-line
Cylinders and related design costs 5 years Straight-line
Equipment furniture and fixtures 20% Declining balance
Computer equipment 30% and 20% Declining balance
Automobile 30% Declining balance
</TABLE>
Amortization for assets acquired during the year is recorded at
one-half of the indicated rates, which approximate when they were
put into use.
i) Income taxes
The companies account for income tax under the provisions of
Statement of Financial Accounting Standards No. 109, which requires
recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes are
provided using the liability method. Under the liability method,
deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets
and liabilities.
11
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
j) Foreign Currency Translation
The companies maintain their books and records in Canadian dollars.
Foreign currency transactions are translated using the temporal
method. Under this method, all monetary items are translated into
Canadian funds at the rate of exchange prevailing at balance sheet
date. Non-monetary items are translated at historical rates. Income
and expenses are translated at the rate in effect on the transaction
dates. Transaction gains and losses are included in the
determination of earnings for the year.
The translation of the financial statements from Canadian dollars
("CDN $") into United States dollars is performed for the
convenience of the reader. Balance sheet accounts are translated
using closing exchange rates in effect at the balance sheet date and
income and expense accounts are translated using an average exchange
rate prevailing during each reporting period. No representation is
made that the Canadian dollar amounts could have been, or could be,
converted into United Sates dollars at the rates on the respective
dates and or at any other certain rates. Adjustments resulting from
the translation are included in the cumulative translation
adjustments in stockholders' equity.
k) Sales
Sales represent the invoiced value of goods supplied to customers.
Sales are recognized upon the passage of title to the customers.
l) Net Income Per Weighted Average Common Stock
Net income per common stock is computed by dividing net income for
the year by the weighted average number of common stock outstanding
as presented on a pro-forma basis as explained in note 14 (d).
m) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts of
assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
n) Accounting Changes
On January 1, 1997, the companies adopted the provisions of SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 121 requires that
long-lived assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS No. 121
is effective for financial statements for fiscal years beginning
after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the companies' result of operations.
12
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
n) Accounting Changes (cont'd)
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduced the use of a fair
value-based method of accounting for stock-based compensation. It
encourages, but does not require, companies to recognize
compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to
adopt the new rules will continue to apply the existing accounting
rules contained in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. However, SFAS No. 123
requires companies that choose not to adopt the new fair value
accounting rules to disclose pro forma net income and earnings per
share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995. The
companies have adopted the disclosure provisions of SFAS No. 123.
2. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Accounts receivable 5,328,734 4,788,725
Less: Allowance for doubtful accounts 102,149 104,813
--------- ---------
Accounts receivable, net 5,226,585 4,683,912
--------- ---------
--------- ---------
</TABLE>
3. INVENTORY
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Inventory comprised the following:
Raw materials 99,138 41,678
Finished goods 6,780,156 7,152,153
--------- ---------
6,879,294 7,193,831
--------- ---------
--------- ---------
</TABLE>
13
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
4. LOANS RECEIVABLE FROM AFFILIATED COMPANIES
The loans receivable from affiliated companies which are related
through common ownership bear interest at prime plus 1.5%, have no
specific repayment terms, and are not expected to be repaid prior to
July 1, 1999.
5. DEFERRED PRODUCT COSTS
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Book development costs 841,991 848,996
Deferred software costs 60,858 62,915
-------- -------
Cost 902,849 911,911
-------- -------
Less: Accumulated amortization
Book development costs 685,918 208,299
Deferred software costs 17,009 12,584
-------- -------
702,927 270,883
-------- -------
Net Deferred Product Costs 199,922 641,028
-------- -------
-------- -------
</TABLE>
6. DEFERRED POLICY COSTS
Deferred policy costs represents the prepaid portion of premiums on
the life insurance policies referred to in note 20.
14
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
7. MORTGAGES RECEIVABLE
Second mortgages from companies related through common ownership,
secured by land and buildings, bear interest at 9% and are payable
on demand. No repayments are expected prior to July 1, 1999.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
1216748 Ontario Inc. 176,299 209,073
1217576 Ontario Inc. 159,904 193,611
------- -------
336,203 402,684
------- -------
------- -------
</TABLE>
The fair value of the mortgages receivable is estimated to be
$360,000.
8. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Leasehold improvements 30,535 31,331
Automobile 19,547 20,057
Equipment and furniture 296,153 255,335
Furniture and fixtures 249,362 301,585
Computer and equipment 342,942 335,796
Cylinders and related design costs 3,469,770 3,057,727
--------- ---------
Cost 4,408,309 4,001,831
--------- ---------
Less: Accumulated amortization
Leasehold improvements 11,716 10,448
Automobile 16,598 16,485
Equipment and furniture 202,668 184,572
Furniture and fixtures 186,694 196,837
Computer and equipment 238,756 228,903
Cylinders and related design costs 1,583,275 1,433,717
--------- ---------
2,239,707 2,070,962
--------- ---------
Net Assets 2,168,602 1,930,869
--------- ---------
--------- ---------
</TABLE>
15
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
9. BANK INDEBTEDNESS
The companies have available credit facilities up to a maximum of
$5,700,000 ($7,910,000 Canadian), which bear interest at rates
varying between the bank's prime rate and prime plus 1.5%. The
indebtedness is secured by general assignments of book debts, pledge
of inventory under Section 427 of the Bank Act of Canada, general
security agreements providing a first floating charge over all
assets, guarantees and postponement of claims to a maximum of
$722,000 each from two officers, guarantees and postponement of
claims to a maximum of $1,450,000 from the companies, guarantees
from affiliated companies up to $595,000, assignment of life
insurance of $1,450,000 on the lives of two key officers and
assignment of fire insurance.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Accounts payable and accrued expenses is comprised of the following:
Trade payables 5,523,407 6,358,585
Accrued expenses 989,133 38,846
--------- ---------
6,512,540 6,741,431
--------- ---------
--------- ---------
11. LONG-TERM DEBT
1998 1997
$ $
a) Settlement Payable
Settlement of a claim initiated by a third party payable $7,242
monthly. The fair value of the settlement payable is
estimated to be $120,000 120,774 165,231
--------- ---------
</TABLE>
16
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
11. LONG-TERM DEBT (cont'd)
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Balance forward 120,774 165,231
b) Insurance Loan
Amount in excess of cash surrender values of life insurance
policies (note 20) which is payable on demand but is
expected to become due for payment in the year 2004
The loan bears interest at prime plus 1.5% and is secured
by letters of guarantee from a major Canadian Chartered
Bank and a second collateral mortgage on the assets of the
companies 891,130 914,366
--------- ---------
1,011,904 1,079,597
Less: Current portion (80,521) (82,616)
--------- ---------
Long-term portion 931,383 996,981
--------- ---------
--------- ---------
</TABLE>
12. LOANS PAYABLE TO STOCKHOLDERS
Stockholder's advances are secured by general security
agreements, bears interest at prime plus 1.5%, have no specific
repayment terms, and the stockholders are not expected to demand
repayment prior to July 1, 1999.
13. ADVANCES FROM DIRECTORS
Advances from directors are secured by general security agreements,
bears interest at prime plus 1.5%, have no specific repayment terms,
and the directors are not expected to demand repayment prior to July
1, 1999.
17
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
14. CAPITAL STOCK
a) Ontario Paint & Wallpaper Limited
Authorized
500,020 Class A Preference shares, 8% non-cumulative,
non-voting, redeemable at $12,500 per share
25,000 Class B Preference shares, 8% non-cumulative,
non-voting, redeemable at paid up amount
249,980 Common shares
Issued
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C> <C>
20 Class A Preference shares 0 1
20 Common shares 0 2
----- -----
0 3
----- -----
----- -----
</TABLE>
b) Rosedale Wallcoverings and Fabrics Inc.
Authorized
3,600 Preference shares, 9% non-cumulative, non-voting,
redeemable at the amount paid up plus a premium of 10%
4,000 Common shares
Issued
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
200 Common shares 0 160
----- -----
----- -----
</TABLE>
18
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
14. CAPITAL STOCK (cont'd)
c) Rosedale Decorative Products Ltd.
Authorized
Unlimited number of common shares
Issued
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
2,600,000 Common Shares 4,306,778 0
---------- ------
---------- ------
</TABLE>
d) Issued -- Combined
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
20 Class A Preference shares 0 1
220 Common Shares 0 162
2,600,000 Common Shares 4,306,778 0
--------- ------
4,306,778 163
--------- ------
--------- ------
</TABLE>
d) Weighted Average Number of Common Shares
On May 14, 1997, a newly incorporated holding company, Rosedale
Decorative Products Ltd. (the "Registrant"), was formed by the
shareholders of the companies for the purpose of consolidating and
reorganizing their 100% ownership interests in anticipation of an
initial public offering. This reorganization will be carried out
using the pooling of interests method.
For the purpose of determining earnings per share, the weighted
average number of common shares has been presented on a pro-forma
basis, on the assumption that the reorganisation was completed as at
June 30, 1998.
This reorganization will result in the transfer of all the
outstanding common shares of the parent companies of Ontario and
Rosedale currently held by the Fine and Ackerman families to the
Registrant in exchange for 1,500,000 common shares of the
Registrant.
On June 18, 1998, the company issued 1,100,000 common shares to the
public.
Accordingly, the earnings per share data are presented herein on a
pro-forma basis assuming that the weighted average number of shares
issued is 2,600,000.
Subsequent to June 30, 1998, the Company issued 165,000 common
shares to the public.
19
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
15. INCOME TAXES
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
a) Current 629,410 113,995
Deferred 185,720 168,015
-------- --------
815,130 282,010
-------- --------
-------- --------
</TABLE>
b) Deferred income taxes represented the tax charges derived from
temporary differences between amortization of property, plant
and equipment and amounts deducted from taxable income.
c) Rosedale has operating losses of approximately $770,000 which is
expected to he used to reduce future taxable income. The
potential tax benefit relating to the losses have been
recognized in the accounts to the extent that they reduce
deferred taxes. The deductibility of these losses if available
expires as follows:
<TABLE>
<S> <C>
2001 $ 432,000
2002 312,000
2004 26,000
----------------
$ 770,000
----------------
----------------
</TABLE>
Rosedale has been reassessed by Revenue Canada and the Province
of Ontario for fiscal year ended December 31, 1993 and December 31,
1994 in the amount of approximately $690,000 [see note 18 (b)].
Should the assessments be upheld, the benefits of these losses may
not be realized.
20
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
16. RELATED PARTY TRANSACTIONS
Amounts due from or paid to companies which are related through
common ownership.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Loan -- 966578 Ontario Inc. 0 10,345
Loan -- 976168 Ontario Inc. 2,019 4,467
Mortgage receivable -- 1216748 Ontario Inc. 176,299 192,640
Mortgage receivable -- 1217576 Ontario Inc. 159,904 178,544
Rent paid -- 966578 Ontario Inc. 8,176 17,648
</TABLE>
17. SEGMENTED INFORMATION
Rosedale is engaged primarily in the design, manufacturing,
marketing, and distribution and Ontario is engaged primarily in the
marketing and distribution of wallpaper and designer fabrics.
a) The breakdown of sales by geographic area is as follows:
<TABLE>
<CAPTION>
Period ended June 30, 1998 three months six months
-------------------------- ----------- -----------
<S> <C> <C>
United States of America $ 2,023,082 $ 5,415,204
Canada 2,142,566 4,518,270
Other 79,228 817,991
----------- -----------
$ 4,244,876 $10,751,465
----------- -----------
----------- -----------
Period ended June 30, 1997
--------------------------
United States of America $ 2,993,595 $ 5,398,990
Canada 2,792,588 4,592,845
Other 247,274 966,802
----------- -----------
$ 6,033,457 $10,958,637
----------- -----------
----------- -----------
</TABLE>
21
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
17. SEGMENTED INFORMATION (cont'd)
a) The companies' accounting records do not readily provide
information on net income by geographic area. Management is of
the opinion that the proportion of net income based principally
on sales, presented below, would fairly present the results of
operations by geographic area.
<TABLE>
<CAPTION>
Period ended June 30, 1998 three months six months
-------------------------- ------------ ---------
<S> <C> <C>
United States of America $ 125,739 $ 401,604
Canada 141,465 334,670
Other 479 60,559
--------- ---------
$ 267,683 $ 796,833
--------- ---------
--------- ---------
Period ended June 30, 1997
--------------------------
United States of America $ 68,025 $ 224,072
Canada 73,730 190,519
Other (6,681) 39,998
--------- ---------
$ 135,074 $ 454,509
--------- ---------
--------- ---------
</TABLE>
b) The breakdown of identifiable assets by geographic area is as
follows:
<TABLE>
<CAPTION>
Period ended June 30, 1998
--------------------------
<S> <C>
United States of America $ 1,425,695
Canada 17,046,943
Other 1,637,002
-----------
$20,109,640
-----------
-----------
Period ended June 30, 1997
United States of America $ 1,149,550
Canada 13,133,391
Other 1,411,891
-----------
$15,694,832
-----------
-----------
</TABLE>
22
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
17. SEGMENTED INFORMATION (cont'd)
c) Sales to major customers are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales $2,517,971 $1,707,766
---------- ----------
% of total sales 23% 16%
---------- ----------
Amounts included in accounts receivable $1,194,710 $ 470,373
---------- ----------
d) Purchases from major suppliers are as follows:
1998 1997
Purchases $2,940,735 $3,705,657
---------- ----------
% of total purchases 33% 55%
---------- ----------
Amounts included in accounts payable $2,419,155 $1,622,003
---------- ----------
</TABLE>
18. CONTINGENCIES
a) The company is contingently liable under contested lawsuits
amounting to approximately $31,000. Management is of the opinion
that the company's defence is meritorious and the lawsuit will
result in no material loss. Accordingly, no provision is
included in the accounts for possible related losses. Should any
expenditures be incurred by the company for resolution of these
lawsuits, it will be charged to the operations of the year in
which such expenditures are incurred.
b) Rosedale has been re-assessed by Revenue Canada and the Province
of Ontario for fiscal years ended December 31, 1993 and
December 31, 1994 for additional taxes estimated to be $690,000.
The company has objected to these reassessments and has no
obligation to pay the portion relating to Revenue Canada in the
amount of $450,000 until the objections have been processed. No
provision has been made in the accounts for the additional
taxes.
23
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
19. COMMITMENTS
Minimum payments under operating leases for premises amount to
approximately $321,000 per annum, exclusive of insurance and other
occupancy charges. The leases expire on October 31, 2004. The future
minimum lease payments over the next four years are as follows:
<TABLE>
Payable during the following periods:
<S> <C>
Within one year $ 321,018
Over one year but not exceeding two years 321,018
Over two years but not exceeding three years 321,018
Over three years but not exceeding four years 321,018
Over four years but not exceeding five years 321,018
Thereafter 427,910
----------
$2,033,000
----------
----------
</TABLE>
20. LIFE INSURANCE POLICIES
The companies are the beneficiaries of life insurance policies with
The Prudential of America Life Insurance Company (Canada) ("PruCan")
taken out on the lives of two of the officers and one shareholder
for a total insured value of $22 million. In consideration for this
benefit, the companies agreed to fund the premiums payable on the
policies. Funding is being provided by advances from the Laurentian
Bank of Canada ("Laurentian").
The Laurentian has a legal right of set-off of the cash surrender
values of the life insurance policies against the debt owing to it
by the companies. Accordingly the related assets and liabilities
have been offset in the financial statements.
24
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
20. LIFE INSURANCE POLICIES (cont'd)
The amounts offset were as follows:
<TABLE>
<S> <C>
Cash surrender value of life insurance policies $ 2,030,532
Advances $(2,030,532)
</TABLE>
The amount in excess of the cash surrender value of the life
insurance policies is included in long-term debt (see note 11).
The advances from Laurentian are payable on demand but are expected
to become due for payment in the year 2004. The companies are liable
for the interest on the advances. Security is provided by first
charges on the insurance policies, letters of credit from a major
Canadian chartered bank and general security agreements creating a
second charge over all corporate assets.
21. FOREIGN EXCHANGE CONTRACTS
As at June 30, 1998, the Company had outstanding foreign exchange
contracts to sell U.S. dollars to the National Bank of Canada to
hedge against fluctuations in foreign currency. The purpose of the
Company's foreign exchange hedging activities is to protect the
Company from the risk that the eventual dollar net cash inflows
resulting from the sale and purchase of products in foreign
currencies will not be adversely affected by changes in exchange
rates. It is the Company's policy to use derivative financial
instruments to reduce foreign risks. Fluctuations in the value of
these hedging instruments are offset by fluctuations in the value of
the underlying exposures being hedged. As the contracts are settled,
the related gains or losses, if any, will be reported in the
statements of financial position and income. Since these contracts
are expected to settle in the time period from April 1, 1998 through
December 31, 1998, there is no impact on the financial statements
for the period ended June 30, 1998. There is a potential risk of
non-performance by the National Bank of Canada, the financial
institution that the Company has the Foreign Forward Exchange
Contracts with. However, given the National Bank's prominence and
financial condition, the Company believes that this risk is
insignificant. The cash requirements arise as the contracts are
exercised to the value of $17,985,000 (in varying amounts from July
1998 through December 1999). The following table presents the
aggregate notional principal amounts, carrying values and fair
values of the Company's foreign exchange contracts outstanding at
June 30, 1998. Deferred gains and losses on forward exchange
contracts are recognized in earnings when the future purchases and
sales being hedged are recognized. The Company does not hold or
issue financial instruments for trading purposes. The estimated fair
values of the derivatives used to hedge the Company's risks will
fluctuate over time.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
---------------------- --------------------
Forward Notional Forward Notional
Exchange Principal Carrying Fair Exchange Principal Carrying
Contracts Amounts Value Values Contracts Amounts Values
--------- ---------- --------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1998 $8,235,000 -- ($ 413,439) -- -- --
1998 $9,750,000 -- ($ 196,710) -- -- --
</TABLE>
25
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Results of Operation
Six months ended June 30, 1998 compared to six months ended June 30, 1997.
Revenues for the six months ended June 30, 1998 were $10,751,465, a
1.9% reduction over prior year revenues of $10,958,637. This decrease was due
to the weakening of the Canadian dollar versus the U.S. dollar. Using a
consistent exchange rate, revenues increased by 4.3%. This increase can be
attributed to greater acceptance of product lines in the market, increased
market share from retail chains, and increased residential real estate sales
coupled with the improving economic climate in North America.
Gross profit for the Company for the six months ended June 30, 1998 was
41.4% of sales, an increase as compared to the same period one-year ago,
which was 36.5%. This increase in gross profit margin can be attributed to a
change in sales mix due to a decrease in sales to the export market and the
strengthening of the U.S. dollar, from which 50% of the Company's sales are
derived. As the majority of the Company's purchases are made in Canadian
dollars, a stronger U.S. dollar will help the Company's gross margin, whereas
a strong U.S. dollar has a negative impact on the conversion of the Canadian
sales for the financial statements.
Selling expenses for the Company decreased by 7.63% to $1,042,976 for
the six- month period ended June 30, 1998 as compared to $1,129,125 for the
six-month period ended June 30, 1997. This decrease is attributable to a
decrease in sales, travel and promotion expense.
General and administrative expenses for the Company increased by 8.54%,
to $1,042,976, for the six- months period ended June 30, 1998 from $1,010,659
for the six-months ended June 30, 1997. In 1997, the Company recorded a bad
debt recovery in the amount of $53,912. In the first six months of 1998,
government employee benefits increased by 21% over last year as the method of
calculation was changed. A portion of this increase however will be recovered
later in the year.
The Company develops wallpaper and fabric sample books, which are
created for each collection and sold through distributors. The majority of
expenditures for the creation of sample books are incurred in the quarter
before the introduction of a collection. Some expenditures are incurred as
early as six to eight months in advance. Revenues generated from the sales of
sample books are netted from the costs incurred in the same period and the
net amount is shown on the income statement. Because expenditures are made in
the quarter before the launch of a collection, there is not always a matching
of revenues and expenses e.g. costs for a January launch would be recorded in
the following year. The Company ensures that there are firm orders in place
from customers before significant expenditures are incurred to produce the
sample books. Therefore, there is little speculative risk in their
production. Book development cost for the six-month period ended June 30,
1998 was $81,262 compared to $205,407 for the same period last year.
26
<PAGE>
Design studio expenses for the Company decreased by 8.29%, to $364,195,
for the six-months ended June 30, 1998 versus $397,122 for the same period
last year. This reduction is attributable to lower staff requirements as a
result of the implementation of computer-aided design ("CAD") design computer
systems for the studio.
Operating income for the six-months ended June 30, 1998 increased
74.44%, to $1,554,925, from $891,361 for the six-months ended June 30, 1997.
This relates to the increase in gross margins and a conscious effort to
control expenses.
Interest expense for the Company for the six-months ended June 30, 1998
increased 63.73%, to $220,553, from $134,708 for the six-months ended June
30, 1997. This increase in interest expense is attributable to higher
interest rates and increased borrowing.
Net income for the six-months ended June 30, 1998 increased 75.29% over
the same period ended June 30, 1997. The improvement is attributable to a
better mix of sales, better gross margins and a tighter control of costs.
Earnings per share for the six months ended June 30, 1998 were $0.31
compared to $0.17 for the same period last year. Earnings per share were
calculated for both periods based on 2,600,000 common shares issued as of
June 30, 1998.
Fully diluted earnings per share were $0.22 for the six months ended
June 30, 1998 compared to $0.12 for the comparative period last year. Fully
diluted earnings per share were calculated based on a total of 3,700,000
common shares which includes 1,100,000 warrants.
Subsequent to June 30, 1998, the Company issued an additional 165,000
common shares and 165,000 warrants to the public.
Three months ended June 30, 1998 compared to three months ended
June 30, 1997.
Revenues for the three months ended June 30, 1998 were $4,244,876, a
29.6% reduction as compared to the same period last year. Export sales
weakened in the second quarter to create part of the shortfall and the
production delay in the launch of a new collection also contributed to the
decline.
Gross Profit for the three months ended June 30, 1998 was $2,202,359, a
1.3% increase over the comparative previous period. This relates to the
strengthening of the U.S. dollar which accounted for 50% of the Company's
sales. Gross Profit increased as the majority of the Company's product costs
are in Canadian dollars.
Selling expenses for the three months ended June 30, 1998 decreased by
15% to $532,732. A reduction in commissions due to the decrease in sales and
savings on sales promotions and travel account for the majority of these
savings.
General and administrative expenses decreased by 15% for the three
month period ended June 30, 1998, as a result of a reduction in professional
and computer consulting fees.
27
<PAGE>
Book development costs decreased by $72,623, to $30,370, for the three
month period ended June 30, 1998. Recovery on converted books has been higher
this year due to the increase in the U.S. dollar which has reduced on subsidy.
Design studio expenses for the second quarter increased by 48% due to
increased travel to offshore suppliers for purposes of implementing new
collections for the third and fourth quarter.
Net Income for the three months ended June 30, 1998 increased 98% over the
same period last year. This can be attributed to better gross margins and
tighter cost controls on expenses.
Earnings per share for the three months ended June 30, 1998 were $0.10
compared to $0.05 for the previous year, which is a 100% increase. A total of
2,600,000 common shares were used to make these calculations. Diluted Earnings
per share for the second quarter of 1998 was $0.07 with the second quarter 1997
being $0.04.
Liquidity and Capital Resources
The Company had a positive net change in cash of $1,408,849 for the six
months ended June 30, 1998. The principal sources of cost were Net Income of
$796,833, a decrease in Inventories and Deferred Products Costs and an increase
in Income Taxes Payable. These items were offset by cash used to reduce Accounts
Payable and an increase in Accounts Receivable at the end of the period. This is
a substantial improvement over the same period in 1997 where $190,059 was
generated from Operating Profits offset by a sizeable increase in Accounts
Receivable.
Cash flows used in investing activities for the six months ending June 30, 1998
were $475,168. This reflected planned capital addition for cylinders, designs
and engravings for new collections. In June 1998, the Company received net
proceeds from its initial public offering in the amount of $4,306,615. The
Company believes that the proceeds of the offering, coupled with the income from
operations, will fulfill the Company's working capital needs for at least the
next eighteen months. It is the Company's intention to utilize a good portion of
these funds to develop new product lines of wallpaper and fabric, and to
continue the development of lines of floor coverings and ceiling tiles.
Other Information
In June 1998, the Company completed an initial public offering of its
common stock and common stock purchase warrants pursuant to a registration
statement declared effective by the commission on June 18, 1998.
The following are the Company's expenses incurred in connection with the
issuance and distribution of the common stock and warrants in the offering from
the effective date of the registration statement to June 30, 1998.
<TABLE>
<S> <C>
Underwriters Discounts and Commissions $ 563,750
Expenses paid to or for the Underwriter 185,853
Other expenses (estimate) 581,282
----------
Total expenses $1,330,885
</TABLE>
28
<PAGE>
None of the foregoing expenses were paid, directly or indirectly, to any
director or officer of the Company or their associates, to any person who owns
10 percent or more of common stock or warrants of the Company, or to any
affiliate of the Company.
The net offering proceeds to the Company after deducting for the expenses
were $4,306,615. The net offering proceeds are intact in cash as at June 30,
1998 as no use of proceeds has occurred.
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
clearing broker to recognize the Year 2000 could have material adverse effect on
the Company's results of operations. There can be no assurance that the Year
2000 issue can be resolved by any of such third parties prior to the upcoming
change in the century. Although the Company may incur substantial costs,
particularly costs resulting from increased charges by its third party service
providers, as a result of such third party service providers correcting Year
2000 issues, such costs are not sufficiently certain to estimate at this time.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the six month
period ended June 30, 1998.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ROSEDALE DECORATIVE PRODUCTS LTD.
Date: August 14, 1998 By: /s/Alan Fine
------------------------------------
Alan Fine
Date: August 14, 1998 By: /s/Norman G. Maxwell
------------------------------------
Norman G. Maxwell
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
FINANCIAL STATEMENTS AS AT JUNE 30 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 4,806,036 0
<SECURITIES> 0 0
<RECEIVABLES> 5,328,734 0
<ALLOWANCES> 102,149 0
<INVENTORY> 6,879,294 0
<CURRENT-ASSETS> 17,224,668 0
<PP&E> 4,408,309 0
<DEPRECIATION> 2,239,707 0
<TOTAL-ASSETS> 20,109,640 0
<CURRENT-LIABILITIES> 10,610,809 0
<BONDS> 0 0
0 0
0 0
<COMMON> 4,306,778 0
<OTHER-SE> 1,742,138 0
<TOTAL-LIABILITY-AND-EQUITY> 20,109,640 0
<SALES> 10,751,465 10,958,637
<TOTAL-REVENUES> 10,751,465 10,958,637
<CGS> 6,302,625 6,959,616
<TOTAL-COSTS> 2,874,711 3,163,994
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 19,204 (56,334)
<INTEREST-EXPENSE> 220,553 134,708
<INCOME-PRETAX> 1,334,373 756,653
<INCOME-TAX> 537,539 302,064
<INCOME-CONTINUING> 796,833 454,589
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 796,833 454,589
<EPS-PRIMARY> 0.31 0.17
<EPS-DILUTED> .22 0.12
</TABLE>
