<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 March 31, 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 [ X ] NO [ ]
As of July 14, 1998, 2,500,000 shares of Common Stock, par value $.01
per share, of Rosedale Decorative Products Ltd. were issued and outstanding.
1
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Interim Combined Balance Sheet as of March 31, 1998 and March 31, 1997 3 - 4
Interim Combined Statement of Income for the period ended March 31, 1998
and March 31, 1997 5
Interim Combined Statement of Cash Flows for the period ended
March 31, 1998 and March 31, 1997 6 - 7
Interim Combined Statement of Stockholders' Equity for the period ended
March 31, 1998 and March 31, 1997 8
Notes to Interim Combined Financial Statements 9 - 22
</TABLE>
2
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Balance Sheet
As of March 31,
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
$ $
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash 179,427 400,235
Accounts receivable (note 2) 6,950,599 4,182,970
Inventory (note 3) 5,723,775 5,996,220
Prepaid expenses and sundry assets 424,821 337,384
---------- ----------
13,278,622 10,916,809
LOANS RECEIVABLE FROM AFFILIATED
COMPANIES (note 4) 39,487 58,958
DEFERRED PRODUCT COSTS (note 5) 259,506 146,304
DEFERRED POLICY COSTS (note 6) 184,251 125,108
MORTGAGES RECEIVABLE (note 7) 417,368 377,765
PROPERTY, PLANT AND EQUIPMENT (note 8) 2,000,594 1,446,829
---------- ----------
16,179,828 13,071,773
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Balance Sheet
As of March 31,
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
$ $
LIABILITIES
<S> <C> <C>
CURRENT LIABILITIES
Bank indebtedness (note 9) 4,485,280 3,747,105
Accounts payable and accrued expenses
(note 10) 5,868,378 4,637,735
Income taxes payable 508,372 112,652
Current portion of long-term debt (note 11) 55,491 64,026
---------- ----------
10,917,521 8,561,518
LONG-TERM DEBT (note 11) 1,004,495 862,730
LOANS PAYABLE TO STOCKHOLDERS 240,746 249,695
ADVANCES FROM DIRECTORS (note 13) 1,557,417 1,664,435
DEFERRED INCOME TAXES 191,998 142,300
---------- ----------
13,912,177 11,480,678
---------- ----------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 14) 163 163
CUMULATIVE TRANSLATION ADJUSTMENT (197,727) 135,181
RETAINED EARNINGS 2,465,215 1,455,751
---------- ----------
2,267,651 1,591,095
---------- ----------
16,179,828 13,071,773
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Combined Statement of Income
For the period ended March 31,
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three-months Three-months
March 31, March 31,
1998 1997
$ $
<S> <C> <C>
SALES 6,506,589 4,925,180
COST OF SALES 4,078,108 2,920,969
---------- ----------
GROSS PROFIT 2,428,481 2,004,211
---------- ----------
OPERATING EXPENSES
General and administrative 522,362 377,928
Selling 510,243 500,082
Design studio 173,860 268,516
Book development costs 50,892 102,414
Amortization 157,793 182,158
---------- ----------
TOTAL OPERATING EXPENSES 1,415,150 1,431,098
---------- ----------
OPERATING INCOME 1,013,331 573,113
Interest expense 131,181 54,956
---------- ----------
INCOME BEFORE INCOME TAXES 882,150 518,157
Income taxes (note 15) 353,000 198,642
---------- ----------
NET INCOME 529,150 319,515
---------- ----------
---------- ----------
Pro Forma Earnings Per Share (note 14) 0.20 0.12
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Combined Statements of Cash Flows
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three-months Three-months
March 31 March 31,
1998 1997
$ $
<S> <C> <C>
Cash flows from operating activities:
Net income 529,150 319,515
----------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 157,793 182,158
(Increase) decrease in deferred product costs 381,523 (146,304)
(Increase) in accounts receivable (2,266,687) (268,207)
(Increase) decrease in inventory 1,470,056 281,779
(Increase) in prepaid expenses and sundry assets (244,725) (201,525)
Increase (decrease) in accounts payable and accrued expenses (873,053) (833,071)
Increase (decrease) in income taxes payable 335,833 (87,777)
Increase in deferred income taxes 1,436 113,116
----------- ----------
Total adjustments (1,037,824) (959,831)
----------- ----------
Net cash provided by (used in) operating activities (508,674) (640,316)
----------- ----------
Cash flows from investing activities:
Increase in deferred policy costs (1,378) 1,260
Purchases of property, plant and equipment (227,518) (185,959)
Increase in mortgages receivable (14,684) (377,765)
----------- ----------
Net cash used in investing activities (243,580) (562,464)
----------- ----------
----------- ----------
</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>
Three-months Three-months
March 31, March 31,
1998 1997
$ $
<S> <C> <C>
Cash flows from financing activities:
Proceeds from bank indebtedness 514,337 148,325
(Repayment of) proceeds from loans with affiliated companies (2,602) 5,586
Proceeds from long-term debt (19,610) (64,051)
Repayment of stockholders' loans 17,625 (2,514)
Proceeds from loans with directors 1,801 194,369
------------ ----------
Net cash provided by financing activities 511,551 281,715
------------ ----------
Effect of foreign currency exchange rate changes (22,525) 241,477
------------ ----------
Net (decrease) increase in cash and cash equivalents (263,228) (679,588)
Cash and cash equivalents, January 1 442,655 1,079,823
------------ ----------
End of three month period ended March 31 179,427 400,235
------------ ----------
------------ ----------
Income taxes paid 17,166 15,180
------------ ----------
------------ ----------
Interest paid 83,169 54,956
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<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 March 31, 1997 20 220 163 1,455,751 135,181
Foreign currency translation - - - - (310,386)
Net income for the nine-month
period to December 31, 1997 - - - 480,314 -
----------- ----------- ----------- ----------- -----------
Balance as of December 31,
1997 20 220 163 1,936,065 (175,205)
Foreign currency translation - - - - (22,522)
Net income for the three-month
period to March 31, 1998 - - - 529,150 -
----------- ----------- ----------- ----------- -----------
Balance as of March 31,
1998 20 220 163 2,465,215 (197,727)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<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 March 31, 1998 and 1997
Rosedale Wallcoverings and Fabrics Inc. March 31, 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.
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.
9
<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)
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.
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 delivery of goods and
passage of title to customers.
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)
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.
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 6,844,996 5,174,136
Less: Allowance for doubtful accounts 105,603 991,166
--------- ---------
Accounts receivable, net 6,950,599 4,182,970
--------- ---------
--------- ---------
</TABLE>
During 1997, two accounts receivable amounting to approximately
$780,000, previously provided for were written off against the
allowance for doubtful accounts.
11
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
3. INVENTORY
<TABLE>
<CAPTION>
1998 1997
$ $
Inventory comprised the following:
<S> <C> <C>
Raw materials 102,742 98,681
Finished goods 5,621,033 5,897,539
--------- ---------
5,723,775 5,996,220
--------- ---------
--------- ---------
</TABLE>
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
October 1, 1999.
5. DEFERRED PRODUCT COSTS
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Book development costs 848,996 146,304
Deferred software costs 62,915 -
--------- ---------
Cost 911,911 146,304
--------- ---------
Less: Accumulated amortization
Book development costs 634,821 -
Deferred software costs 17,584 -
--------- ---------
652,405 -
--------- ---------
Net Deferred Product Costs 259,506 146,304
--------- ---------
--------- ---------
</TABLE>
6. DEFERRED POLICY COSTS
Deferred policy costs represents the prepaid portion of premiums on
the life insurance policies referred to in note 20.
12
<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 April 1, 1999.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
1216748 Ontario Inc. 230,909 197,610
1217576 Ontario Inc. 186,459 180,155
--------- ---------
417,368 377,765
--------- ---------
--------- ---------
</TABLE>
The fair value of the mortgages receivable is estimated to be
$350,000.
8. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Leasehold improvements 31,565 32,374
Automobile 20,208 20,725
Equipment and furniture 257,793 263,690
Furniture and fixtures 306,165 294,720
Computer and equipment 345,268 329,347
Cylinders and related design costs 3,240,592 2,428,827
--------- ---------
Cost 4,201,591 3,369,683
--------- ---------
Less: Accumulated amortization
Leasehold improvements 11,319 8,372
Automobile 16,884 15,854
Equipment and furniture 190,189 176,772
Furniture and fixtures 203,920 182,574
Computer and equipment 238,728 213,128
Cylinders and related design costs 1,539,957 1,326,154
--------- ---------
2,200,997 1,922,854
--------- ---------
Net Assets 2,000,594 1,446,829
--------- ---------
--------- ---------
</TABLE>
13
<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 parent 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
$ $
Accounts payable and accrued expenses is comprised of the following:
<S> <C> <C>
Trade payables 5,505,476 4,388,784
Accrued expenses 362,902 248,951
--------- ---------
5,868,378 4,637,735
--------- ---------
--------- ---------
</TABLE>
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
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 $138,000 145,621 165,231
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Balance forward 145,621 165,231
</TABLE>
14
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
11. LONG-TERM DEBT (cont'd)
<TABLE>
<S> <C> <C>
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 914,365 761,525
--------- ---------
1,059,986 926,756
Less: Current portion (55,491) (64,026)
--------- ---------
Long-term portion 1,004,495 862,730
--------- ---------
--------- ---------
</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
April 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 April
1, 1999.
15
<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>
20 Class A Preference shares 1 1
20 Common shares 2 2
--------- ---------
3 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 160 160
--------- ---------
--------- ---------
</TABLE>
c) Issued - Combined
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
20 Class A Preference shares 1 1
220 Common shares 162 162
--------- ---------
163 163
--------- ---------
--------- ---------
</TABLE>
16
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
14. CAPITAL STOCK (cont'd)
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 March 31, 1998.
This reorganization will result in the transfer of all the
outstanding common shares of the parent companies of Ontario and
Rosedale current held by the Fine and Ackerman families to the
Registrant in exchange for 1,500,000 common shares of the
Registrant.
After giving effect to the above transaction, there will be
1,500,000 issued common shares of the Registrant prior to the
public offering. Subsequent to March 31, 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.
15. INCOME TAXES
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
a) Current 303,302 56,342
Deferred 49,698 142,300
--------- ---------
353,000 198,642
--------- ---------
--------- ---------
</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.
17
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
15. INCOME TAXES (cont'd)
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.
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. 12,747 -
Loan - 976168 Ontario Inc. 24,651 25,281
Mortgage receivable - 1216748 Ontario Inc. 230,920 197,610
Mortgage receivable - 1217576 Ontario Inc. 186,459 180,155
Rent paid - 966578 Ontario Inc. 4,236 4,334
</TABLE>
18
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
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 March 31, 1998
---------------------------
<S> <C>
United States of America $ 3,392,122
Canada 2,375,704
Other 738,763
-------------
$ 6,506,589
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
Period ended March 31, 1997
---------------------------
<S> <C>
United States of America $ 2,405,395
Canada 1,800,257
Other 719,528
-------------
$ 4,925,180
-------------
-------------
</TABLE>
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 March 31, 1998
---------------------------
<S> <C>
United States of America $ 275,865
Canada 193,205
Other 60,080
-------------
$ 529,150
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
Period ended March 31, 1997
---------------------------
<S> <C>
United States of America $ 156,047
Canada 116,789
Other 46,679
-------------
$ 319,515
-------------
-------------
</TABLE>
19
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
17. SEGMENTED INFORMATION (cont'd)
b) The breakdown of identifiable assets by geographic area is as
follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997
----------------------------
<S> <C>
United States of America $ 1,933,015
Canada 12,413,197
Other 1,833,616
-------------
$ 16,179,828
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 1996
------------------------
<S> <C>
United States of America $ 983,932
Canada 11,410,711
Other 677,130
-------------
$ 13,071,773
-------------
-------------
</TABLE>
c) Sales to major customers are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Sales 1,354,454 895,016
------------- -------------
% of total sales 21% 18%
------------- -------------
Amounts included in accounts receivable $ 907,146 $ 437,708
------------- -------------
</TABLE>
d) Purchases from major suppliers are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Purchases $ 1,273,878 $ 943,816
------------- -------------
% of total purchases 45% 50%
------------- -------------
Amounts included in accounts payable $ 2,567,096 $ 1,733,603
------------- -------------
</TABLE>
20
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
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 re-assessments 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.
19. COMMITMENTS
Minimum payments under operating leases for premises amount to
approximately $330,000 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:
Payable during the following periods:
<TABLE>
<S> <C>
Within one year $ 329,787
Over one year but not exceeding two years 329,787
Over two years but not exceeding three years 329,787
Over three years but not exceeding four years 329,787
Over four years but not exceeding five years 329,787
Thereafter 661,065
----------------
$ 2,310,000
----------------
----------------
</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 three of the officers 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.
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).
21
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Combined Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
20. LIFE INSURANCE POLICIES (cont'd)
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 March 31, 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 March 31, 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 Company had no contracts outstanding with
maturities beyond one year. The cash requirements arise as the
contracts are exercised to the value of $6,970,000 (in varying
amounts from April through December 1998). The following table
presents the aggregate notional principal amounts, carrying values
and fair values of the Company's foreign exchange contracts
outstanding at March 31, 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>
March 31, 1998 March 31, 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 $6,970,000 - ($363,600) - - -
</TABLE>
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Results of Operations
Three months ended March 31, 1998 compared to three months ended March
31, 1997.
Revenues for the three months ended March 31,1998 were $6,506,589, a
32.1% increase over prior year revenues of $4,925,180. This increase was due to
greater acceptance of product lines in the market, increased market share from
retail chains, increased residential real estate sales and expansion of the
export market coupled with the improving economic climate in North America.
Gross profit for the company for the three months ended March 31, 1998
was 37.32% of sales, a reduction as compared to the same period one year ago,
which was 40.69%. This decrease in gross profit margin can be attributed to a
change in sales mix due to an increase in sales to large retail chains, which
buy larger volumes at smaller profit margins.
Selling expenses for the Company increased by 2.03%, from $500,082 to
$510,243 for the three month period ended March 31, 1998 as compared to the
three month period ended March 31, 1997. This increase is attributable to an
increase in sales affecting commissions and warehouse costs.
General and administrative expenses for the Company increased by 38.22%
to $522,362 for the three months ended March 31, 1998 from $377,928 for the
three months ended March 31, 1997. In 1997, the Company recorded a bad debt
recovery in the amount of $79,132. This extraordinary item distorts the results
for the period ended March 31, 1997. Exclusive of such extraordinary item the
Company's general and administrative expense increased by approximately $65,000.
This increase can be attributed mostly to the fact that in the first quarter of
1998, government employee benefits increased by 42% over last year as the method
of calculation was changed. A portion of this increase however, will be
recovered later in the year.
Rosedale 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 sale 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 costs for
the three month period ended March 31, 1998 was $50,892, compared to $102,414
for the same period last year.
Design studio expenses for the Company decreased by 35.25% to $173,860
for the three months ended March31, 1998 versus $268,516 for the same period
last year. This reduction is attributable to lower staff requirements as a
result of the implementation of the computer-aided design ("CAD") computer
system for the studio.
23
<PAGE>
Operating income for the three months ended March 31, 1998 increased
76.81% to $1,013,331 from $575,113 for the three months ended March 31, 1997.
This related directly to the increase in sales.
Interest expense for the Company for the three months ended March 31,
1998 increased 138.7% to $131,181 from $54,956 for the three months ended March
31, 1997. This increase in interest expense is directly attributable to higher
interest rates and increased borrowings. In addition, in the period March 31,
1998, the Company has included premiums on insurance policies on the lives of
two of its officers and one principal shareholder in the aggregate amount of
$48,012 as an interest expense.
Net income for the three months ended March 31, 1998 increased 65.61%
over the same period in the prior year. The improvement is attributable to an
improved mix of sales and a positive rationalization of costs.
24
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in legal proceedings with Revenue Canada. The
Revenue Canada proceeding involves the Company's challenge to a Revenue Canada
decision to disallow a business loss deduction taken by Rosedale for losses it
incurred when attempting to create a startup company in California. Rosedale
started the California company in 1992 to make window blinds as an adjunct to
its wallcovering and fabric business. The California company's growth did not
meet the Company's expectations and subsequently was sold in 1994. Rosedale
claimed losses incurred during the operation of the California business as a
business loss deduction on its 1994 tax return. Revenue Canada allowed the
deduction as a capital loss only. Rosedale has filed a formal notice of
objection to Revenue Canada's classification of the deduction. In the event that
Revenue Canada's decision is upheld, Rosedale would be required to pay $664,000
plus interest to satisfy its tax obligation. The Company believes that it has a
meritorious defense and is working to try to settle the matter. The Company is
not aware of any other of any other material legal proceedings pending or
threatened against the Company.
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
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the six month
period ended March 31, 1998.
25
<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: July 14, 1998 By: /s/Alan Fine
-----------------------------
Alan Fine
Date: July 14, 1998 By: /s/Sidney Ackerman
-----------------------------
Sidney Ackerman
26
