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, 1999
[ ] 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)
<TABLE>
<CAPTION>
<S> <C>
Ontario, Canada 5110
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
</TABLE>
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 March 31, 1999, 2,765,000 shares of Common Stock, no par value
per share, of Rosedale Decorative Products Ltd. were issued and outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Interim Consolidated Balance Sheet as of March 31, 1999 and December 31, 1998 4 - 5
Interim Consolidated Statement of Income for the period ended March 31, 1999 6
Interim Consolidated Statement of Cash Flows for the period ended March 31, 1999 7 - 8
Interim Consolidated Statement of Stockholders' Equity for the period ended
March 31, 1999 9
Notes to Interim Consolidated Financial Statements 10 - 25
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Balance Sheet
As of March 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
$ $
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash 3,296,459 3,417,414
Accounts receivable (note 3) 5,418,360 3,696,050
Inventory (note 4) 7,127,000 7,229,444
Prepaid expenses and sundry assets 275,175 288,764
Income taxes recoverable 28,510 38,738
16,145,503 14,670,410
LOANS RECEIVABLE FROM AFFILIATED COMPANIES
(note 5) 10,333 1,933
DEFERRED PRODUCT COSTS (note 6) 817,877 851,202
DEFERRED POLICY COSTS (note 7) 272,884 268,506
MORTGAGES RECEIVABLE (note 8) 327,089 321,841
PROPERTY, PLANT AND EQUIPMENT (note 9) 2,277,860 2,160,433
19,851,546 18,274,325
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Balance Sheet
As of March 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
$ $
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C> <C>
Bank indebtedness (note 10) 4,288,782 3,327,022
Accounts payable and accrued expenses
(note 11) 4,740,991 4,581,034
Income taxes payable - -
Current portion of long-term debt (note 12) - 77,076
9,029,773 7,985,132
LONG-TERM DEBT (note 12) 966,461 950,956
ADVANCES FROM RELATED PARTIES (note 13) 1,171,857 1,174,987
DEFERRED INCOME TAXES 220,587 156,786
11,388,679 10,267,861
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 14) 5,013,883 5,013,883
ADDITIONAL PAID-IN CAPITAL (note 14) 142,314 142,314
CUMULATIVE TRANSLATION ADJUSTMENT (257,706) (388,341)
RETAINED EARNINGS 3,564,376 3,238,608
8,462,867 8,006,464
19,851,546 18,274,325
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated 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,
1999 1998
$ $
<S> <C> <C>
SALES 5,047,457 6,506,589
COST OF SALES 2,924,443 4,078,108
GROSS PROFIT 2,123,014 2,428,481
OPERATING EXPENSES
General and administrative 596,588 522,362
Selling 561,516 510,243
Design studio 192,749 173,860
Book development costs 123,252 50,892
Amortization 187,542 157,793
TOTAL OPERATING EXPENSES 1,661,647 1,415,150
OPERATING INCOME 461,367 1,013,331
Interest expense 27,587 131,181
INCOME BEFORE INCOME TAXES 433,780 882,150
Income taxes (note 15) 108,011 353,000
NET INCOME 325,768 529,150
Net Income Per Share (note 14) 0.12 0.24
Weighted average number of common shares
Outstanding (note 14) 2,765,000 2,160,753
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Cash Flows
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three-months Three-months
March 31 March 31,
1999 1998
$ $
Cash flows from operating activities:
<S> <C> <C>
Net income 325,768 529,150
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 187,542 157,793
(Increase) decrease in deferred product costs 47,192 381,523
(Increase) in accounts receivable (1,661,604) (2,266,687)
(Increase) decrease in inventory 220,264 1,470,056
(Increase) in prepaid expenses and sundry assets 18,292 (244,725)
Increase (decrease) in accounts payable and accrued expenses 85,239 (873,053)
Increase (decrease) in income taxes payable/recoverable 10,857 335,833
Increase in deferred income taxes 61,229 1,436
Total adjustments (1,030,989) (1,037,824)
Net cash provided by (used in) operating activities (705,221) (508,674)
Cash flows from investing activities:
Increase in deferred policy costs 1 (1,378)
Purchases of property, plant and equipment (269,720) (227,518)
Increase in mortgages receivable - (14,684)
Net cash used in investing activities (269,719) (243,580)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Cash Flows
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three-months Three-months
March 31, March 31,
1999 1998
$ $
Cash flows from financing activities:
<S> <C> <C>
Proceeds from bank indebtedness 907,271 514,337
(Repayment of) proceeds from loans with affiliated companies (8,366) (2,602)
Proceeds from long-term debt (78,313) (19,610)
Repayment of stockholders' loans (22,283) 17,625
Proceeds from loans with directors - 1,801
Net cash provided by financing activities 798,309 511,551
Effect of foreign currency exchange rate changes 55,676 (22,525)
Net (decrease) increase in cash and cash equivalents (120,955) (263,228)
Cash and cash equivalents, January 1 3,417,414 442,655
End of three month period ended March 31 3,296,459 179,427
Income taxes paid 15,903 17,166
Interest paid 66,662 83,169
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Stockholders' Equity
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock Cumulative
Number of Retained Translation
Shares Amount Earnings Adjustments
$ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1997 1,500,000 2 2,188,055 (226,990)
Foreign currency translation .. -- -- -- (22,522)
Net income for the three-month
period to March 31, 1998 ... -- 529,150 --
Balance as of March 31, 1998 .. 1,500,000 2 2,717,205 (249,512)
Balance as of December 31,
1998 2,765,000 5,156,197 3,238,608 (388,341)
Foreign currency translation .. -- -- -- 130,635
Net income for the three-month
period to March 31, 1999 ... -- -- 325,768 --
Balance as of March 31,
1999 2,765,000 5,156,197 3,564,376 (257,706)
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
These consolidated financial statements include the accounts of Rosedale
Decorative Products Ltd. ("the company") and its wholly owned subsidiaries,
521305 Ontario Inc. ("521305") and 1010037 Ontario Inc. ("1010037"), the parent
companies of the operating subsidiaries Ontario Paint and Wallpaper Limited
("Ontario") and Rosedale Wallcoverings and Fabrics Inc. ("Rosedale").
On June 15, 1998, the company acquired all the issued and outstanding
common shares of 521305 and 1010037 from their shareholders in exchange for
1,500,000 shares of the company. Since these companies were under common control
by a related group, this transaction has been recorded using the pooling of
interest method whereby the assets, liabilities and operations have been
consolidated as if the Company had owned the wholly-owned subsidiaries since
incorporation. The company was incorporated on May 14, 1997 by its shareholders
for the purpose of consolidating their 100% ownership interests in anticipation
of an initial public offering.
All material inter-company accounts and transactions have been eliminated.
(see note 14)
b) Principal Activities
The company. Which was incorporated on May 14, 1997 is principally engaged
in the designing, manufacturing and marketing of wallpapers and decorative
fabrics in Canada, U.S. and Europe through its operating subsidiaries Ontario
Paint and Wallpaper Limited and Rosedale Wallcoverings and Fabrics Inc. These
subsidiaries were incorporated in Canada on December 31, 1971 and April 7, 1981
respectively.
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.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated 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>
<CAPTION>
<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 company accounts 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.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated 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 delivery of goods and passage of title to customers.
l) 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.
m) Accounting Changes
On January 1, 1996, 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.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
m) 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.
COMPREHENSIVE INCOME
The company has adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income as of December 1, 1998 which requires new
standards for reporting and display of comprehensive income and its components
in the financial statements. However, it does not affect net income or total
stockholders' equity. The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
$ $
<S> <C> <C>
NET INCOME 325,768 529,150
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation 130,635 (22,522)
------- --------
COMPREHENSIVE INCOME 456,403 506,628
3. ACCOUNTS RECEIVABLE March 31 December 31,
1999 1998
$ $
Accounts receivable 5,580,345 3,842,820
Less: Allowance for doubtful accounts 161,985 146,770
Accounts receivable, net 5,418,360 3,696,050
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
<TABLE>
<CAPTION>
4. INVENTORY March 31,December 31,
1999 1998
$ $
Inventory comprised the following:
<S> <C> <C>
Raw materials 137,213 185,956
Finished goods 6,989,787 7,043,488
7,127,000 7,229,444
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 April 1, 2000.
DEFERRED PRODUCT COSTS
March 31, December 31
1999 1998
$ $
Book development costs 1,373,652 1,285,831
Deferred software costs 63,941 58,338
Cost 1,437,593 1,344,169
Less: Accumulated amortization
Book development costs 590,706 467,454
Deferred software costs 29,010 25,513
619,716 492,967
Net Deferred Product Costs 817,877 851,202
</TABLE>
7. DEFERRED POLICY COSTS
Deferred policy costs represents the prepaid portion of premiums on
the life insurance policies referred to in note 21.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
8. 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, 2000.
<TABLE>
<CAPTION>
March 31,December31,
1999 1998
$ $
<S> <C> <C> <C>
1216748 Ontario Inc. 171,520 168,768
1217576 Ontario Inc. 155,569 153,073
327,089 321,841
The fair value of the mortgages receivable is estimated to be
$350,000.
PROPERTY, PLANT AND EQUIPMENT
March 31, December31,
1999 1998
$ $
Leasehold improvements 29,707 29,230
Automobile 19,017 18,711
Equipment and furniture 288,481 283,502
Furniture and fixtures 244,439 240,517
Computer and equipment 456,494 348,874
Cylinders and related design costs 3,974,010 3,716,883
Cost 5,012,148 4,637,717
Less: Accumulated amortization
Leasehold improvements 13,619 12,671
Automobile 16,895 16,380
Equipment and furniture 211,687 203,399
Furniture and fixtures 188,892 185,861
Computer and equipment 281,066 245,381
Cylinders and related design costs 2,022,129 1,813,592
2,734,288 2,477,284
Net Assets 2,277,860 2,160,433
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
10. BANK INDEBTEDNESS
The companies have available credit facilities up to a maximum of
$6,735,000 ($10,160,000 Canadian), which bear interest at rates varying between
the bank's prime rate and prime plus 0.25%. 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
$1,657,000 from the company, guarantees from affiliated companies up to
$563,000, assignment of life insurance of $1,000,000 on each of the lives of two
key officers and assignment of fire insurance.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
March 31, December31,
1999 1998
$ $
Accounts payable and accrued expenses is comprised of the following:
<S> <C> <C>
Trade payables 4,378,130 4,230,024
Accrued expenses 362,861 351,010
4,740,991 4,581,034
LONG-TERM DEBT
March 31, December31,
1999 1998
$ $
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 - 77,076
b) Insurance Loan
Amount in excess of cash surrender values of life insurance
policies (note 21) 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 966,461 950,956
966,461 1,028,032
Less: Current portion - (77,076)
Long-term portion 966,461 950,956
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
13. DUE TO STOCKHOLDERS AND DIRECTORS
Stockholders' and directors advances are secured by general security
agreements, bears interest at the National Bank of Canada prime lending rate
plus 1.5%, are without specific terms of repayment, and are not expected to be
repaid prior to April 1, 2000.
COMMON STOCK
a) Authorized
An unlimited number of common and preference shares
The preference shares are issuable upon approval by the directors with the
appropriate designation, rights, privileges and conditions attaching to each
share of such series.
<TABLE>
<CAPTION>
Issued
1999 1998
$ $
<S> <C> <C> <C>
2,765,000 Common shares 5,013,883 5,013,883
1,265,000 Warrants 142,314 142,314
------- -------
5,156,197 5,156,197
--------- ---------
</TABLE>
b) During 1998, the company issued 1,265,000 common shares and 1,265,000
warrants as follows:
<TABLE>
<CAPTION>
<S> <C>
Proceeds received from the issuance $ 6,158,857
Issuance costs (net of income taxes) (1,002,662)
Net proceeds $ 5,156,195
---------
</TABLE>
Net proceeds include the deferred income tax recoveries
c) Weighted Average Number of Common Shares
On June 15, 1998, the shareholders transferred their 100% ownership
interests in 521305 Ontario Inc. and 1010037 Ontario Inc. in exchange for the
issuance of 1,500,000 common shares of the company.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
14. COMMON STOCK (cont'd)
c) Weighted Average Number of Common Shares
On June 18, 1998, the company issued 1,100,000 common shares to the public.
On July 29, 1998, the company issued 165,000 common shares to the public.
The weighted average number of shares for 1998 was based on the number of
days the shares were outstanding during the year under the assumption that the
share transfer referred to above occurred at the beginning of the year.
The weighted average number of shares for 1999 was based on the shares
outstanding as of January 1, 1999 as no further shares have been issued.
d) The company has adopted a Stock Option Plan (the 1998 Plan), pursuant to
which 750,000 shares of Common Stock are reserved for issuance.
The 1998 Plan is for a period of ten years. Options may be granted to
officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to the Company. Options granted under the
1998 Plan may be exercisable for up to ten years, may require vesting, and shall
be at an exercise price all as determined by the board. Options will be
non-transferable except to an option holders personal holding company or
registered retirement savings plan and are exercisable only by the participant
during his or her lifetime.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for three months from such occurrence but not beyond the options
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1998 Plan, as the directors of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participants personal recourse
note, or with an assignment to the Company of sufficient proceeds from the sale
of the Common Stock acquired upon exercise of the Options with an authorisation
to the broker or selling agent to pay that amount to the company, or any
combination of the above.
Options under the 1998 Plan must be issued within ten years from the
effective date of the 1998 Plan.
Any unexercised options that expire or that terminate upon an employees
ceasing to be employed by the company become available again for issuance under
the 1998 Plan.
The 1998 Plan may be terminated or amended at any time by the board of
directors , except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1998 Plan may not be
increased without the consent of the stockholders of the Company. No options
were granted during this period.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Statements
(Amounts expressed in US dollars)
(Unaudited)
e) Purchase Warrants
During the year, Purchase Warrants ("Warrants") were issued pursuant to a
Warrant Agreement between the company and J.P. Turner and Company. Each Warrant
entitles its holders to purchase, during the four year period commencing on June
18, 1999, one share of common stock at an exercise price of $6.00 per share,
subject to adjustment in accordance with the anti-dilution and other provision
referred to below.
The Warrants may be redeemed by the company at any time commencing one year
from June 18, 1998 (or earlier with the consent of the representative) and prior
to their expiration, at a redemption price of $0.10 per Warrant, on not less
than 30 days' prior written notice to the holders of such Warrants, provided
that the closing bid price of the common stock if traded on the Nasdaq SmallCap
Market, or the last sale price of the common stock, if listed on the Nasdaq
National Market or on a national exchange, is at least 150% ($9.00 per share,
subject to adjustment) of the exercise price of the Warrants for a period of 10
consecutive business days ending on the third day prior to the date the notice
of redemption is given. Holders of Warrants shall have exercise rights until the
close of the business day preceding the date fixed for redemption.
The exercise price and the number of shares of common stock purchasable
upon the exercise of the Warrants are subject to adjustment upon the occurrence
of certain events, including stock dividends, stock splits, combinations or
classification of the common stock. The Warrants do not confer upon holders any
voting or any other rights of shareholders of the company.
No Warrant will be exercisable unless at the time of exercise the company
has filed with the Commission a current prospectus covering the issuance of
common stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant. The company has undertaken to use its
best efforts to maintain a current prospectus relating to the issuance of shares
of common stock upon the exercise of the Warrants until the expiration of the
Warrants, subject to the terms of the Warrant Agreement. While it is the
company's intention to maintain a current prospectus, there is no assurance that
it will be able to do so.
15. INCOME TAXES
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
a) Current - -
Deferred 220,587 156,786
220,587 156,786
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Statements
(Amounts expressed in US dollars)
(Unaudited)
15. INCOME TAXES (cont'd)
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>
<CAPTION>
<S> <C> <C>
2001 $ 127,000
2002 286,000
2004 21,000
2005 100,000
$ 534,000
</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 $717,000 (see note 19). 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>
1999 1998
$ $
<S> <C> <C> <C>
Loan - 976168 Ontario Inc. 10,333 1,933
Mortgage receivable - 1216748 Ontario Inc. 171,520 168,768
Mortgage receivable - 1217576 Ontario Inc. 155,569 153,073
Rent paid - 966578 Ontario Inc. 3,97 4,236
</TABLE>
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the year 2000 Issue may be experienced before, on or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect a company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
18. 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:
Period ended March 31, 1999
<TABLE>
<CAPTION>
<S> <C>
United States of America $ 2,785,862
Canada 2,089,443
Other 172,152
$ 5,047,457
Period ended March 31, 1998
United States of America $ 3,392,122
Canada 2,375,704
Other 738,763
$ 6,506,589
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.
Period ended March 31, 1999
United States of America $ 179,802
Canada 134,855
Other 11,111
$ 325,768
Period ended March 31, 1998
United States of America $ 275,865
Canada 193,205
Other 60,080
$ 529,150
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
18. SEGMENTED INFORMATION (cont'd)
b) The breakdown of identifiable assets by geographic area is as follows:
<TABLE>
<CAPTION>
Period ended March 31, 1999
<S> <C>
United States of America $ 3,570,561
Canada 15,390,361
Other 890,624
$ 19,851,546
Year ended December 1998
United States of America $ 1,744,862
Canada 15,430,713
Other 1,098,750
$ 18,274,325
</TABLE>
c) Sales to major customers are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Sales 1,214,634 1,354,454
% of total sales 24% 21%
Amounts included in accounts receivable $ 1,578,585 $ 907,146
d) Purchases from major suppliers are as follows:
1999 1998
Purchases $ 1,166,282 $ 1,273,878
% of total purchases 41% 45%
Amounts included in accounts payable $ 1,638,184 $ 2,567,096
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
19. CONTINGENCIES
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 $717,000. 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.
The company has retained a firm of tax specialists to represent them in
presenting their case to Revenue Canada and currently the Notices of Objections
are being considered by the Chief of Appeals.
Since the company considers the re-assessments to be incorrect, no
liability has been set up in the accounts. Should all or part of the
re-assessments be upheld, the additional income taxes would be taken into
account in the year of occurrence.
20. COMMITMENTS
Minimum payments under operating leases for premises amount to
approximately $293,000 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>
<CAPTION>
Payable during the following periods:
<S> <C>
Within one year $ 293,287
Over one year but not exceeding two years 293,287
Over two years but not exceeding three years 293,287
Over three years but not exceeding four years 293,287
Over four years but not exceeding five years 293,287
Thereafter 171,080
$1,637,515
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
21. 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 for a total insured value of $6.6 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:
Cash surrender value of life insurance policies $ 1,817,683
Advances $ (1,817,683)
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.
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Interim Consolidated Financial Statements
(Amounts expressed in US dollars)
(Unaudited)
21. FOREIGN EXCHANGE CONTRACTS
As at March 31, 1999, 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. 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 $14,020,000 (in varying amounts from April 1999
through June 2000). The following table presents the aggregate notional
principal amounts, carrying values and fair values of the Company's foreign
exchange contracts outstanding as of March 31, 1999. 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, 1999 March 31, 1998
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)
1999 $11,920,000 - ($641,582)
2000 $ 2,100,000 - ($36,578)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements contained in this Report that are not historical are
forward-looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future. Forward-
looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Additionally, the following discussion and analysis
should be read in conjunction with the Financial Statements and notes thereto
appearing elsewhere in this Report. The discussion is based upon such financial
statements which have been prepared in accordance with U.S. Generally Accepted
Accounting Principles and are presented in United States dollars ($).
Results of Operation
Three months ended March 31, 1999 compared to three months ended March 31,
1998.
Revenues for the three months ended March 31, 1999 decreased 22.4% to
$5,047,457, as compared to revenues of $6,506,589 for the same period in 1998.
This decrease was attributable the weakening value of the Canadian dollar versus
the U.S. dollar, a 76.7% reduction in our export sales and the general weakening
of the market in which we operate, as observed by the continuing restructuring
of many companies within the wallpaper industry. Additionally, we launched one
less new collection during the first quarter of 1999 as compared to the first
quarter of 1998.
Gross profit, as a percentage of sales, increased to 42.1% for the three
months ended March 31, 1999 as compared to 37.3% the same period in 1998. This
increase in gross profit is attributable to a change in our sales mix that was
made because of decreased sales in our export markets. The strong U.S. dollar
also contributed to the increase in gross profit as over 50% of our sales are
derived from the United States and the majority of our purchases are made in
Canadian dollars. However, the strong U.S. dollar, as compared to the Canadian
dollar, has a negative impact on our overall financial statements when converted
from Canadian to U.S. dollars. Additionally, we have begun to source other
manufacturing facilities in Canada which will reduce our costs and have a
positive impact on gross profit.
Selling expenses increased by 10.0% to $561,516 for the three month period
ended March 31, 1999 as compared to $510,243 for the three month period ended
March 31, 1998. This increase is attributable to public relations expenses
incurred during the first quarter of 1999. We did not incur such expenses during
the same period in 1998. Also, selling expenses increased as a result of
increased promotion expense relating to two very successful trade shows, held in
Toronto and Quebec City, which we attended.
General and administrative expenses for the Company increased by 14.2% to
$596,588 for the three months period ended March 31, 1999, from $522,362 for the
three months ended March 31, 1998. This increase is attributable to
approximately $60,000 in expenditures relating to consulting services, legal
services and registration expenses; expenses we did not incur during the same
period in 1998.
Rosedale Decorative Products Ltd. develops wallpaper and fabric sample
books which are created for each of its collections and are sold through
distributors. The majority of expenditures relating to the creation of sample
books are incurred during the fiscal quarter that is prior to the date of the
introduction of a collection. Some expenditures are incurred as early as six to
eight months in advance of the introduction of a collection. Because revenues
generated from the sale of sample books are generally received during fiscal
quarters that are subsequent to quarters where the expenses for such sample
books are recognized, our quarterly financial statements do not always reflect a
matching of revenues and expenses. Before significant expenditures are incurred
to produce sample books, we ensure that there are firm orders for such books.
Therefore, there is little speculative risk in the production of sample books.
<PAGE>
Sample book development cost for the three month period ended March 31,
1999 was $123,252 compared to $50,892 for the same period last year. We have
increased expenditures on sample book production as the market has become
increasingly competitive and our customers have become more demanding, choosing
less books for their stores. As sample books serve as our silent salesperson, it
is imperative that we design and produce high quality books to keep them in the
marketplace and on top of our customer's sales counters.
Design studio expenses for the Company increased by 10.86% to $192,749 for
the three months ended March 31, 1999 as compared to $173,860 for the same
period last year. This increase reflects increased expenditures relating to our
anticipated launch of an additional four collections in 1999. We expect the
launch of the additional collections to trigger additional sales in 1999.
Operating income for the three months ended March 31, 1999 decreased 54.5%
to $461,367 from $ 1,013,331 for the three months ended March 31, 1998. This
relates to the decrease in sales and additional expenses incurred after our
public offering.
Interest expense for the Company for the three months ended March 31, 1999
decreased to $27,587 from $131,181 for the three months ended March 31, 1998.
This decrease in interest expense is attributable to lower interest rates and
decreased short term investment interest generated from funds raised in our
public offering.
Net income for the three months ended March 31, 1999 decreased 38.4% from
the same period ended March 31, 1998. The decrease is due to decreased sales and
slightly higher operating expenses.
Earnings per share, based on 2,765,000 total shares outstanding, were $0.12
for the three months ended March 31, 1999, compared to $0.19 for the same period
last year.
Liquidity and Capital Resources
We had a negative net change in cash of $120,955 for the three months ended
March 31, 1999. The principal sources of cash were net income of $325,768 and an
increase in bank indebtedness. These items were offset by cash used to increase
accounts receivable at the end of the period ended March 31, 1999.
Cash flows used in investing activities for the three months ending March
31, 1999 were $269,719. This reflects planned capital addition for cylinders,
designs and engravings for new collections. We received net proceeds of
$5,156,195 from our initial public offering which was completed in June 1998. We
believe that the proceeds of the offering, coupled with the income from
operations, will fulfill our working capital needs for, at least, the next
eighteen months. It is our intention to utilize a significant portion of these
funds to develop new product lines of wallpaper and fabric, plus continue the
development of floor coverings and ceiling tiles.
Year 2000
Our review of our own operating systems do not indicate any Year 2000
problems; however, we are highly dependent on third party vendors. Failures and
interruptions, if any, resulting from the inability of certain computing systems
of third party vendors, including our clearing broker, to recognize the Year
2000 could have material adverse effect our 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 we may incur
substantial costs, particularly costs resulting from increased charges by our
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.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
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 three month
period ended March 31, 1999.
<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: May 14, 1999 By: /s/Alan Fine
Alan Fine
Date: May 14, 1999 By: /s/Norman G. Maxwell
Norman G. Maxwell
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27: Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
IS QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> mar-31-1999
<CASH> 3,296,459
<SECURITIES> 0
<RECEIVABLES> 5,580,345
<ALLOWANCES> 161,985
<INVENTORY> 7,127,000
<CURRENT-ASSETS> 16,145,503
<PP&E> 5,012,148
<DEPRECIATION> 2,734,288
<TOTAL-ASSETS> 2,803,322
<CURRENT-LIABILITIES> 9,029,773
<BONDS> 0
0
0
<COMMON> 5,156,197
<OTHER-SE> 3,306,670
<TOTAL-LIABILITY-AND-EQUITY> 19,851,546
<SALES> 5,047,457
<TOTAL-REVENUES> 5,047,457
<CGS> 2,924,443
<TOTAL-COSTS> 1,661,647
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,587
<INCOME-PRETAX> 433,780
<INCOME-TAX> 108,011
<INCOME-CONTINUING> 325,768
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 325,768
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.08
</TABLE>
