UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 333-44747
ROSEDALE DECORATIVE PRODUCTS LTD
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(Exact name of registrant as specified in its charter)
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Ontario, Canada N/A
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
731 Millway Avenue
Concord, Ontario, Canada L4K 3S8
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(Address of principal executive offices) (Zip Code)
(905) 669-8909
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Redeemable Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the registrant (1) has 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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Company's revenues for the year ended December 31, 1999 were $16,908,400
As of March 17, 2000 the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on The NASDAQ Stock Market last sale
price of $1.437 on March 1, 2000 was $4,004,508.
As of March 17, 2000, there were 2,786,714 shares of the registrant's common
stock outstanding.
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PART I.
Item 1. HISTORY OF THE COMPANY
Rosedale Decorative Products, Ltd. (the "Company") commenced operations
as a single retail store, Ontario Paint & Wallpaper Limited, in 1913 and has
operated as a family owned business since its inception. The focus of the
business during its early years was the sale of paint to homeowners and major
contractors. The retail store is still in operation in its original location and
has become a Toronto landmark. In the early 1970's, Ontario Paint & Wallpaper
Limited ("Ontario") diversified into wallpaper distribution. In 1981, the
Company's subsidiary Rosedale Wallcoverings and Fabrics, Inc. ("Rosedale")
commenced operations under the name Desart Wallcoverings Inc. In 1988, Desart
Wallcoverings Inc. changed its name to Rosedale Wallcoverings Inc. and in 1995
the name was changed to Rosedale Wallcoverings & Fabrics Inc. Over the years,
the Company has become one of the largest independent wholesale wallpaper
distributors in Canada. In the early 1990's the Company continued to diversify
by designing wallcovering collections for distribution in Canada, the United
States, Europe, South America and Asia.
On May 14, 1997 the Company was formed by the shareholders of Rosedale
and Ontario for the purpose of consolidating the business of the two
subsidiaries.
General
The Company, through its two wholly owned subsidiaries, Ontario and
Rosedale, designs, markets and distributes residential wallcoverings and
designer fabrics. The Company also operates one retail paint and wallpaper store
located in downtown Toronto, Canada which has been in continuous operation since
1913. The Company's products include wallpaper and wallpaper borders (which are
collectively referred to as wallcoverings), designer fabrics, area rugs and
paint.
The Company designs wallcovering and designer fabric collections that
it distributes under its own brand names. Wallcoverings and fabrics sold under
Company brand names are manufactured for the Company on an outsource basis by
third party manufacturers. In addition to selling its own brand name
wallcoverings and fabrics, the Company is also a wholesale distributor of
wallcoverings designed and manufactured by other manufacturers. Wholesale
distribution of other manufacturers' wallcoverings is done through the Company's
Ontario subsidiary. Design and distribution of Company brand wallcoverings is
accomplished primarily through its Rosedale subsidiary and, to a lesser extent,
through its Ontario subsidiary.
The Company's Rosedale subsidiary has received a number of industry
recognized awards. Since 1994, the Rosedale subsidiary has received the "Estate
Award for Excellence in Wallcovering Design" on four separate occasions. This
award is presented by a leading trade publication and is given in recognition of
wallcovering collections that exhibit outstanding design characteristics. In
addition, Rosedale has received the "Hot Line Elite" award on numerous occasions
which is presented by another leading trade publication to the wallcovering
producer whose collections have been cited by independent retail stores
throughout the United States as top sellers. Its largest distributor, The
Blonder Company, has also twice named Rosedale "Supplier of the Year" (most
recently in 1997) despite the fact that its collections represent only
approximately 5% of the total wallcovering collections offered by The Blonder
Company in each year.
Sales of Company"s name brand wallcoverings account for approximately
57% of the Company's total revenues and wholesale distribution of wallcoverings
under non-company brand names accounts for approximately 26% of the Company's
total revenues. Sales of designer fabrics account for approximately 10% of the
Company's revenues and the Company's retail paint and wallpaper store generates
approximately 7% of the Company's annual revenues.
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In 1999, the Company distributed approximately 25 Company brand
wallcovering and fabric collections to approximately 10,000 to 20,000 retail
wallpaper and paint stores worldwide. In addition, in 1999, the Company's
Ontario subsidiary distributed approximately 60 non-Company brand wallcovering
collections to approximately 1,500-2,000 home decorating stores in Canada.
The Company believes that its product mix of wallcoverings, designer
fabrics and paints, along with its newer offerings of floor coverings and
ceiling tiles presents significant cross marketing opportunities. Rosedale has
recently introduced wallcovering and fabric sample books that include
coordinated carpets and area rugs; a first in the industry.
Company Brands
The Company designs and distributes approximately nine different lines
of wallcoverings and fabrics sold under the Company's own brand names each year.
A variety of wallcovering and fabric collections are sold under each of the
Company's brand names. Each wallcovering collection sold by the Company consists
of a variety of coordinated wallpapers, borders and fabrics. Collections take
approximately twelve months to develop and are generally available in the
marketplace for a minimum of two years after launch. The Company's Rosedale
subsidiary designs and distributes five wallcovering collections and two fabric
programs per year, sold under five brand names, and the Ontario subsidiary
designs and distributes two wallcovering collections per year, sold under two
brand names. Such products are distributed to approximately 10,000 to 20,000
retail stores and interior designers worldwide.
Wallcovering and designer fabric collections are developed by the
Company's design staff using a variety of color schemes to create thematically
consistent collections. Each collection is tailored to fit the particular target
market for the brand name for which the collection is being created. The
Company's management, design, marketing and sales staff approves collections for
production based upon their assessment of the commercial potential of those
collections in each of the Company's target markets.
Each of the Company's subsidiaries maintains its own design studio and
creative staff. Rosedale's design studio is located in its Concord, Ontario
facility. Recently, the Company's Rosedale subsidiary installed a state of the
art computer aided design (CAD) system, with two workstations, for the creation
and coloring of wallcovering and fabric designs. The system provides Rosedale's
design staff with the ability to produce a wide variety of designs and color
schemes and has reduced the time required for producing finished designs. The
Company's Ontario subsidiary maintains a design studio and staff in London,
England.
Company brand name wallcoverings and fabrics include; Rosedale,
Cambridge Studios, Hamilton House, Kingsway Fabrics, Concord and Ridley Nash.
The Company's brand name wallcoverings and fabrics are targeted for middle and
upper middle income consumers and to the high end interior designer market where
the Company's wallcoverings can compete based upon quality and design. The
Company does not design wallcovering and fabric collections for the lower end of
the market where competition is based primarily upon price.
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The Company's Rosedale and Cambridge Studios brands were established in
1987 and 1993, respectively, and are designed and marketed by the Company's
Rosedale subsidiary. The Concord and Ridley Nash lines of wallcoverings were
established in 1992 and 1995, respectively, and are designed by the design staff
of the Company's Ontario subsidiary. Each year, the Company produces
approximately seven different lines of wallcoverings under its Rosedale,
Cambridge Studios, Concord and Ridley Nash brands. Wallcovering collections sold
under all four brand names are targeted to middle to and upper middle income
consumers.
The Company's Hamilton House brand, which was introduced in 1995 by the
Company's Rosedale subsidiary in order to provide the Company with a brand,
which is specifically designed, for the interior design market and decorator
boutiques. With the addition of the Hamilton House brand line of wallcoverings,
Rosedale's product mix was expanded to cover all major price categories from the
middle level market through to the high-end interior designer market.
The Concord and Ridley Nash brands were established by the Company's
Ontario subsidiary to provide Ontario with its own brand name of wallpaper
products for introduction into the United States market. Both brands are created
in London, England by the Company's design staff. The Company designs and
distributes one wallcovering collection per year under each brand name. Both
lines of wallcoverings are targeted for middle to upper income consumers.
The Company's various brands enable the Company to take advantage of
the changing nature of the North American wholesale distribution business,
including the growth of large national distributors as well as the trend towards
consolidation amongst the smaller regional distributors, and to broaden its
product mix to cover all major price categories with the market with the
exception of the low margin, mass merchant business.
Decorative Fabrics and Floor Coverings
As part of the Company's growth strategy, its Rosedale subsidiary has
recently expanded its product lines to include coordinated products, namely
decorative fabrics, soft window treatments and floor coverings. The Company's
decorative fabric products are sold under the Kingsway Fabrics brand name and
are intended to be utilized by consumers for draperies, upholstery and bed
coverings. The expansion into the coordinated fabric market has been undertaken
in order to take advantage of the tremendous trend towards coordinated selling
in the home decorating industry. These changes encompass the way that products
are introduced into the market as well as the nature of consumer buying habits.
Designer fabrics represent approximately 10% of Rosedale's annual
revenues. Rosedale designs and markets two fabric collections per year which are
coordinated with its wallcovering collections. Recently, Rosedale has added
coordinated area rugs and runners to complement its wallcovering and fabric
offerings.
The Company believes that offering a combination of wallcoverings,
decorative fabrics and floor coverings provides significant opportunities for
cross merchandising of the Company's products. This in turn opens other markets
for the Company's product lines. For example, by offering coordinated lines of
wallcoverings, fabrics, and floor coverings, consumers looking to purchase
wallcoverings will be exposed to the Company's designer fabric and floor
covering lines. The Company believes that it is now able to offer consumers a
complete home decorating package. The end result being that the Company's
products are saleable to a wider variety of retail stores and consumers.
Third Party Manufacturing
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Wallcovering manufacturers in the United Kingdom, Canada and the United
States manufacture company brand wallcoverings for the Company. The Company's
Rosedale and Cambridge Studios lines of wallcoverings are manufactured in the
United Kingdom by Imperial Home Decor Group ("Borden") and Zen Wallcoverings
Ltd. ("Zen"), and in Canada by Imperial Home Decor Group ("Sunworthy") and Blue
Mountain Wallcoverings Ltd.. The majority of the production for Rosedale and
Cambridge Studios wallcoverings has been diverted to Canada.. The Company's
Hamilton House brand is manufactured in the United States by Hawthorne
Wallcoverings.
Designer fabric collections designed by the Company and sold under the
Kingsway Fabrics brand name are manufactured in the United States by two
manufacturers, Santee Print Works Ltd. ("Santee") and New London Textiles, Inc.
("New London").
The Company generally enters into contracts with its manufacturers to
produce its designs to the Company's specifications on a "make and ship" basis,
which means that the manufacturers hold no inventory of the Company's products.
The Company's products are manufactured on a pattern by pattern basis. The terms
and conditions of production are outlined by the Company in written instructions
provided to the manufacturers for each new design that the Company produces. The
Company maintains the exclusive copyrights to each of its designs and the
manufacturers do not have rights to sell the Company's designs unless permitted
by the Company.
Wholesale Distribution of Wallcoverings Manufactured by Third Parties
The Company, through its Ontario subsidiary, is a wholesale distributor of
wallcoverings designed and produced by manufacturers located in the United
Kingdom and Canada. The Company markets wallcovering collections produced by
third party manufactures under each manufacturer's brand names. The Company has
distribution agreements with John Wilman Limited ("John Wilman") and Vymura
International PLC ("Vymura"), located in the United Kingdom, and with Norwall
Group Inc. ("Norwall"), located in Canada. The Company's distribution agreements
with John Wilman, Vymura and Norwall provide the Company with the exclusive
Canadian distribution rights for each manufacturers' wallcovering lines. The
Company believes that its position as one of the few remaining distributors not
owned by a manufacturing facility, makes it an attractive distributor to
manufacturers that do not want to sell their products to competitive
manufacturers for distribution.
New Products
The Company intends to expand the products offered by its Ontario
subsidiary to include a line of retro art decorative ceiling tiles for
commercial and residential customers. The decorative ceiling tiles are designed
to fit into standard suspension ceiling frameworks and are embossed with designs
that emulate ceilings found in many turn of the century buildings. This provides
commercial and residential customers with the ability to add Victorian style
ceilings to their decor. The Company believes that its decorative ceiling tiles
will be attractive to commercial users, such as restaurants looking to recreate
the look of the late 1800's. The decorative ceiling tiles were launched in
Canada in the fourth quarter of 1999 and will be introduced into the U.S. market
in early 2000.
Retail Operation
The Company's retail operation, Ontario Paint & Wallpaper, has been in
continuous operation since 1913 and the store has become a landmark in
metropolitan Toronto. The retail store sells Benjamin Moore paints and related
sundry products, including wallcoverings to customers ranging from individual
homeowners to large industrial accounts. The store offers a full line of
wallcoverings, include all brands distributed by the Company. The majority of
Ontario Paint & Wallpaper's paint sales are made to local movie studios for set
designs and to commercial customers for apartment and office buildings. Sales to
commercial customers have been growing steadily over the past two years. The
retail store is the largest single source distributor of Benjamin Moore Paints
in Canada.
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The retail store offers special services to attract and maintain
commercial customers. The store maintains detailed records of paint purchases by
commercial customers. Commercial customers that have purchased paint in the past
can order additional paint simply by telephoning the store and indicating which
area of their building requires paint. The store manager then retrieves the
stored information about the building, selects the correct paint colors for the
commercial customer and then delivers the paint to the customer. In addition,
the Company has a portable paint scanner which provides retail store employees
with the ability to visit a building and scan the building's paints and return
to the store where the scanned information is transferred to a paint mixer which
then mixes matching paint colors.
Marketing and Distribution (Company Brands)
The Company distributes its brand name wallcoverings and fabrics in the
United States and Canada through regional and national distributors. The Company
appoints a single distributor to a particular geographical area and their
territories generally do not overlap. The Company does not maintain formal
distribution agreements with its distributors, as is the custom in the industry.
It is understood and common practice in the industry that neither the
distributor nor the manufacturer is obligated to maintain a relationship other
than on a collection by collection basis. It is the Company's policy that each
of its distributors is obligated to purchase every collection the Company
markets or forfeit its right to be a Company distributor.
In addition the Company sells directly to selected large national and
regional retail chains and specialty stores that specialize in the sale of
wallcoverings and designer fabrics.
The Company markets and promotes its products through the distribution
and sale of sample books. The Company prepares a sample book for each of its
Company brand collections of wallcoverings and fabrics designs. The majority of
the sample books prepared by the Company contain partial sheets of wallpaper,
coordinated borders and fabrics. Recently, the Company has added coordinated
floor coverings to its sample books. In addition, sample books contain
photographs of model room settings demonstrating how the Company's
wallcoverings, coordinated designer fabrics and floor coverings look in
simulated home environments. By offering coordinated wallcoverings and fabric
collections in its sample books, the Company is able to have its entire product
line shown to a wider variety of end users. The Company also produces sample
books, which contain only designer fabric samples, which it distributes to
fabric wholesalers.
The number of sample books that the Company prepares for any given
collection is determined based upon orders from the Company's distributors. The
distributors inform the Company how many books they will require for each
collection and the Company produces the sample books. The Company does not
produce sample books unless a distributor has requested them. The sample books
are sold to distributors and the distributors, in turn, place the sample books
with retail and interior design customers who ultimately sell the Company's
products to consumers. In addition to purchasing the Company's sample books,
each distributor is also required to purchase inventory for each pattern in each
collection.
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It takes between 10 to 12 months from the time that the Company
approves designs for a collection to the shipping of sample books for that
collection. Recently, the Company's Rosedale subsidiary began producing preview
copies of its sample books using it's in house computer aided design ("CAD")
system. This allows Rosedale to preview its collections to distributors and to
make changes to its collections based upon feedback from distributors before the
final printing of sample books. This has resulted in a large cost saving to the
Company. Rosedale believes that this innovation will also allow it to more
specifically tailor its collections and sample books to consumer trends in the
markets on a more timely basis.
Canadian Distribution
The Company sells approximately 40% of its wallcoverings and fabrics in
Canada through its Ontario subsidiary. The balance of its sales is through
regional distributors and national chains such as Color Your World and Sears
Canada. Regional distributors include Crown Wallcoverings, the largest
distributor to the Canadian interior design market and Images Wallcoverings.
Images Wallcoverings Ltd. is a distributor located on the west coast of Canada.
United States Distribution
Approximately 56% of the Company's wallcovering sales are made in the
United States. Distribution of the Company's wallcoverings in the United States
is done through sales to national and regional distributors as well as sales to
large retail wallpaper chains. Regional distributors in the United States
include Walltrends, Hunter & Co., Key Wallcoverings, G&W Distributors, Fashion
Wallcoverings, Olney Wallcoverings, Eisenhart Wallcoverings and Aztec. National
distributors include The Blonder Company, which distributes the Company's
Cambridge Studios and Ridley Nash brands, Seabrook Wallcoverings, which
distributes the Company's Hamilton House brand and Imperial Home Decor Group
which distributes another line of wallcoverings.
The Company also sells directly to retail chains in the United States,
which include Wallpapers to Go, Sherwin Williams, Gardener Wallcoverings,
Horners and Tretiaks.
In 1993, Rosedale embarked on the development of a separate
distribution network of wholesalers throughout North America for the purpose of
distributing its decorative fabrics. The Company designer fabrics are sold by
approximately ten independent salespersons who also sell products produced by
other fabric companies. The other fabrics sold by these salespersons generally
do not compete directly with the Company's designer fabrics in either look or
price points. The salespersons are compensated on a commission only basis. The
Company does not have contracts with any of these salespersons.
Wallcovering Market
Over two billion rolls of wallcoverings were sold worldwide in 1994,
with over 161 million rolls sold in Canada and the United States and over 500
million rolls of residential wallcoverings sold in Europe during the same
period. Sales of wallcoverings tend to have a direct relationship to the level
of home renovations and the economy in general, but have a lesser relationship
to new housing starts.
The Company competes primarily within the residential wallcovering
segment of the home decorative industry, which is a sector of the building
supplies industry, which caters to the do-it-yourself market. Currently the
wallcovering segment is fragmented, comprised of, many small and medium sized
companies with no single large company dominating the market. Management
believes that several of the companies within this segment may consider
consolidation and may be acquisition targets for the Company in the future,
although there can be no assurances that the Company will be able to identify
such acquisition target and consummate an acquisition on terms that are
acceptable to the Company.
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The Company believes that homes built prior to 1980 account for
approximately 86% of the U.S. housing market. As a result, many of these homes
may warrant renovations. With the bulk of the United States population entering
the post-40 age group, the U.S. Census Bureau estimates that by the year 2000
home ownership will increase to 70% from 66% in 1996. Based upon 1997 economic
data the U.S. Census Bureau predicts that domestic housing will continue to rise
by at least 1 million homes per year through the year 2000.
The trend at the distribution level of the industry has been towards a
market characterized by fewer distributors with higher distribution volumes. The
Company has developed strong relationships with independent regional
distributors. The Company is also well positioned to take advantage of growth in
mass merchandising through its relationship with its national distributors and
large retail chains. In addition, the Company hopes to penetrate alternative
fabric markets such as apparel and soft goods industries.
Patents and Trademarks
The Company trademarks the names of each of its collections and brand
names. In addition, the Company copyrights designs created for its brand
wallcovering and fabrics.
Government Regulation
The Company is subject to various Canadian regulations relating to
health and safety standards applicable warehouse operations. The Company must
comply with Canadian federal regulations administered by the Workman's
Compensation Board, relating to worker safety issues in its warehouse facility.
Although the cost of compliance with such regulations is not material, changes
to existing regulations may have a material adverse effect on the Company's
business and result of operations. The Company is also subject to U.S. Federal
Regulations relating to imports of goods and the North American Free Trade
Agreement on its products that it exports to the United States. Although the
cost of compliance with such regulations is not material, changes to existing
regulations may have a material adverse effect on the Company's business and
result of operations.
Employees
As of December 31, 1999, the Company employed 60 (58 on a full time
basis) persons, which includes 8 senior executives, 19 sales staff persons (17
full time, 2 part time), 9 design studio, 14 support staff persons and 10
warehouse workers. The Company has no unionized employees and believes that its
relationship with its employees is satisfactory.
Item 2. PROPERTIES AND FACILITIES
The Company leases facilities in Concord, Ontario for each of its
subsidiaries. The Company leases an approximately 78,000 square foot facility
for its Ontario subsidiary. The lease was amended July 13, 1995 and expires on
October 31, 2004 with an annual base rent of Cdn. $260,027. The building houses
Ontario's executive offices, warehouse and showroom. The Company leases a 47,000
square foot facility for its Rosedale subsidiary. The lease for the Rosedale
facility runs through October 31, 2004 and has a base annual rent of
Cdn.$176,640. The Rosedale subsidiary houses its design facilities, executive
offices, warehouse and showroom. Management believes that this space is adequate
for its design and warehouse needs in the foreseeable future. Management also
believes that there is ample room for expansion in the future.
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The Company also leases space for its retail paint store, located in
downtown Toronto, from a company owned by Alan Fine, Chief Executive Officer of
the Company, and Sid Ackerman, the Company's President. The lease calls for
rental payments in the amount of Cdn. $24,000 per annum, plus property taxes,
payable in equal monthly installments of Cdn. $2,000. The lease is for a
one-year term, automatically renewable from year to year unless terminated in
writing by either the landlord or the tenant on 30 days written notice.
Item 3. LEGAL PROCEEDINGS [IS THIS ISSUE RESOLVED]
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 the taxes
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 material legal proceedings pending or threatened against
the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The high and low bid price of the Company's common stock for each
quarter since its initial public offering which commenced on June 18, 1998,
through the close of its fiscal year on December 31, 1999 are as follows:
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Date High Low
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6/30/98 $7.625 $7.000
9/30/98 $9.375 $6.875
12/31/98 $7.750 $4.562
3/31/99 $4.750 $1.750
6/30/99 $2.593 $1.000
9/30/98 $1.625 $1.000
12/31/99 $4.000 $1.000
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The Company has not paid dividends to date.
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Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
General
The statements contained in this report that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements regarding the
Company's expectations, intentions, beliefs or strategies regarding the future.
All 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.
The wallcoverings, decorative fabrics and paint markets are highly
competitive and consist of foreign and domestic manufacturers and distributors
most of who are larger and have greater resources than the Company. The
Company's future success as a designer and distributor of high quality
wallcoverings and designer fabrics will be influenced by several factors
including the ability of the Company to efficiently meet the quality and design
requirements of its customers, management's ability to evaluate the public's
quality and design requirements and to achieve market acceptance of its
wallcoverings and designer fabrics collections. Further factors impacting the
Company's operations are increases in expenses associated with continued sales
growth, the ability of the Company to control costs, to develop products with
satisfactory profit margins and the ability to develop and manage the
introduction of new product lines and competition.
Management's Plans for 2000
The Company has taken appropriate steps to rectify its performance.
Selling prices on collections launched in 2000 have been increased to show a
positive impact on margins. A cutting charge for single rolls has been
instituted, which will generate revenue and save man-hours.
The Company is in final negotiations with a number of new potential
customers that could result in a substantial increase in revenues. The Ontario
division intends to launch two additional collections in 2000, which could
result in an additional $2-3 million in sales. Coupled with the initial success
of the decorative ceiling panels program, 2000 has the potential of being a very
profitable year for the Company.
Expenses are being watched closely, with certain areas being cut.
Substantial personnel cuts have been made in the design studio as a result of
increased efficiencies associated with the continued computerization of the
design process. The Company anticipates additional savings in cost of sample
book production.
It is management's intention to continue to rationalize the efficiency
of the Company's operations and attain profitability in 2000.
Results of Operations
Fiscal year ended December 31, 1999 compared to the fiscal year
December 31, 1998
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Revenues for the fiscal year ended December 31, 1999 were $16,908,400,
a 10.9% reduction over prior year revenues of $18,970,793. This decrease was due
to a decrease in sales in all sectors of the market, but in particular, was due
to the Chapter 11 filing of one of our large customers, Imperial Home Decor
Group. The estimated revenue lost as a result of this filing was in excess of
$1,000,000 for the period ended December 31, 1999.
Gross Profit for the Company for the fiscal year ended December 31,
1999 was 33.9% of sales, a decrease as compared to the same period one-year ago,
which was 39.8%. This decrease in gross profit margin can be attributed to the
mix of sales changing year over year. Stock obsolescence accounted for over 2%
of this change. The foreign exchange forward contracts that the Company entered
into affected margins by over 2% as well.
Selling expenses for the Company increased by 16.9% to $2,496,841 for
the fiscal year ended December 31, 1999 as compared to $2,135,594 for the fiscal
year ended December 31, 1998. This increase is attributable to additional
commissioned sales personnel being hired for Kingsway Fabrics, a division of
Rosedale Wallcoverings, and an additional sales person to handle the marketing
of commercial vinyl and the ceiling panels. Travel increased substantially in
1999 as Kingsway Fabrics began developing a market for its product line. This
cost will not re-occur in 2000 as the majority of the preliminary set-up costs
have occurred.
General and administrative expenses for the Company increased by 30%,
to $2,749,064 for the fiscal year ended December 31, 1999 from $2,114,943 for
the fiscal year ended December 31, 1998. Over $400,000 of this increase relates
to bad debt expense, due mainly to the filing under Chapter 11 of the Imperial
Home Decor Group in the U.S. There was also an increase in consulting and legal
fees, approximately $150,000, as the Company entered into negotiations regarding
a possible acquisition, which did not come to fruition.
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 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 showed a
small revenue for the fiscal year ended December 31, 1999 of $2,593 compared to
costs of $279,454 for the same period last year.
Design studio expenses for the Company increased by 3.3% to for the
fiscal year ended December 31, 1999, to $791,741 versus $766,235 for the fiscal
year ended December 31, 1998. This slight increase is attributable to a general
inflation increase and a fluctuation in exchange rates.
The operating loss for the fiscal year ended December 31, 1999 was
$(1,121,541) compared to an operating income of $1,655,037 for the fiscal year
ended December 31, 1998. This relates to lower sales volume with lower margins,
an increase in operating costs and a significant bad debt expense as previously
discussed. The U.S. dollar has remained very strong against the Canadian dollar,
which has had a negative impact of approximately $400,000 on the operating loss
due to the foreign exchange forward contracts the Company has committed to.
<PAGE>
Interest expense for the Company for the fiscal year ended December 31,
1999 decreased 9.0% to $265,990 from $292,341 for the year ended December 31,
1998. This decrease in interest expense is attributable to interest on
short-term investments on funds raised during our initial public offering.
The net loss for the fiscal year ended December 31, 1999 was
$1,528,250, as compared to net income of $1,050,553 for the fiscal year ended
December 31, 1998.
The loss per share for the fiscal year ended December 31, 1999 were
$0.55 compared to earnings per share of $0.49 for the fiscal year ended December
31, 1998. Earnings per share were calculated for both periods based on the
weighted average number of shares issued in each year. The weighted average
number of shares for 1999 was 2,769,997 and 2,160,753 for 1998.
Liquidity and Capital Resources
The Company had a negative net change in cash of $176,694 for the
fiscal year ended December 31, 1999. The principal sources of cash were an
increase in bank indebtedness of $1,175,468 and a decrease in Accounts
Receivable of $568,201. These items were offset by the net loss recorded for the
year.
Cash flows used in investing activities for the fiscal year ended
December 31, 1998 were $1,127,488. This reflected capital addition for
cylinders, designs and engravings for new collections. It is the Company's
intention to utilize a good portion of the funds to develop new product lines of
wallpaper plus continue the development of floor coverings and ceiling tiles.
Item 7. FINANCIAL STATEMENTS
The Financial Statements are included with this report commencing on
page F-1.
Item 8. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth certain information concerning the
Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Alan Fine 54 Chief Executive Officer and Chairman of the Board
Sidney Ackerman 54 President and Director
Norman G. Maxwell 52 Chief Financial Officer and Director
Ken Page 37 Director
Gregory Sichenzia 37 Director
------------------------------- ----------- ---------------------------------------------------------------
</TABLE>
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by each of them.
Alan Fine has served as the Chief Executive Officer and Chairman of the
Board of the Company since its inception in May 1997. In 1982, Mr. Fine founded
Rosedale Wallcoverings & Fabrics Inc. and has served as the President of
Rosedale Wallcovering & Fabrics, Inc. since 1987. Mr. Fine has also served as
the Secretary for Ontario Paint & Wallpaper Ltd. since 1978. From 1972 to 1977
Mr. Fine was the Manager of Wallpaper Distribution for Ontario Paint & Wallpaper
Ltd.
Sidney Ackerman has served as the President of the Company since its
inception in May 1997. In 1971, Mr. Ackerman was responsible for the development
of Ontario Wallcoverings, which became the wallpaper distribution arm of Ontario
Paint & Wallpaper Ltd. In June 1978, Mr. Ackerman was elected Director and
Treasurer of Ontario Paint & Wallpaper Ltd. Since 1994, Mr. Ackerman has served
as the President of Ontario Paint & Wallpaper Ltd.
Norman G. Maxwell has been Chief Financial Officer and Operations Manager
of the Company since its inception in May 1997 and has served as a director of
the Company since May 1997. Prior thereto, since 1992, Mr. Maxwell has served as
the Vice President of Finance with Ontario. From 1989 to 1992, Mr. Maxwell
served as the Controller of Ontario. Mr. Maxwell has been in the wallcovering
industry for over 20 years and has been a Certified Management Accountant since
1977.
Ken Page has been a Director of the Company since June 1998. Since 1992 Mr.
Page has been a partner of the law firm of Page Hill in Toronto, Ontario,
Canada. Mr. Page graduated from the University of Western Ontario with an LLB in
1986 and was admitted to the bar in Ontario 1988.
<PAGE>
Gregory Sichenzia has been a Director of the Company since August 1998. Mr.
Sichenzia is a partner of the law firm of Sichenzia, Ross & Friedman LLP in New
York, New York and has been since May 1998. He had been a partner of Singer
Zamansky LLP in New York, New York, since November 1996. Prior thereto and since
August 1994, he had been an associate attorney at Schneck Waeltman Hashmall &
Mischel LLP in New York City.
Committees of the Board of Directors
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee consists of Gregory Sichenzia, Ken Page and Sid
Ackerman. Mr. Sichenzia and Mr. Page are independent directors who are not
salaried officers of the Company. The purpose of the Compensation Committee is
to review the Company's compensation of its executives, to make determinations
relative thereto and to submit recommendations to the Board of Directors with
respect thereto. The Compensation Committee also selects the persons to whom
options to purchase shares of the Company's Common Stock under the 1998 Stock
Option Plan will be granted and to make various other determinations with
respect to such Plan.
The Audit Committee consists of Gregory Sichenzia, Ken Page and Alan Fine.
The purpose of the Audit Committee is to provide general oversight of audit,
legal compliance and potential conflict of interest matters.
Compensation of Directors
The Company has not paid compensation to any director for acting in such
capacity. The Company is currently reviewing its policy on compensation of
outside directors and may pay outside directors in the future.
The Company intends to file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year covered by this report an
information statement (the "Information Statement"), pursuant to Regulation 14C
pertaining to the Annual Meeting of Stockholders to be held in May 2000.
Information regarding directors and executive officers of the Company will
appear under the caption "Election of Directors" in the Information Statement
and is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company during fiscal year 1999, the Company is not aware of
any director, officer or beneficial owner of more than ten percent of the
Company"s Common Stock that, during fiscal year 1999, failed to file on a timely
basis reports required by Section 16(a) of the Securities Exchange Act of 1934.
<PAGE>
Item 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company during each of the last three fiscal years to
the Company's Chief Executive Officer and to each of the Company's executive
officers who earned in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Awards Payouts
Securities All
Restricted Underlying Other
Other Stock Options/ LTIP Compen-sation
Compen-sation Award(s) SARs Payouts ($)
Name Position Year (1) Salary Bonus ($) (#)(1)(2) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alan Fine(1) Chief 1999 $ 161,529 $9,541 ---- ---- 125,750 ---- ----
Executive 1998 $ 160,000 $7,602 ---- ---- ---- ---- ----
Officer 1997 $ 173,360 $7,020 ---- ---- ---- ---- ----
Sidney President 1999 $ 161,529 $18,245 ---- ---- 125,750 ---- ----
Ackerman(1) 1998 $ 160,000 $8,995 ---- ---- ---- ---- ----
1997 $ 173,360 $9,595 ---- ---- ---- ---- ----
- ----------------- ---------- ---------- ----------- ------------ ---------- ----------- ------------ --------- ----------
</TABLE>
(1) Reflects total compensation received from both the Company's Ontario and
Rosedale subsidiaries. As the Company is located in Canada, the executives
are have been paid salaries of $240,000 Canadian dollars, ($160,000 U.S.
based on an effective exchange rate of $1.50).
(2) Options under the 1998 Plan were granted on August 19, 1999 at the most
recent closing price of the Company's shares as traded on NASDAQ,
specifically, $1.00 per share on August 18, 1999.
STOCK OPTIONS GRANTS AND EXERCISES
Stock options totaling 251,500 shares were granted to the named
executive officers during the last completed fiscal year.
The following table shows the value at December 31, 1999 of
unexercised options held by the named executive officers:
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option Values
Number of securities Value of unexercised
underlying unexercised in-the-money options at
options at fiscal fiscal year-end ($)
year-end (#)
Name Shares acquired on Value Realized
exercise (#) ($) Exercisable/unexercisable Exercisable/unexercisable
<S> <C> <C> <C> <C> <C> <C>
Sidney Ackerman, President 0 0 125,750/0 $100,600/0
- ---------------------------- --------------------- ---------------- --------------------------- ------------------------------
</TABLE>
Employment Agreements
On the effective date of the Company's Registration Statement, Alan
Fine and Sidney Ackerman both entered into five year employment agreements with
the Company. Alan Fine is retained as Chief Executive Officer of the Company at
an annual salary of $160,000. Sidney Ackerman is retained as President of the
Company at an annual salary of $160,000.
<PAGE>
The employment agreements with Alan Fine and Sidney Ackerman provide
that upon the death of any of the two employees that three years full salary
will be paid to the employee's estate in a lump sum payment. The agreements also
provide for reimbursement of reasonable business expenses.
Alan Fine and Sidney Ackerman are entitled to bonuses of up to $10,000
each based on achieving sales, profitability and management goals as
predetermined by the Board of Directors or compensation committee and other
subjective criteria as determined by the Board of Directors or Compensation
Committee.
Alan Fine and Sidney Ackerman shall each receive $20,000 per year
additional compensation, including car allowance, insurance and retirement
savings with matched contributions by the Company and such other perquisites.
Upon the resignation, or exercise of retirement option upon reaching
the age of 60, the Company shall pay the employee a lump sum resignation
allowance equal to three years salary plus equivalent in benefits. Based upon
any wrongful termination of either Alan Fine or Sidney Ackerman, the Company
shall pay the employee a lump sum resignation allowance of 5 years salary and
equivalent in benefits.
In the event that there is a change in control of the Company, through
an acquisition where any person acquires more than 50% of the shares of the
Company, an amalgamation, consolidation or merger with another corporation
resulting in at least 50% of the voting shares of the surviving corporation
being controlled by a new acquirer or the sale directly or otherwise of all of
the assets of the Company to a third party in a non-distress situation, then the
Company shall pay to Alan Fine and Sidney Ackerman a lump sum payment equal to
the sum of one and one-half times their respective annual salaries paid or
payable in respect of the most recently completed fiscal year.
Stock Option Plan
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 administered by the Compensation Committee or the
board of directors, who determine, among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of the options and the option exercise price.
The 1998 Plan is for a period for 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 holder's 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 option's
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause, which results in immediate
termination of the option.
<PAGE>
Options granted under the 1998 Plan, at the discretion 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 participant's
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 authorization to the broker or selling agent to pay that amount to the
Company, or any combination of the above.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
The exercise price of all future options will be at least 85% of the fair market
value of the Common Stock on the date of grant of the options. A benefit equal
to the amount by which the fair market value of the shares at the time the
employee acquires them exceeds the total of the amount paid for the shares or
the amount paid for the right to acquire the shares shall be deemed to be
received by the employee in the year the shares are acquired pursuant to
paragraph 7(1) of the ITA. Where the exercise price of the option is equal to
the fair market value of the shares at the time the option is granted, paragraph
110(1)(d) of the ITA allows a deduction from income equal to one quarter of the
benefit as calculated above. If the exercise price of the option is less than
the fair market value at the time it is granted, no deduction under paragraph
110(1)(d) is permitted. Options granted to any non-employees, whether directors
or consultants or otherwise will confer a tax benefit in contemplation of the
person becoming a shareholder pursuant to subsection 15(1) of the ITA.
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
employee's 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 shareholders of the Company.
On August 19, 1999, the Board of Directors granted 336,500 stock
options at the most recent closing price of the Company's shares as traded on
NASDAQ, specifically, U.S. $1.00 per share on August 18, 1999. Officers,
Directors and five percent shareholders were granted 276,500 options. The
remaining 60,000 options were granted to key employees.
Information regarding executive compensation will appear under the
caption "Executive Compensation" in the Information Statement and is
incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth certain information, as of the date
hereof, and as adjusted to give effect to the sale of 1,286,714 shares of Common
Stock and 1,265,000 Warrants, by the Company with respect to the beneficial
ownership of the Common Stock by each beneficial owner of more than 5% of the
outstanding shares thereof, by each director, each nominee to become a director
and each executive named in the Summary Compensation Table and by all executive
officers, directors and nominees to become directors of the Company as a group.
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Approximate Percentage
Owned of Common Stock
Outstanding
Name
- -------------------------------------------------------------- ------------------- --------------------------
<S> <C> <C> <C>
Sidney Ackerman(2) 516,726 18.5%
Alan Fine (3) 548,781 19.7%
Rosalyn Fine (4) 201,219 7.2%
The Ackerman Family Trust (5) 233,274 8.4%
All Executive Officers and Directors
as a Group (two persons) 1,065,507 38.2%
- ---------------------
</TABLE>
(1) Unless otherwise indicated, the address is c/o Rosedale Decorative
Products Ltd., 731 Millway Avenue, Concord, Ontario, Canada L4K 3S8.
(2) Does not include 233,274 shares of Common Stock held by the Ackerman
Family Trust. Includes 228,574 shares of Common Stock owned by 1369597 Ontario
Inc., which is owned by Sidney Ackerman and the Ackerman Family Trust.
(3) Includes 404,706.5 shares of Common Stock owned by 1369598 Ontario Inc.
of which Alan Fine and the Fine Family Trust are shareholders.
(4) Includes 57,143.5 shares of Common Stock owned by 1274152 Ontario, Inc.
of which Rosalyn Fine is a 100% owner. Rosalyn Fine is the former wife of Alan
Fine and the sister of Sidney Ackerman.
(5) The Ackerman Family Trust owns 233,274 shares of Common Stock. Sheldon
Shapiro and Fred Stoppell are trustees of The Ackerman Family Trust. Under the
terms of the trust instrument, the trustees have the power to vote on the
shares.
During the year, a tax-free reorganization of the share capital held
by the principal stockholders' was done. The above table reflects the
results of that reorganization. The total number of shares of 1,500,000
beneficially owned did not change.
Voting Agreement
Effective August 16, 1999, Sidney Ackerman, Alan Fine, The Ackerman
Family Trust, 1274152 Ontario Inc., 1324864 Ontario Inc. and 454590 Ontario
Limited (the "Shareholders"), entered into a Common Stock voting agreement.
Pursuant to the terms of the voting agreement, each of the Shareholders agrees
to vote all of their Shares unanimously in respect of any matter to be voted on
at any meeting of the shareholders of the Company. In the event the Shareholders
cannot express unanimity or any of them abstains from voting then the
Shareholders agree to vote all of their Shares against such matter or withhold
all of their votes in respect of such matter as applicable and to so instruct
their proxies. The provisions of the voting agreement shall apply to any shares
in the capital stock of the Company to which voting rights attach which may be
issued to the Shareholders at any time during the term of the voting agreement
and any shares in the capital stock of the Company which are issued in
replacement of any shares or after acquired shares. The voting agreement does
not apply to any shares that are sold or transferred to a Shareholder and does
not apply to any shares that are sold or transferred to a third party in an
arm's-length transaction. The voting agreement terminates upon Sidney Ackerman
or Alan Fine being no longer employed by the Company or any of its subsidiaries
or the date upon which any Shareholder divests itself of all shares in an
arm's-length transaction for fair market consideration, whichever is earlier.
Information regarding ownership of certain beneficial owners and
management will appear under the caption "Ownership of Securities" in the
Information Statement and is incorporated herein by reference.
<PAGE>
Item 12. CERTAIN TRANSACTIONS
In 1995, Alan Fine, Chief Executive Officer of the Company and Sidney
Ackerman, President of the Company each loaned funds to the Company's Ontario
and Rosedale subsidiaries. As at December 31, 1998, the outstanding amounts of
loans made by Alan Fine to Ontario and Rosedale were $208,429 and $473,477,
respectively, and the outstanding amount of the loans made by Sidney Ackerman to
Ontario and Rosedale were $110,777 and $335,217, respectively. These loans are
secured by a general security agreement on the personal property of Rosedale and
Ontario and bear interest at a rate equal to the prime rate of interest charged
by the National Bank of Canada plus 1.5% per annum and are payable on demand.
Alan Fine, Chief Executive Officer of the Company, and Sidney Ackerman,
President of the Company, own all of the issued and outstanding capital stock of
966578 Ontario Inc. and 976168 Ontario Inc. The Company leases space for its
retail store, located in downtown Toronto, from 966578 Ontario Inc. The lease
calls for rental payments in the amount of $16,826 per annum, plus general
property taxes, payable in equal monthly installments of $1,402. The lease is
for a one year term, automatically renewable from year to year unless terminated
in writing by either the landlord or the tenant on 30 days written notice.
In 1995, the Company loaned two related companies, 966578 Ontario Inc. and
976168 Ontario Inc.. As of December 31, 1997, the Company had outstanding loan
receivables from 976168 Ontario Inc. in the amount of $2,054. The loans bear
interest at a rate equal to the prime rate of interest as charged by the
National Bank of Canada plus 1.5% and are payable on demand.
The Company has second mortgages from two related companies, 1216748
Ontario Inc. and 1217576 Ontario Inc., both of which are 50% owned by Sidney
Ackerman, President and Alan Fine, Chief Executive Officer. The principal amount
of the loans from 1216748 Ontario Inc. and 1217576 Ontario Inc. are $179,291 and
$162,619, respectively. The mortgages are secured by land and buildings and bear
interest at 9% per annum and are payable on demand.
The Company has available credit facilities up to a maximum of $7,039,000,
which bear interest at rates varying between the bank's prime rate plus 0.25%
and prime plus 1.25%. The credit facilities are 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 $1,732,000 from the
Company and its subsidiaries, guarantees from affiliated companies up to
$589,000, assignment of life insurance of $2,079,000 on the lives of two key
officers and assignment of fire insurance.
Information regarding Certain Transaction will appear under the caption
"Certain Transaction" in the Information Statement and is incorporated herein by
reference.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Registrant(1)
3.2 By-laws of Registrant(1)
4.1 Form of Underwriters' Warrant(3)
4.2 Form of Warrant Agreement(1)
4.3 Specimen Common Stock Certificate(3)
4.4 Specimen Redeemable Common Stock Purchase
Warrant Certificate(4)
<PAGE>
10.2 1998 Stock Option Plan(3)
10.4 Form of Employment Agreement with Sidney Ackerman(3)
10.5 Form of Employment Agreement with Alan Fine(3)
21 List of Subsidiaries of Registrant*
27 Financial Data Schedule**
----------------
* Previously filed.
**Filed herewith
(1) Incorporated by reference from registrant's Registration Statement on
Form SB-2, filed on January 22, 1998.
(2) Incorporated by reference from registrant's Registration Statement on
Form SB-2, Amendment No. 1, filed on April 23, 1998.
(3) Incorporated by reference from registrant's Registration Statement on
Form SB-2, Amendment No. 2, filed on May 28, 1998.
(4) Incorporated by reference from registrant's Registration Statement on
Form SB-2, Amendment No. 3, filed on June 11, 1998.
(b) Reports on Form 8-K.
-------------------
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/Alan Fine
Alan Fine, Chairman and Chief
Executive Officer
Date: April 4, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
<S> <C> <C>
/s/ ALAN FINE Chairman, Chief Executive Officer April 4, 2000
Alan Fine
/s/ SIDNEY ACKERMAN President Director April 4, 2000
Sidney Ackerman
/s/ NORMAN G. MAXWELL Director, Chief Financial Officer, April 4, 2000
Norman G. Maxwell Principal Accounting Officer
/s/ KEN PAGE Director April 4, 2000
Ken Page
/s/ GREGORY SICHENZIA Director April 4, 2000
Gregory Sichenzia
</TABLE>
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND DECEMBER 31, 1998
TOGETHER WITH REPORT OF INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Report of Independent Auditors 1
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998 2 - 3
Consolidated Statements of Operations for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997 4
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
December 31, 1998 and December 31, 1997 5 - 6
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1999, December 31, 1998 and December 31, 1997 7
Notes to Consolidated Financial Statements 8 - 25
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Rosedale Decorative Products Ltd.
We have audited the accompanying consolidated balance sheets of Rosedale
Decorative Products Ltd. (incorporated in Canada) as of December 31, 1999
and 1998 and the related consolidated statements of operations, cash
flows and changes in stockholders' equity for each of the years ended
December 31, 1999, 1998 and 1997. These consolidated financial statements
are the responsibility of the management of Rosedale Decorative Products
Ltd. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Rosedale Decorative Products Ltd. as of December 31, 1999 and 1998 and
the results of its operations and its cash flows for each of the years
ended December 31, 1999, 1998 and 1997, in conformity with generally
accepted accounting principles in the United States of America.
Since the accompanying financial statements have not been prepared and
audited in accordance with generally accepted accounting principles and
standards in Canada, they may not satisfy the reporting requirements of
Canadian statutes and regulations.
/s/ Schwartz Levitsky Feldman LLP
Schwartz Levitsky Feldman LLP
Toronto, Ontario
March 13, 2000 Chartered Accountants
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Balance Sheets
As of December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash 3,240,720 3,417,414
Accounts receivable (notes 3 and 10) 3,341,592 3,696,050
Inventory (notes 4 and 10) 7,385,373 7,229,444
Prepaid expenses and sundry assets [note 19(a)] 626,074 288,764
Income taxes recoverable 95,827 38,738
---------- ----------
14,689,586 14,670,410
LOAN RECEIVABLE FROM AFFILIATED COMPANY (note 5) 2,054 1,933
DEFERRED PRODUCT COSTS [note 1(a) and 6] 861,366 851,202
DEFERRED POLICY COSTS (note 7) - 268,506
MORTGAGES RECEIVABLE (note 8) 341,910 321,841
PROPERTY, PLANT AND EQUIPMENT (note 9) 2,901,705 2,160,433
---------- ----------
18,796,621 18,274,325
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Balance Sheets
As of December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1999 1998
$ $
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C> <C>
Bank indebtedness (note 10) 4,744,567 3,327,022
Accounts payable and accrued expenses (note 11) 5,289,746 4,581,034
Current portion of long-term debt (note 12) - 77,076
---------- ----------
10,034,313 7,985,132
LONG-TERM DEBT (note 12) - 950,956
DUE TO STOCKHOLDERS AND DIRECTORS (note 13) 1,560,918 1,174,987
DEFERRED INCOME TAXES 219,913 156,786
---------- ----------
11,815,144 10,267,861
---------- ----------
STOCKHOLDERS' EQUITY
COMMON STOCK (note 14) 5,061,956 5,013,883
ADDITIONAL PAID-IN CAPITAL (note 14) 142,314 142,314
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) 66,849 (388,341)
RETAINED EARNINGS 1,710,358 3,238,608
---------- ----------
6,981,477 8,006,464
---------- ----------
18,796,621 18,274,325
========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Operations
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
SALES 16,908,400 18,970,792 20,757,423
COST OF SALES 11,179,513 11,420,943 13,350,033
---------- ---------- ----------
GROSS PROFIT 5,728,887 7,549,849 7,407,390
---------- ---------- ----------
OPERATING EXPENSES
General and administrative 2,749,065 2,114,943 2,379,749
Selling 2,496,841 2,135,594 2,321,585
Design studio 791,741 766,235 826,796
Book development costs (recovery) (2,593) 279,454 189,566
Amortization 815,374 598,586 572,655
---------- ---------- ----------
TOTAL OPERATING EXPENSES 6,850,428 5,894,812 6,290,351
---------- ---------- ----------
OPERATING INCOME (LOSS) (1,121,541) 1,655,037 1,117,039
Interest expense 265,990 292,341 209,403
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (1,387,531) 1,362,696 907,636
Income taxes (note 15) 140,719 312,143 282,010
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE (1,528,250) 1,050,553 625,626
Cumulative effect of change in accounting
principle (note 1c) - - 174,202
---------- ---------- ----------
NET INCOME (LOSS) (1,528,250) 1,050,553 799,828
========== ========== ==========
Net earnings (loss) per common share, basic and
diluted (note 14) (0.55) 0.49 0.53
========== ========== ==========
Weighted average number of common shares
outstanding 2,769,997 2,160,753 1,500,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) (1,528,250) 1,050,553 799,828
---------- ---------- ----------
Adjustments to reconcile net income to net
cash (used in) provided by
operating activities:
Amortization 815,374 598,586 572,655
(Increase) decrease in deferred product costs 41,687 (260,562) (658,762)
(Increase) decrease in accounts receivable 568,201 693,551 (964,145)
(Increase) decrease in inventory 286,443 (570,438) (1,222,626)
Increase in prepaid expenses and sundry assets (310,170) (124,276) (51,588)
Increase (decrease) in accounts payable and
accrued expenses 410,952 (1,758,420) 1,549,646
Increase in income taxes recoverable (53,110) (205,553) (20,144)
Increase (decrease) in deferred income taxes 51,824 (21,615) 168,015
---------- ---------- ----------
Total adjustments 1,811,201 (1,648,727) (626,949)
---------- ---------- ----------
Net cash provided by (used in) operating
activities 282,951 (598,174) 172,879
---------- ---------- ----------
Cash flows from investing activities:
(Increase) decrease in deferred policy costs 277,090 (100,759) (25,227)
Purchases of property, plant and equipment (1,404,578) (968,113) (871,703)
Decrease in mortgages receivable - 55,421 -
---------- ---------- ----------
Net cash used in investing activities (1,127,488) (1,013,451) (896,930)
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Cash Flows
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
Cash flows from financing activities:
<S> <C> <C> <C>
Issuance of common stock ....................... 48,073 5,156,195 --
Proceeds from (repayment of) bank indebtedness . 1,175,468 (388,743) 540,267
Proceeds from loans from stockholders .......... 419,756 33,429 25,789
(Repayment of) proceeds from long-term debt .... (1,060,898) 21,426 134,616
Proceeds from (repayment of) directors loans ... (116,038) (269,222) 132,861
----------- ---------- ----------
Net cash provided by financing activities ...... 466,361 4,553,085 833,533
----------- ---------- ----------
Effect of foreign currency exchange rate changes .... 201,482 33,299 (218,749)
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (176,694) 2,974,759 (637,168)
Cash and cash equivalents, beginning of year ........ 3,417,414 442,655 1,079,823
----------- ---------- ----------
Cash and cash equivalents, end of year .............. 3,240,720 3,417,414 442,655
=========== ========== ==========
Income taxes paid ................................... 316,810 238,575 135,302
=========== ========== ==========
Interest paid ....................................... 531,980 330,384 299,421
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
Common
Stock Common Additional Other
Number of Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (loss)
------------- ------------- -------------- ------------- -------------
$ $ $ $
<S> <C> <C> <C> <C> <C>
Balance as of December 31,
1997 1,500,000 2 - 2,188,055 (226,990)
Issuance of common stock 1,265,000 5,013,881 - - -
Purchase warrants (1,265,000) - - 142,314 - -
Foreign currency translation - - - - (161,351)
Net income for the year - - - 1,050,553 -
--------- --------- -------- --------- ----------
Balance as of December 31,
1998 2,765,000 5,013,883 142,314 3,238,608 (388,341)
Issuance of common stock
[note 14 (b) (iv) (v)] 21,714 48,073 - - -
Foreign currency translation - - - - 455,190
Net loss for the year - - - (1,528,250) -
--------- --------- -------- --------- ----------
Balance as of December 31,
1999 2,786,714 5,061,956 142,314 1,710,358 66,849
========= ========= ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The 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, Rosedale Wallcoverings and Fabrics Inc.
("Rosedale") and Ontario Paint and Wallpaper Limited ("Ontario"),
respectively.
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.
On January 1, 2000, 521305 and 1010037 were amalgamated with
Rosedale and Ontario. The amalgamation will be accounted for as
a pooling of interest.
All material inter-company accounts and transactions have been
eliminated.
b) Principal Activities
The company, which was incorporated in Canada 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
(i) Book Development Costs
Expenditures relating to the design and distribution of
wallpaper and fabric sample books consisting of book
development and design costs relating to collections that have
not been launched are deferred and amortized over a period of
up to five years on a straight-line basis. Proceeds from the
sale of sample books to distributors are offset against the
book development costs when received.
The deferral of a portion of book development and design costs
commencing in 1997 represented a change in accounting
principle from a full write-off to a deferral over a period of
up to five years.
(ii) Book Subsidy
Sales of completed sample books to retailers are sold at a
discount. This discount is deferred and amortized over a
period of up to four years on a straight-line basis.
8
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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 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.
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 20% 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 approximates when they
were put into use.
i) Income taxes
The company accounts for income tax under the provisions of FAS
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.
9
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
j) Foreign Currency Translation
The company maintain its 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 accumulated other comprehensive income
(loss) in stockholders' equity.
k) Earnings or Loss Per Share
The company adopted FAS No.128, "Earnings per Share" during
fiscal 1998 which requires disclosure on the financial
statements of "basic" and "diluted" earnings (loss) per share.
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding for the year. Diluted earnings (loss) per share is
computed by dividing net income (loss) by the weighted average
number of common shares outstanding plus common stock
equivalents (if dilutive) related to stock options and warrants
for each year.
l) Sales
Sales represent the invoiced value of goods supplied to
customers. Sales are recognized upon the passage of title to the
customers.
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
estimated.
n) Long-Lived Assets
On January 1, 1996, the company adopted the provisions of FAS
No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be disposed of. FAS No. 121 requires
that long-lived assets 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. Management used its best estimate of the
undiscounted cash flows to evaluate the carrying amount and have
determined that no impairment has occurred.
10
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
o) Stock Based Compensation
In December 1995, FAS 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. The Company chose
to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the measurement date over
the amount an employee must pay to acquire the stock. See note
14 (c ) for a summary of the pro-forma EPS determined as if the
company had applied FAS No. 123.
p) Concentrations of Credit Risks
The company's receivables are unsecured and are generally due in
30 days. Currently, the company's customers are primarily local,
national and international users of wallpapers and decorative
fabrics. The company's receivables do not represent significant
concentrations of credit risk as at December 31, 1999, due to
the wide variety of customers, markets and geographic areas to
which the company's products are sold.
q) Recently Issued Accounting Standard
In June 1998, FAS No. 133 was issued with respect to
Accounting for Derivative Instruments and Hedging activities. The
requirements of FAS No. 133 was extended to fiscal years
beginning January 1, 2001 by FAS No. 137. The company anticipates
that adoption of FAS No. 137 will initially affect comprehensive
income with respect to the foreign exchange contracts referred to
in note 22.
2. COMPREHENSIVE INCOME (LOSS)
The company has adopted FAS 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>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
NET INCOME (LOSS) (1,528,250) 1,050,553 799,828
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation 455,190 (161,351) (77,653)
----------- ---------- --------
COMPREHENSIVE INCOME (LOSS) (1,073,060) 889,202 722,175
</TABLE>
11
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
2. COMPREHENSIVE INCOME (LOSS) (cont'd)
The foreign currency translation adjustments are not currently
adjusted for income taxes as the company is located in Canada and the
adjustments relate to the translation of the financial statements
from Canadian dollars into United States dollars, which are done only
for the convenience of the reader as disclosed in note 1(j).
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C>
Accounts receivable 3,778,086 3,842,820
Less: Allowance for doubtful accounts 436,494 146,770
--------- ---------
Accounts receivable, net 3,341,592 3,696,050
========= =========
</TABLE>
Included in the 1999 allowance for doubtful accounts is a provision
of $198,518 for a receivable from a major customer who has filed for
a Chapter 11 reorganization under the Bankruptcy Reform Act.
4. INVENTORY
<TABLE>
<CAPTION>
1999 1998
$ $
Inventory comprised the following:
<S> <C> <C>
Raw materials 353,694 185,956
Finished goods 7,031,679 7,043,488
--------- ---------
7,385,373 7,229,444
========= =========
</TABLE>
5. LOAN RECEIVABLE FROM AFFILIATED COMPANY
The loan receivable from affiliated company, which is related through
common ownership, bears interest at prime plus 1.5%, has no specific
repayment terms and is not expected to be repaid prior to January 1,
2001.
12
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
6. DEFERRED PRODUCT COSTS
1999 1998
$ $
<S> <C> <C>
Book development costs 1,793,139 1,285,831
Deferred software costs - 58,338
--------- ---------
Cost 1,793,139 1,344,169
--------- ---------
Less: Accumulated amortization
Book development costs 931,773 467,454
Deferred software costs - 25,513
--------- ---------
931,773 492,967
--------- ---------
Net Deferred Product Costs 861,366 851,202
========= =========
</TABLE>
7. DEFERRED POLICY COSTS
Deferred policy costs represented the prepaid portion of charges on
the life insurance policies referred to in note 21.
8. MORTGAGES RECEIVABLE
Second mortgages from companies related through common ownership are
secured by land and buildings, bear interest at 9% and are payable on
demand. No repayments are expected prior to January 1, 2001.
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C> <C>
1216748 Ontario Inc. 179,291 168,768
1217576 Ontario Inc. 162,619 153,073
--------- ---------
341,910 321,841
========= =========
</TABLE>
13
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
9. PROPERTY, PLANT AND EQUIPMENT
1999 1998
$ $
<S> <C> <C>
Leasehold improvements 35,303 29,230
Automobile 19,879 18,711
Equipment and furniture 302,796 283,502
Furniture and fixtures 255,879 240,517
Computer equipment 535,155 348,874
Cylinders and related design costs 5,180,649 3,716,883
--------- ---------
Cost 6,329,661 4,637,717
--------- ---------
Less: Accumulated amortization
Leasehold improvements 16,779 12,671
Automobile 18,145 16,380
Equipment and furniture 233,263 203,399
Furniture and fixtures 209,137 185,861
Computer equipment 346,385 245,381
Cylinders and related design costs 2,604,247 1,813,592
--------- ---------
3,427,956 2,477,284
--------- ---------
Net 2,901,705 2,160,433
========= =========
</TABLE>
10. BANK INDEBTEDNESS
The company has available credit facilities up to a maximum of
$7,039000 ($10,160,000 Canadian), which bear interest at rates
varying between the bank's prime rate plus 0.25% and prime plus
1.25%. 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 $1,732,000 from the company, guarantees from affiliated companies
up to $589,000, assignment of life insurance of $2,079,000 on the
lives of two key officers/ shareholders and assignment of fire
insurance.
As at the year end, the company was in breach of a covenant in its
banking agreement with respect to capital expenditures. This covenant
requires that annual capital expenditures shall not exceed an amount
based on cash flows from operations. As a result of the losses
incurred during the year, the company was not able to generate
sufficient cash flows as defined by the bank to cover its annual
capital expenditures. It is management's opinion that this matter
will be resolved to the mutual satisfaction of the company and its
bankers.
14
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1999 1998
$ $
Accounts payable and accrued expenses is comprised of the following:
<S> <C> <C>
Trade payables 4,840,934 4,230,024
Accrued expenses 448,812 351,010
--------- ---------
5,289,746 4,581,034
========= =========
</TABLE>
<TABLE>
<CAPTION>
12. LONG-TERM DEBT
1999 1998
$ $
a) Settlement Payable
<S> <C> <C>
Settlement of a claim initiated by a third party payable $7,242
monthly. The balance was repaid in 1999 - 77,076
b) Insurance Loan
Amount in excess of cash surrender values of life insurance
policies transferred to the holding companies ("holdcos") of
two shareholders/key officers as described in note 21.
The holdcos directly own 22.72% of the issued common stock of
the company and accordingly the amounts payable to the
holdcos are included as due to stockholders and directors
(note 13) - 950,956
--------- ---------
- 1,028,032
--------- ---------
Less: Current portion - (77,076)
--------- ---------
Long-term portion - 950,956
========= =========
</TABLE>
13. DUE TO STOCKHOLDERS AND DIRECTORS
Stockholders' and directors advances are secured by general security
agreements, bear 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 January 1, 2001.
15
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
14. COMMON STOCK
a) Authorized
An unlimited number of common and preference shares
The preference shares are issuable in series upon approval by
the directors with the appropriate designation, rights,
privileges and conditions attaching to each share of such
series.
Issued
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C> <C> <C> <C>
2,786,714 Common shares (1998 - 2,765,000) 5,061,956 5,013,883
1,265,000 Warrants 142,314 142,314
--------- ---------
5,204,270 5,156,197
========= =========
</TABLE>
b) Changes to issued share capital
i) 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.
ii)On June 18, 1998, the company issued 1,100,000 common
shares to the public.
iii) On July 29, 1998, the Company issued 165,000 common
shares to the public. The proceeds received from the issuance was
$6,158,857 with related costs (net of income taxes) amounting to
$1,002,662. Net proceeds included the deferred income tax
recoveries.
iv)On October 8, 1999, the company issued 15,000 shares of
common stock to its U.S. legal counsel as part of a retainer for
legal representation in connection with a Public Registration of
Securities. The fair value of these shares were measured using
the stock price of $2.0938 at October 8, 1999, being the date of
commitment.
v) On August 30, 1999, the Company entered into an agreement
with a New York research company, First Hudson Research, LLC
("FHR") to obtain use of that company's "AwareNet" service. This
service allowed the use of FHR's proprietary e-mail data base to
send information about the company to interested third parties.
The agreement included a provision for the issuance of shares to
a value of $16,666 at a share price determined by an average
seven day bid and ask price prior to the commencement of the
e-mail campaign. Based on this measurement criteria, 6,714 common
shares were issued to FHR at an average price of $2.4822.
16
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
14. COMMON STOCK (cont'd)
c) Employee Stock Option Plan
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 for 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, by 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.
On August 19,1999, the Board of Directors granted 336,500 stock
options at the most recent closing price of the Company's shares
as traded on NASDAQ, specifically, U.S. $1.00 per share on
August 18, 1999. Officers, Directors and five percent
shareholders were granted 276,500 options. The remaining 60,000
options were granted to key employees.
17
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
14. COMMON STOCK (cont'd)
c) Employee Stock Option Plan (cont'd)
Pro-forma information regarding net income and earnings per
share is required by FAS No. 123 - "Accounting for Stock Based
Compensation" and has been determined as if the company had
accounted for its employee stock options based on fair values at
the grant date for options granted under the 1998 Plan. The
company's pro-forma information for the year ended December 31,
1999 would have been as follows:
<TABLE>
<CAPTION>
1999 1999
-------------- ---------------
As Reported Pro-Forma
<S> <C> <C>
Loss from continuing operations $ (1,528,250) $ (1,538,304)
Basic and diluted EPS from continuing operations $ (0.55) $ (0.56)
The fair value of each option grant used for purposes of
estimating the pro-forma amounts summarized above is based on
the grant date using the Black-Scholes option pricing model.
The activity of the company's stock option plan is as follows:
Options Exercise
Outstanding Price
Granted 336,500 $ 1
--------- ----------
Outstanding at the end of the year 336,500
=========
Options exercisable at year-end 336,500
---------
Available for future grant 413,500
=========
</TABLE>
The remaining life of the stock options as of December 31, 1999
is 9.7 years.
d) Purchase Warrants
During 1998, 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.
18
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
14. COMMON STOCK (cont'd)
d) Purchase Warrants (cont'd)
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.
<TABLE>
<CAPTION>
15. INCOME TAXES
1999 1998
$ $
<S> <C> <C>
a) Current 88,895 -
Deferred 51,824 312,143
--------- -------
140,719 312,143
========= =======
b) Current income taxes consists of:
Amounts calculated at basic Canadian Federal and Provincial
Rates (619,000) 545,076
Increase (decrease) resulting from:
Temporary differences (51,824) (312,143)
Part 1.3 large corporation tax 12,500 -
Non-deductible expenses - 81,896
Adjustment for prior year's taxes 79,000 -
Losses utilized - (314,829)
Losses carried forward 668,219 -
--------- -------
88,895 -
========= =======
</TABLE>
19
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
15. INCOME TAXES (cont'd)
c) Deferred income taxes represent the tax charges derived from
temporary differences between amortization of property, plant
and equipment and amounts deducted from taxable income. As a
consequence of the issuance of common stock during 1998,
issuance costs were incurred which are deductible for tax
purposes for a period up to five years. The resulting deferred
income taxes recoverable has been applied to the issue expenses
(note 14).
d) Rosedale has operating losses of approximately $2,652,000 which
is expected to be used to reduce future taxable income. The
potential tax benefit relating to the losses, in the amount of
approximately $416,000, has been recognized in the accounts as a
reduction to the deferred income tax liability. The
deductibility of these losses if available expires as follows:
2001 $ 120,000
2002 303,000
2004 22,000
2006 2,207,000
-----------
$ 2,652,000
===========
Rosedale has been reassessed by Revenue Canada and the Province
of Ontario for fiscal years ended December 31, 1993 and December
31, 1994 in the amount of approximately $765,000 (see note 19).
Should the assessments be upheld, the losses pertaining to 2001
would be denied.
16. RELATED PARTY TRANSACTIONS
Amounts due from or paid to companies which are related through
common ownership are as follows:
<TABLE>
<CAPTION>
1999 1998
$ $
<S> <C> <C> <C>
Loan - 976168 Ontario Inc. 2,054 1,933
Mortgage receivable - 1216748 Ontario Inc. 179,291 168,768
Mortgage receivable - 1217576 Ontario Inc. 162,619 153,073
Rent paid - 966578 Ontario Inc. 16,826 16,116
</TABLE>
17. 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.
20
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
18. SEGMENTED INFORMATION
The company has adopted FAS No. 131 - "Disclosures about
segments of enterprise and related 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.
These products are regarded as one segment by the company. As the
company's reportable segment has been organized around its
principal products, disclosure of revenue by product is not
required.
<TABLE>
<CAPTION>
a) The breakdown of sales by geographic area is as follows:
1999 1998 1997
$ $ $
<S> <C> <C> <C>
United States of America 9,457,021 9,749,412 9,880,533
Canada 6,655,528 8,065,013 9,185,160
Other 795,851 1,156,367 1,691,730
---------- ---------- ----------
16,908,400 18,970,792 20,757,423
========== ========== ==========
</TABLE>
The companies' accounting records do not readily provide
information on net income (loss) by geographic area. Management
is of the opinion that the proportion of net income (loss) based
principally on sales, presented below, would fairly present the
results of operations by geographic area.
<TABLE>
<CAPTION>
1999 1998 1997
$ $ $
<S> <C> <C> <C>
United States of America (854,764) 535,782 279,780
Canada (601,554) 451,738 295,020
Other (71,932) 63,033 50,826
---------- ---------- ----------
(1,528,250) 1,050,553 625,626
========== ========== ==========
</TABLE>
b) The breakdown of identifiable assets by geographic area is as
follows:
Period ended December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
United States of America $ 2,625,466
Canada 14,363,537
Other 1,807,618
----------
$ 18,796,621
==========
</TABLE>
21
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
18. SEGMENTED INFORMATION (cont'd)
b) The breakdown of identifiable assets by geographic area is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Period ended December 31, 1998
United States of America $ 1,744,862
Canada 15,430,713
Other 1,098,750
----------
$ 18,274,325
==========
</TABLE>
<TABLE>
<CAPTION>
c) Sales to major customers are as follows:
1999 1998 1997
<S> <C> <C> <C>
Sales $ 5,385,915 $ 6,957,178 $ 2,890,783
--------- --------- ----------
% of total sales 32% 37% 14%
--------- --------- ----------
Amounts included in accounts receivable $ 649,838 $ 811,291 $ 298,595
--------- --------- ----------
d) Purchases from major suppliers are as follows:
1999 1998 1997
Purchases $ 5,317,789 $ 6,610,748 $ 8,070,027
--------- --------- ----------
% of total purchases 47% 57% 52%
--------- --------- ----------
Amounts included in accounts payable $ 2,383,245 $ 2,339,508 $ 3,101,539
--------- --------- ----------
</TABLE>
19. CONTINGENCIES
a) 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 corporate income taxes estimated to be
$765,000. The company has objected to these re-assessments and
has no obligation to pay the portion relating to Revenue Canada
in the amount of $500,000 until the objections have been
processed. 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.
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.
As at December 31, 1999, Rosedale made payments in respect to
the above income tax re-assessments amounting to $207,900 to the
Province of Ontario. This amount has been included in prepaid
expenses and sundry assets.
22
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
19. CONTINGENCIES (cont'd)
b) Rosedale and Ontario have guaranteed the indebtedness of
affiliated companies in the amount of $1,723,493 through general
security agreements ranking behind the National Bank of Canada.
As at December 31, 1999, the indebtedness of the affiliated
companies amounted to $Nil.
c) Rosedale has disputed invoices from a supplier in the amount of
$112,456 for which debit notes have been issued. As at December
31, 1999, these debit notes were not cleared with the supplier.
d) Rosedale and Ontario have issued guarantees secured by general
security agreements for the loans made by Laurentian to the
holdcos. (see note 21)
20. COMMITMENTS
a) Minimum payments under operating leases for premises amount to
approximately $303,000 per annum, exclusive of insurance and
other occupancy charges. The leases expire on October 31, 2004.
The future minimum lease payments over the next five years are
as follows:
Payable during the following periods:
<TABLE>
<CAPTION>
<S> <C>
Within one year $ 302,548
Over one year but not exceeding two years 302,548
Over two years but not exceeding three years 302,548
Over three years but not exceeding four years 302,548
Over four years but not exceeding five years 252,123
Thereafter -
---------
$ 1,462,315
=========
b) Minimum payments under operating leases for equipment amount to
approximately $26,000 per annum. The future minimum lease
payments over the next three years are as follows:
Payable during the following periods:
Within one year $ 25,957
Over one year but not exceeding two years 7,605
Over two years but not exceeding three years 1,663
Thereafter -
---------
$ 35,225
=========
</TABLE>
23
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
20. COMMITMENTS (cont'd)
c) Minimum payments under operating leases for vehicles amount to
approximately $33,000 per annum. 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 $ 33,414
Over one year but not exceeding two years 11,583
Over two years but not exceeding three years 7,036
Over three years but not exceeding four years 1,759
Thereafter -
------
$ 53,792
======
</TABLE>
21. LIFE INSURANCE
During the year, as a cost saving measure, the company initiated
negotiations with The Prudential of America Life Insurance Company
(Canada) and the Laurentian Bank of Canada ("Laurentian"), the
objective of which was to reduce the insurance coverage on the lives
of three shareholders/key officers and the related insurance loans
held by the operating companies, Rosedale and Ontario. Previously,
the shareholders/key officers' lives were insured to an aggregate
value of $22 million.
The first step was to collapse a policy in the name of a shareholder
and use the proceeds to repay the loan from Laurentian.
Secondly, the policies on the lives of the other two shareholders/key
officers were scaled down from $18 million to $7 million and the
resulting cash realized from the partial surrender used to pay down
the Laurentian loans.
Thirdly, Rosedale and Ontario transferred the life insurance policies
and cash surrender values to the respective holding corporations
("holdcos") of the two shareholders/key officers in consideration for
the repayment of the Laurentian loans previously held by Rosedale and
Ontario. Simultaneously, through Insurance Transfer Arrangements
signed on December 31, 1999, the company apportioned key man life
insurance in the aggregate amount of $2 million from the policies
transferred to the holdcos. The company's interest in the key man
life insurance is subject to the prior claims of the Laurentian and
the National Bank of Canada.
In prior years, because the Laurentian had a legal right of set-off
of the cash surrender values of the life insurance policies against
the debt owing to it by Rosedale and Ontario, the related assets and
liabilities were offset in the financial statements. As at December
31, 1999, the amounts offset and transferred to the holdcos were as
follows:
Cash surrender values of life insurance policies $861,400
Loans .......................................... $861,400
24
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
December 31, 1999 and December 31, 1998
(Amounts expressed in US dollars)
21. LIFE INSURANCE (cont'd)
The amount in excess of the cash surrender values is payable on
demand to the holdcos and is included in amounts due to stockholder
and directors (note 13).
22. FOREIGN EXCHANGE CONTRACTS
As at December 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 cash requirements arise as the contracts are
exercised to the value of $7,350,000 (in varying amounts from January
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 at December 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>
December 31, 1999 December 31, 1998
------------------------------------------- -----------------------------
Forward Notional Notional
Exchange Principal Carrying Fair Principal Carrying Fair
Contracts Amounts Value Values Amounts Values Values
---------- -------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1999 - - - $ 13,800,000 - ($982,978)
2000 $7,350,000 - ($70,771) - - ($69,683)
</TABLE>
25
EXHIBIT 21 - List of Subsidiaries
Rosedale Wallcoverings & Fabrics Inc.
Ontario Paint & Wallpaper Limited
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27 - Financial Data Schedule
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-mos 12-mos
<FISCAL-YEAR-END> dec-31-1999 dec-31-1998
<PERIOD-END> dec-31-1999 dec-31-1998
<CASH> 3,240,720 3,417,414
<SECURITIES> 0 0
<RECEIVABLES> 3,778,806 3,842,820
<ALLOWANCES> 436,494 146,770
<INVENTORY> 7,385,373 7,229,444
<CURRENT-ASSETS> 14,689,586 14,670,410
<PP&E> 6,329,661 4,637,717
<DEPRECIATION> 3,427,955 2,477,284
<TOTAL-ASSETS> 18,796,621 18,274,325
<CURRENT-LIABILITIES> 10,034,313 7,985,132
<BONDS> 0 0
0 0
0 0
<COMMON> 5,204,270 5,156,197
<OTHER-SE> 1,777,207 2,850,267
<TOTAL-LIABILITY-AND-EQUITY> 18,796,621 18,274,325
<SALES> 16,908,400 18,970,793
<TOTAL-REVENUES> 16,908,400 18,970,793
<CGS> 11,179,513 11,420,944
<TOTAL-COSTS> 6,850,428 5,894,811
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 265,990 292,341
<INCOME-PRETAX> (1,387,531) 1,362,697
<INCOME-TAX> 140,719 312,143
<INCOME-CONTINUING> (1,528,250) 1,050,553
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,528,250) 1,050,553
<EPS-BASIC> (0.55) 0.49
<EPS-DILUTED> (0.55) 0.49
</TABLE>
