<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended June 27, 1998
------------------
Registration No.: 333-58913
THE IMPERIAL HOME DECOR GROUP INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0370302
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification. No.)
Incorporation or Organization)
23645 Mercantile Road, Cleveland, Ohio 44122
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(216) 464-3700
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
None
----------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
------------------
Indicate by check T 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 / / No /X/
Number of shares outstanding of each class of common stock at August 31, 1998:
5,937,500 Common Shares
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
THE IMPERIAL HOME DECOR GROUP, INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 27, Dec. 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents .......................................................... $ 6,018 $ 3,795
Accounts receivable, less allowance for doubtful accounts of $3,935 and $1,758,
respectively ............................................................. 103,725 55,160
Inventories:
Finished and in-process goods ............................................ 107,101 52,012
Raw materials and supplies ............................................... 11,567 7,467
--------- ---------
Total inventories ........................................................ 118,668 59,479
Other current assets .......................................................... 19,364 20,382
--------- ---------
Total Current Assets ............................................................. 247,775 138,816
--------- ---------
Property, plant and equipment, net of accumulated depreciation of $110,096 and
$58,729, respectively ........................................................... 103,223 66,740
Assets held for resale ........................................................... 7,000
Goodwill ......................................................................... 10,562 10,868
Other non-current assets ......................................................... 46,649 23,210
--------- ---------
415,209 $ 239,634
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Bank loan ..................................................................... $ $ 1,529
Notes payable under revolving credit facility ................................. 23,857
Accounts payable .............................................................. 51,817 31,310
Income tax payable ............................................................ 12,149 6,249
Other current liabilities ..................................................... 57,994 22,470
--------- ---------
Total Current Liabilities ........................................................ 145,817 61,558
--------- ---------
Long-term debt ................................................................... 323,000
Other long-term liabilities ...................................................... 23,719 11,346
Commitments and Contingencies (Note 8)
Shareholders' Equity (Deficiency):
Common stock .................................................................. 59 200
Preferred stock ............................................................... 194,189
Paid-in capital ............................................................... (62,694) (69,242)
Accumulated translation adjustment ............................................ (1,329) (672)
Retained earnings (deficit) ................................................... (12,064) 15,676
Owner's investment ............................................................ 27,878
Minimum pension liability adjustment .......................................... (1,299) (1,299)
--------- ---------
Total Shareholders' Equity (Deficiency) .......................................... (77,327) 166,730
--------- ---------
$ 415,209 $ 239,634
========= =========
</TABLE>
2
<PAGE>
THE IMPERIAL HOME DECOR GROUP, INC
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................... $ 119,096 $ 101,465 $ 215,030 $ 197,507
Cost of goods sold (including amortization of
inventory step-up $7,425 and $8,662 for the
three and six months ended June 27, 1998,
respectively) ............................... 78,962 61,668 146,315 124,510
--------- --------- --------- ---------
Gross margin ................................ 40,134 39,797 68,715 72,997
Distribution expense ........................ 5,338 6,102 11,429 11,773
Marketing expense ........................... 22,758 16,562 39,246 32,622
General and administrative expense .......... 8,745 6,116 17,704 10,472
Restructuring charges and other integration
costs ....................................... 1,854 -- 8,740
--------- --------- --------- ---------
Operating income (loss) ..................... 1,439 11,017 (8,404) 18,130
Merger costs ................................ -- -- 4,000 --
Interest (income) expense, net (including
amortization of deferred financing costs of
$637 and $737 for the three months and six
months ended June 27, 1998, respectively) ... 8,554 126 9,902 (156)
--------- --------- --------- ---------
Income (loss) before income taxes ........... (7,115) 10,891 (22,306) 18,286
Income tax expense .......................... 257 3,879 124 6,590
--------- --------- --------- ---------
Net income (loss) ........................... $ (7,372) $ 7,012 $ (22,430) $ 11,696
========= ========= ========= =========
</TABLE>
3
<PAGE>
THE IMPERIAL HOME DECOR GROUP, INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
June 27, June 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ......................................................... $ (22,430) $ 11,696
Adjustments to reconcile net (loss) income to net cash (used in)provided by
operating activities, net of acquisition:
Depreciation and amortization ........................................ 7,578 4,571
Amortization of deferred financing costs ............................. 737
Accounts receivable .................................................. (6,479) (9480)
Inventories .......................................................... 874 (2,433)
Accounts payable ..................................................... 3,443 728
Current and deferred foreign income taxes ............................ (78) 7,183
Other assets ......................................................... (2,951) (1,882)
Other liabilities .................................................... 2,361 159
--------- ---------
Cash (used in) provided by operating activities ...................... (16,945) 10,542
--------- ---------
Cash flows from investing activities:
Capital expenditures ...................................................... (9,259) (6,964)
Acquisition of Imperial Wallcoverings, Inc. ............................... (72,200)
--------- ---------
Cash used in investing activities .................................... (81,459) (6,964)
--------- ---------
Cash flows from financing activities:
Repayment of borrowings on bank loan ...................................... (1,529)
Borrowings under revolving credit facility ................................ 23,847
Borrowings under long-term debt arrangements .............................. 323,000
Debt issuance fees ........................................................ (19,136)
Equity contribution ....................................................... 84,500
Borden recapitalization cash distribution ................................. (311,200)
Dividends paid ............................................................ (2,635) (11,365)
Changes in owners' investment ............................................. 5,288 7,148
--------- ---------
Cash provided by (used in) financing activities ...................... 102,135 (4,217)
--------- ---------
Effect of exchange rate changes on cash ...................................... (1,508)
--------- ---------
Increase (decrease) in cash and equivalents .................................. 2,223 (639)
Cash and equivalents at beginning of period .................................. 3,795 6,768
--------- ---------
Cash and equivalents at end of period ........................................ $ 6,018 $ 6,129
========= =========
</TABLE>
4
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Imperial Home Decor Group Inc. formerly known as Borden Decorative Products
Holdings, Inc. ("BDPH") operations of Borden, Inc. ("Borden") have been prepared
in accordance with generally accepted accounting principles for interim
financial statement information and Article 10 of Regulation S-X and therefore
do not include all of the information and footnotes required by generally
accepted accounting principles for complete annual financial statements. In the
opinion of management, all adjustments (consisting only of usual recurring
adjustments) considered necessary for a fair presentation are reflected in the
condensed consolidated financial statements. The condensed consolidated
financial statements and notes thereto should be read in conjunction with the
combined financial statements and notes thereto for the year ended December 31,
1997. The results of operations for the six months ended June 27, 1998, are not
necessarily indicative of the results to be expected for the full year ending
December 31, 1998.
2. The Transactions
The Initial Offering
The Imperial Home Decor Group Inc. issued 11% Senior Subordinated Notes
due 2008, for an aggregate principal amount of $125,000,000 (the "Initial
Offering"). The Initial Offering was made in connection with (i) the
recapitalization (the "Recapitalization") of BDPH pursuant to a Recapitalization
Agreement, dated as of October 14, 1997, as amended (the "Recapitalization
Agreement"), among BDPH, BDPI Holdings Corporation ("MergerCo") and Borden and
(ii) the acquisition of Imperial Wallcoverings, Inc. and its affiliate
("Imperial") (the "Imperial Acquisition") pursuant to an Acquisition Agreement,
dated as of November 4, 1997, as amended (the "Imperial Acquisition Agreement"),
among Collins & Aikman Corporation ("C&A"), Imperial Wallcoverings, Inc.
("Imperial U.S.") and MergerCo.
The closing of the transactions contemplated by the Recapitalization
Agreement, the initial borrowings under the Company's senior credit facilities
(the "Senior Credit Facilities") and the consummation of the Initial Offering
took place immediately prior to, but substantially simultaneously with, the
closing of the Imperial Acquisition, which occurred on March 13, 1998
(collectively, the "Closing").
The Recapitalization
The principal components of the Recapitalization were:
o The transfer of substantially all the assets and liabilities of
Sunworthy (the Canadian wallcoverings business of Borden) to a
wholly owned subsidiary of BDPH;
o The equity contribution of $84.6 million in cash to MergerCo by
Blackstone Capital Partners III Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners III L.P. and Blackstone Family
Investment Partnership III L.P. (collectively, "Blackstone");
o The merger of MergerCo with and into BDPH;
o The conversion of all the preferred stock and certain common stock
of BDPH into the right to receive a total of $309.5 million in cash,
subject to adjustment as described in the Recapitalization
Agreement; and
o The cancellation and settlement of existing stock options for
$1,254,000 which resulted in a charge to operations of $731,000 for
the excess of the amount paid over that previously accrued.
Following the Recapitalization, Blackstone and its affiliates owned 89%
and Borden retained 11% of the outstanding BDPH common stock. This merger is
accounted for as a recapitalization of BDPH which has no impact on the
historical carrying value of BDPH's assets and liabilities.
5
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. The Transactions--(Continued)
The Imperial Acquisition
The principal components of the Imperial Acquisition were:
o The acquisition of all the outstanding capital stock of Imperial
Wallcoverings, Inc. by BDPH;
o The acquisition of substantially all the assets and liabilities of
Imperial Wallcoverings (Canada), Inc. by a wholly owned subsidiary
of BDPH;
o The payment by BDPH to C&A of the cash purchase price for the
Imperial Acquisition of $71.2 million subject to adjustment as
described in the Imperial Acquisition Agreement; and
o The grant to C&A by BDPH of an option to purchase newly issued
shares of BDPH's common stock equal to 6.7% of BDPH's common stock
outstanding as of the Closing, which was valued at $6.0 million
after arm's length purchase price negotiations between MergerCo and
C&A and was generally based on a five-year discounted cash flow
analysis.
Following the Recapitalization and the Imperial Acquisition, BDPH
changed its name to The Imperial Home Decor Group Inc. (the "Company").
The Imperial Acquisition is accounted for using purchase accounting in
which the total purchase cost was allocated to the Imperial assets acquired and
liabilities assumed, based on their respective fair values. The total purchase
price of $79.8 million consisted of $72.8 million of cash (including
post-closing adjustments), an option valued at $6.0 million and $1.0 million of
direct acquisition costs. The historical book value of the net assets acquired
exceeded the purchase price by $22.8 million. This excess was allocated first to
adjust the assets and liabilities acquired to their estimated fair values and
then as a proportionate reduction of property, plant and equipment and other
non-current assets. The principal components of this allocation were (1) an
increase of $5.9 million in inventories, (2) the recording of $7.0 million in
assets held for resale, $12.4 million in accruals, and $5.0 million in deferred
tax liabilities, and (3) a reduction of $20.2 million in property, plant and
equipment.
The resulting preliminary purchase price allocation was as follows (in
thousands):
Cash........................................................... $ 206
Accounts receivable............................................ 38,241
Inventories.................................................... 60,654
Other current assets........................................... 2,241
Property, plant and equipment.................................. 30,694
Assets held for resale......................................... 7,000
Other non-current assets....................................... 2,521
Accounts payable and accrued expenses.......................... (47,226)
Deferred income taxes.......................................... (5,474)
Other long-term liabilities.................................... (9,057)
-----------
Total.......................................................... $ 79,800
==========
The allocation of the aggregate purchase price is preliminary. The final
purchase adjustment to reflect the fair values of the assets acquired and
liabilities assumed will be based upon appraisals and actuarial studies that are
currently in process and management's evaluation of such assets and liabilities.
The following unaudited pro forma consolidated results of operations have been
prepared as if the Imperial Acquisition had occurred as of the beginning of 1997
and 1998 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 27, 1998 June 28, 1997
------------- -------------
<S> <C> <C>
Net sales....................................................................... $ 248,030 $ 283,690
Net loss before cumulative effect in change in accounting policy................ 27,043 7,312
</TABLE>
6
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. The Transactions--(Continued)
The Financings
The Recapitalization, the Imperial Acquisition and the payment of
related fees and expenses have been financed by: (i) the equity contribution of
$84.6 million; (ii) the initial borrowings of $198.0 million under the Senior
Credit Facilities; and (iii) the net proceeds of $125.0 million from the Initial
Offering.
The 11% Senior Subordinated Notes from the Initial Offering mature on
March 15, 2008. Except as provided for in the Initial Offering, the Company may
not redeem these notes prior to March 15, 2003. On or after that date, the
Company may redeem these notes, in whole or in part, at the redemption prices
set forth in the Initial Offering. Interest on these notes is payable on March
15 and September 15 of each year. These notes are unsecured and subordinated to
the Senior Credit Facilities.
The Senior Credit Facilities consist of (i) a six-year revolving credit
facility in an aggregate principal amount not to exceed $75.0 million ($23.9
million borrowed since the closing date and outstanding at June 27, 1998) and
(ii) term loan facilities consisting of (a) a $38.0 million six-year tranche A
term loan facility ("Term Loan A"), of which an additional $27.0 million is
available for up to 18 months following the Closing on a deferred draw basis,
(b) a $115.0 million seven-year tranche B term loan facility ("Term Loan B"),
and (c) a $45.0 million eight-year tranche C term loan facility ("Term Loan C"
and, collectively with Term Loan A and Term Loan B, the "Term Loans").
The Term Loans require principal payments on a semi-annual basis. Term
Loan A requires aggregate principal payments of $0.5 million in 1999, $1.5
million in 2000, $7.0 million in 2001, $17.25 million in 2002, $25.0 million in
2003 and $13.75 million in 2004. Term Loan B requires aggregate principal
payments of $0.5 million in 1999, $1.0 million from 2000 through 2004 and $109.5
million in 2005. Term Loan C requires aggregate principal payments of $0.25
million in 1999, $0.5 million from 2000 through 2005 and $41.75 million in 2006.
Interest rates for the revolving credit facility and the Term Loans are
variable with each calculated using one of several interest rate options, as
defined in the Senior Credit Facilities Credit Agreement. At June 27, 1998,
interest rates are as follows: Revolving Credit Facility--8.25%; Term Loan
A--8.25%; Term Loan B--8.50%; and Term Loan C--8.75%. A commitment fee of 0.5%
is paid on the unused portion of the revolving credit facility and the unused
portion of Term Loan A.
3. Restructuring Charges and Other Integration Costs
In conjunction with the Imperial Acquisition, a plan to integrate the
Company and Imperial in North America has been adopted that includes the
consolidation and rationalization of operations. As it relates to the Imperial
Acquisition, the Company plans to close facilities in Plattsburgh, New York and
Ashaway, Rhode Island, dispose of certain assets, and reduce the salary and
hourly workforce by approximately 530 employees. The plan is expected to be
substantially complete by the end of 1999. The liabilities accrued under
purchase accounting relating to the Integration Plan for the Imperial
Acquisition was $12.4 million.
Additionally, as part of the consolidation and rationalization of
operations, the Company recorded restructuring charges and other integration
costs of $8.7 million in anticipation of the Company's planned exit of two
distribution centers and the finishing and bookmaking operations at one
manufacturing facility and the consolidation of the Company's and Imperial's
administrative functions. The charge also provided for the restructuring of the
Company's headquarters and sales force, the write-down of certain assets to be
disposed of to net realizable value, lease and other contractual agreement
buyouts, and a reduction in the salary and hourly workforce by approximately 320
employees. The plan is expected to be substantially complete by the end of 2000.
The liabilities accrued under purchase accounting and for the IHDG restructuring
and other integration costs are as follows (in thousands):
7
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Restructuring Charges and Other Integration Costs-- (Continued)
<TABLE>
<CAPTION>
Anticipated Anticipated
Severance Lease and
and Other Anticipated Other
Related Facility Contractual
Asset Employee Closure Agreement
Write-downs Benefits Costs Buyouts Other Total
----------- -------- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Imperial Purchase Accounting:
Liabilities accrued under purchase
accounting at March 13, 1998 . $ -- $ 6,089 $ 3,930 $ 2,085 $ 277 $ 12,381
Cash Expenditures ................ -- (149) (251) (531) (31) (962)
-------- -------- -------- -------- -------- --------
Balance at June 27, 1998 ......... $ -- $ 5,940 $ 3,679 $ 1,554 $ 246 $ 11,419
======== ======== ======== ======== ======== ========
IHDG Restructuring Charges and
Other Integration Costs:
Expensed through June 27, 1998 ... $ 825 $ 5,814 $ -- $ 647 $ 1,454 $ 8,740
Write down of property to net
realizable value ............. (825) -- -- -- -- (825)
Cash expenditures ................ -- (651) -- -- (1,400) (2,051)
-------- -------- -------- -------- -------- --------
Balance at June 27, 1998 ......... $ -- $ 5,163 $ -- $ 647 $ 54 $ 5,864
======== ======== ======== ======== ======== ========
</TABLE>
In addition, the Company recorded inventory write-downs of $4,557 which
is reported with cost of goods sold in the accompanying condensed consolidated
statement of operations for the six months ended June 27, 1998.
8
<PAGE>
4. Supplemental Information
Other current assets, non-current assets, current liabilities and
long-term liabilities consist of the following (in thousands):
June 27,
1998
----
Other current assets:
Sample books .................................... $ 6,337
Design and engraving costs ...................... 8,706
Other ........................................... 4,321
-------
$19,364
=======
Other non-current assets:
Prepaid pension assets .......................... $16,467
Deferred debt issuance cost, net ................ 18,399
Other ........................................... 11,783
-------
$46,649
=======
Other current liabilities:
Accrued restructuring and other integration costs $10,941
Current deferred tax liability .................. 1,125
Customer allowances and credits ................. 7,699
Wages and payroll taxes ......................... 12,683
Interest payable ................................ 5,667
Other ........................................... 19,879
-------
$57,994
=======
9
<PAGE>
June 27,
1998
----
Other long-term liabilities:
Deferred income taxes ........................................ $ 6,746
Non-pension post-employment benefit obligation ............... 9,836
Accrued restructuring and other integration costs ............ 6,342
Other ........................................................ 795
-------
$23,719
=======
5. Income Taxes
Prior to the Merger, income tax expense for domestic and foreign
operations that filed a combined return with other Borden affiliates was
calculated utilizing statutory rates multiplied by pretax income as adjusted for
known book tax differences. Deferred income tax assets and liabilities for
domestic and Canadian operations were included in the owner's investment
account. Upon consummation of the Merger, a valuation allowance of approximately
$500,000 was recognized as management determined that it is more likely than not
that the deferred tax assets for the combined U.S. operations will not be
realized. The Canadian and U.K. net deferred income tax liability was $378,000
and $7,493,000, respectively at June 27, 1998.
6. Comprehensive Income
As of December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income. Comprehensive income for the six months ended June 28, 1997 and June 27,
1998, in thousands, was as follows.
1998 1997
---- ----
Net (loss) income ....................................... $ (22,430) $ 11,696
Foreign currency translation adjustments ................ (657) (1,775)
--------- ---------
Comprehensive (loss) income ............................. $ (23,087) $ 9,921
========== =========
7. New Accounting Pronouncements Not Yet Adopted
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131"). Statement 131 establishes standards for the way
that public business enterprises report selected information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Statement 131 is effective
for financial statements for fiscal years beginning after December 15, 1997, and
therefore, the Company will adopt the new requirements in 1998, which will
require retroactive disclosure. Management has not completed its review of
Statement 131 and has not determined the impact adoption will have on the
Company's financial statement disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosure about Pensions and Other
Post-Retirement Benefits ("Statement 132"). This standard revises employers'
disclosures about pensions and other post-retirement plans, but does not change
the measurement or recognition of those plans. This standard will be effective
for the Company's financial statements for the year ended December 31, 1998.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. Statement 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management has not completed its review of Statement 133 and has not determined
the impact adoption will have on the Company's financial statement disclosures.
10
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. New Accounting Pronouncements Not Yet Adopted--(Continued)
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use. The SOP will
become effective for the Company on January 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The Company
currently capitalizes certain external costs and expenses all other costs as
incurred. The Company has not yet assessed what the impact of the SOP will be on
the Company's future earnings or financial position.
8. Commitments and Contingencies
The Company is subject to federal, state and local laws and regulations
concerning the environment, and it has received notices that it is a potentially
responsible party ("PRP") in administrative proceedings at four sites. It is
difficult to estimate the total cost of remediation due to the complexity of the
environmental laws and regulations, the uncertainty regarding the extent of the
environment risks and the Company's responsibility, and the selection of
alternative compliance approaches. When it is possible to reasonably estimate
the Company's liability with respect to environmental matters, provisions have
been made in accordance with generally accepted accounting principles. The
Company has recorded an accrual of $1,200,000 for potential exposures as of June
27, 1998, including $900,000 for the Solvents Recovery Service of New England
superfund site in Southington, Connecticut. In the opinion of the Company's
management, based on the facts presently known to it, the ultimate outcome of
environmental matters will not have, individually or in the aggregate, a
material effect on the Company's consolidated financial position, results of
operations or cash flows.
Additionally, the Company is party to various litigation matters
arising in the ordinary course of business. The ultimate legal and financial
liability of the Company with respect to litigation cannot be estimated with
certainty, but Management believes, based on its examination of such matters,
experience to date and discussions with counsel, that such liability will not be
material to the business, financial condition, results of operations or cash
flows of the Company.
9. Related Parties
In connection with the Recapitalization and Imperial Acquisition,
Blackstone received a $4.0 million fee and the Company reimbursed Blackstone for
all out-of-pocket expenses incurred in connection with the Recapitalization and
Imperial Acquisition. In addition, pursuant to a monitoring agreement entered
into between Blackstone and the Company, Blackstone will receive an annual $1.5
million monitoring fee and will be reimbursed for certain out-of-pocket
expenses.
The Company and Borden entered into a Stockholders Agreement on the
date of the Closing. This agreement provides certain rights to the shareholders
relating to common stock purchase and sales offers, restrictions on stock
transfers, and registration rights.
Pursuant to the Recapitalization Agreement, Borden entered into a
transition services agreement with the Company as of the date of the Closing.
Under this agreement, Borden will provide certain management support services to
the Company for one year at rates Borden previously billed BDPH for such
services.
11
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Supplemental Consolidating Condensed Financial Information
The Company's payment obligations under the Notes are fully and
unconditionally guaranteed on a joint and several basis (collectively, the
"Guarantees") by the Company's domestic subsidiaries (The Imperial Home Decor
Group (US) LLC, Vernon Plastics Inc. and WDP Investments, Inc.) and Imperial
Home Decor Group Holdings I Limited, a U.K. Company, (collectively the
"Guarantor Subsidiaries"). Each of the Guarantor Subsidiaries is a direct
wholly-owned subsidiary of the Company. The obligations of each Guarantor
Subsidiary under its Guarantee are subordinated to such subsidiary's obligations
under the Senior Credit Facilities. Presented below is condensed consolidating
financial information for Imperial Home Decor Group Inc. ("Parent Company"), the
Guarantor Subsidiaries, and the Company's other subsidiaries (the "Non-Guarantor
Subsidiaries"). In the opinion of management of the Company, separate financial
statements and other disclosures concerning each of the Guarantor Subsidiaries
would not provide additional information that is material to investors in the
Notes. Therefore, the Guarantor Subsidiaries are consolidated in the
presentation below.
Investments in subsidiaries are accounted for by the Parent Company on
the equity method of accounting. Earnings of subsidiaries are, therefore,
reflected in the Parent Company's investments in subsidiaries account and equity
income. The elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions. The intercompany payable and receivable
balances are netted in the owner's investment account.
* * * * * *
12
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents........................ $ (6,254) $ 12,272 $ $ 6,018
Accounts receivable ......................... 52,882 50,843 103,725
Inventories ................................. 64,543 53,113 1,012 118,668
Other current assets ........................ 7,941 11,423 19,364
--------- --------- --------- --------- ---------
Total Current Assets .................... 119,112 127,651 1,012 247,775
Fixed assets, net ................................ 35,580 69,019 (1,376) 103,223
Assets held for resale ........................... 7,000 7,000
Goodwill ......................................... 1,187 9,375 10,562
Other non-current asset .......................... 18,399 4,985 23,265 46,649
Investment in subsidiary ......................... 107,754 (107,754) --
--------- --------- --------- --------- ---------
$ 126,153 $ 167,864 $ 229,310 $(108,118) $ 415,209
========= --------- ========= --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Notes payable under revolving credit facility $ 18,650 $ $ 5,207 $ $ 23,857
Accounts payable ............................ 3,622 17,412 30,776 7 51,817
Income tax payable .......................... (201) 12,350 12,149
Other current liabilities ................... 5,527 22,089 30,385 (7) 57,994
Intercompany payable/(receivable) ........... 224,419 (30,428) (193,991) --
--------- --------- --------- --------- ---------
Total Current Liabilities ............... 252,218 8,872 (115,273) 145,817
Long-term debt ................................... 83,000 50,000 190,000 323,000
Other long-term liabilities ...................... 16,536 405 32 16,973
Deferred income tax .............................. 6,746 6,746
Shareholder's equity/owner's investment .......... (209,065) 92,456 147,432 (108,150) (77,327)
--------- --------- --------- --------- ---------
$ 126,153 $ 167,864 $ 229,310 $(108,118) $ 415,209
========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents........................ $ $ 229 $ 3,566 $ $ 3,795
Accounts receivable......................... 18,086 37,074 55,160
Inventories................................. 19,656 39,823 59,479
Other current assets........................ 3,793 16,589 20,382
---------- ---------- ---------- ---------- ----------
Total Current Assets.................... 41,764 97,052 138,816
Fixed assets, net................................ 10,668 56,072 66,740
Goodwill......................................... 1,352 9,516 10,868
Other non-current asset.......................... 1,214 21,996 23,210
Investment in subsidiary......................... 43,144 (43,144)
---------- ---------- ---------- -----------
$ 43,144 $ 54,998 $ 184,636 $ (43,144) $ 239,634
========== ---------- ---======= ---======== ---=======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Bank loan .................................. $ $ $ 1,529 $ $ 1,529
Accounts payable............................ 15,595 15,715 31,310
Accrued liabilities......................... (1,417) 23,887 22,470
Income tax payable.......................... 6,249 6,249
---------- ---------- ---------- ---------- ----------
Total Current Liabilities............... 14,178 47,380 61,558
Non-current liabilities.......................... 1,491 309 1,800
Deferred income tax.............................. 9,546 9,546
Shareholder's equity/owner's investment.......... 43,144 39,329 127,401 (43,144) 166,730
---------- ---------- ---------- ----------- ----------
$ 43,144 $ 54,998 $ 184,636 $ (43,144) $ 239,634
========== ========== ========== =========== ==========
</TABLE>
14
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ $ 67,642 $ 84,566 $ (33,112) $ 119,096
Cost of goods sold............................... 49,821 61,987 (32,846) 78,962
---------- ---------- ---------- ----------- ----------
Gross margin..................................... 17,821 22,579 (266) 40,134
Distribution expense............................. 1,648 3,690 5,338
Marketing expense................................ 12,277 10,481 22,758
General and administrative expense............... 3,928 4,817 8,745
Restructuring charges and other integration costs 1,854 1,854
---------- ---------- ---------- ---------- ----------
Operating income................................. (1,886) 3,591 1,439
Interest (income) expense, net................... 1,539 1,491 5,524 8,554
---------- ---------- ---------- ---------- ----------
Income before income taxes....................... (1,539) (3,377) (1,933) (266) (7,115)
Equity income.................................... (5,567) 5,567
Income tax expense............................... 303 (46) 257
---------- ---------- ----------- ---------- ----------
Net income (loss)................................ (7,106) (3,680) (1,887) 5,301 (7,372)
========== ========== ========== ========== ==========
</TABLE>
Three Months Ended June 28, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ $ 43,329 $ 82,452 $ (24,316) $ 101,465
Cost of goods sold............................... 30,362 55,622 (24,316) 61,668
---------- ---------- ---------- ----------- -----------
Gross margin..................................... 12,967 26,830 39,797
Distribution expense............................. 1,522 4,580 6,102
Marketing expense................................ 7,352 9,210 16,562
General and administrative expense............... 1,708 4,408 6,116
---------- ---------- ---------- ---------- -----------
Operating income................................. 2,385 8,632 11,017
Interest (income) expense, net................... (490) 616 126
---------- ----------- ---------- ---------- -----------
Income before income taxes....................... 2,875 8,016 10,891
Equity income.................................... 7,012 (7,012)
Income tax expense............................... 1,195 2,684 3,879
---------- ---------- ---------- ---------- -----------
Net income (loss)................................ $ 7,012 $ 1,680 $ 5,332 $ (7,012) $ 7,012
========== ========== ========== ========== ===========
</TABLE>
15
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ $ 107,227 $ 159,573 $ (51,770) $ 215,030
Cost of goods sold............................... 82,652 115,167 (51,504 146,315
---------- ---------- ---------- ---------- ----------
Gross margin..................................... 24,575 44,406 (266) 68,715
Distribution expense............................. 3,349 8,080 11,429
Marketing expense................................ 19,842 19,404 39,246
General and administrative expense............... 6,041 11,663 17,704
Restructuring charges and other integration costs 6,728 2,012 8,740
---------- ---------- ---------- ---------- ----------
Operating income (loss).......................... (11,385) 3,247 (266) (8,404)
Merger costs .................................... 4,000 4,000
Interest (income) expense, net................... 2,974 1,457 5,471 9,902
---------- ---------- ---------- ---------- ----------
Income before income taxes....................... (6,974) (12,842) (2,224) (266) (22,306)
Equity income.................................... (15,190) 15,190
Income tax expense............................... 303 (179) 124
---------- ---------- ----------- ---------- ----------
Net income (loss)................................ $ (22,164) $ (13,145) $ (2,045) 14,924 (22,430)
========== ========== ========== ========== ==========
</TABLE>
Six Months Ended June 28, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ $ 80,851 $ 156,434 $ (39,778) $ 197,507
Cost of goods sold............................... 57,531 106,757 (39,778) 124,510
---------- ---------- ---------- ----------- ----------
Gross margin..................................... 23,320 49,677 72,997
Distribution expense............................. 3,031 8,742 11,773
Marketing expense................................ 14,792 17,830 32,622
General and administrative expense............... 2,622 7,850 10,472
---------- ------------ ------------- ------------------------
Operating income................................. 2,875 15,255 18,130
Interest (income) expense, net................... (1,381) 1,225 (156)
---------- ----------- ------------ -------------------------
Income before income taxes....................... 4,256 14,030 18,286
Equity income.................................... 11,696 (11,696)
Income tax expense............................... 1,743 4,847 6,590
---------- ---------- ---------- ---------- ----------
Net income (loss)................................ $ 11,696 $ 2,513 $ 9,183 $ (11,696) $ 11,696
========== ========== ========== -========== ==========
</TABLE>
16
<PAGE>
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities.. $ (16,099) $ (17,261) $ 16,415 $ $ (16,945)
Cash flow used in investing activities:
Capital expenditures........................ (4,216) (5,043) (9,259)
Acquisition of Imperial..................... (72,200) (72,200)
----------- ---------- ---------- ---------- -----------
Cash used in investing activities................ (72,200) (4,216) (5,043) (81,459)
----------- ----------- ----------- ---------- -----------
Cash flow provided by (used in) financing
activities:
Repayment of borrowing on bank loan......... (1,529) (1,529)
Borrowings under revolving credit facility.. 18,650 5,197 23,847
Borrowings under long-term debt arrangements 323,000 323,000
Debt issuance fees.......................... (19,136) (19,136)
Equity contribution......................... 84,500 84,500
Borden recapitalization cash distribution... (309,550) (1,650) (311,200)
Dividends paid................................... (2,635) (2,635)
Changes in owner's investment/intercompany....... (9,165) 17,629 (3,176) 5,288
----------- ---------- ----------- ---------- ----------
Cash provided by (used in) financing activities.. 88,299 14,994 (1,158) 102,135
---------- ---------- ----------- ---------- ----------
Effect of exchange rate change on cash........... (1,508) (1,508)
---------- ---------- ----------- ---------- -----------
Increase (decrease) in cash and equivalents...... (6,483) 8,706 2,223
Cash and equivalents at beginning of period...... 229 3,566 3,795
---------- ---------- ---------- ---------- ----------
Cash and equivalents at end of period............ $ $ (6,254) $ 12,272 $ $ 6,018
========== ========== ========== ========== ==========
</TABLE>
Six Months Ended June 28, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Elimination
Company Subsidiaries Subsidiaries Adjustments Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities.. $ $ (9,901) $ 20,443 $ $ 10,542
Cash flow used in investing activities:
Capital expenditures........................ (1,939) (5,025) (6,964)
Cash flow provided by (used in) financing
activities:
Dividends paid.............................. (11,365) (11,365)
Changes in owner's investment............... 11,187 (4,039) 7,148
---------- ---------- ----------- ---------- ----------
Net cash provided by (used in) financing
activities..................................... 11,187 (15,404) (4,217)
---------- ---------- ----------- ---------- -----------
Increase (decrease) in cash and equivalents...... (653) 14 (639)
Cash and equivalents at beginning of period...... 1,345 5,423 6,768
---------- ---------- ---------- ---------- ----------
Cash and equivalents at end of period............ $ $ 692 $ 5,437 $ $ 6,129
========== -========= ========== ========== ==========
</TABLE>
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is the result of the combination of the residential
wallcoverings and PVC sheeting businesses of The Imperial Home Decor Group Inc.
("IHDG"), formerly known as Borden Decorative Products Holdings, Inc., which
were previously substantially wholly owned by Borden, Inc. ("Borden"), with the
wallcoverings businesses of Imperial Wallcoverings, Inc. and Imperial
Wallcoverings (Canada), Inc. (together, "Imperial"), which were previously owned
by a subsidiary of Collins & Aikman Corporation ("C&A"). This combination was
accomplished through (i) the recapitalization (the "Recapitalization") of IHDG
pursuant to a Recapitalization Agreement, dated as of October 14, 1997, as
amended, among IHDG, BDPI Holdings Corporation ("MergerCo") and Borden and (ii)
an acquisition of Imperial pursuant to an Acquisition Agreement, dated as of
November 4, 1997, as amended, among Collins & Aikman Products Co., Imperial
Wallcoverings, Inc. and MergerCo. MergerCo was wholly owned by an entity formed
by Blackstone Capital Partners III Merchant Banking Fund, L.P., Blackstone
Offshore Capital Partners III L.P. and Blackstone Family Investment Partnership
III L.P. (collectively, "Blackstone") for purposes of the Recapitalization and
the Imperial acquisition.
The Company has adopted a plan to integrate IHDG and Imperial in North
America (the "Integration Plan"), the five principal components of which are:
(i) closing Imperial's inefficient, limited capacity paper making and coating
facilities in Plattsburgh, New York in favor of leveraging the combined
Company's ability to purchase substrate at a lower cost than either Imperial's
present manufacturing cost level or IHDG's outside purchase cost level; (ii)
rationalizing the Company's printing facilities by consolidating four presently
five-day per week, noncontinuous printing plants into two seven-day continuous
operations; (iii) rationalizing the Company's finishing function by
consolidating all finishing activities from the four printing facilities at
which they are presently are located to the Company's state-of-the-art finishing
and distribution facility in Knoxville, Tennessee; (iv) rationalizing the
Company's distribution network by consolidating seven existing distribution
warehouses into the Knoxville facility; and (v) substantial employee head count
reductions in North America through the elimination of redundancies in selling,
customer service and other support operations.
Results of Operations
As a result of the Imperial acquisition on March 13, 1998, IHDG's 1998
results were impacted by approximately thirteen and fifteen weeks of Imperial
sales, cost of sales, and other expenses for the second quarter and first six
months, respectively.
Net Sales. Net sales were $119.1 million for the second quarter and
$215.0 million for the six months ended June 27, 1998 representing increases
over the same period a year ago of 17.4% and 8.9%, respectively. The increase in
net sales was driven by the Imperial acquisition, which accounted for sales of
$35.1 million for the quarter and $41.9 million for the six months, partially
offset by declines in North American trade sales as a result of Walmart's,
Target's and Hechinger's decisions to reduce their wallcovering offerings and
market softness coupled with the consolidation of IHDG's and Imperial's sales
forces. Trade sales for the U.K. business decreased $8.6 million for the quarter
and $11.4 million for the six months, principally due to weakness in the export
market where the strength of the Sterling and poor economic conditions in
Eastern Europe and the Far East affected export sales.
Sales of flexible vinyl films and sheeting at Vernon Plastics fell $1.0
million to $14.3 million for the quarter and $1.7 million to $26.3 million for
the first six months of 1998. Customer demand shifted to lower priced commodity
products in the pool liner and industrial fabrics product lines.
Gross Margin. Gross margin was 33.7% for the second quarter and 32.0%
for the six months ended June 27, 1998 compared to 39.2% and 37.0% for the same
periods in 1997. In the second quarter of 1998, gross margin was impacted by
$7.4 million of amortization related to the step-up of Imperial inventory to
fair market value. Without the amortization of the step-up, margin would have
been 39.9% for the quarter. For the first six months of 1998, margin was
impacted by $8.7 million of amortization related to the step-up and a $4.6
million charge for excess inventories. The Company recorded the charge for
excess inventories due to production planning changes, consolidation of
manufacturing facilities and distribution centers, the anticipated effect of
consolidating sales forces in North America and assessment of product and
marketing strategies for existing and acquired collections. Without the
amortization of the step-up and charge for excess inventories, margin would have
been 38.1% for the first six months.
18
<PAGE>
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were 32.5% and 35.9% of sales for the quarter and six
months ended June 27, 1998, respectively, compared to 28.4% and 27.8% of sales
for the same periods in 1997. Without the restructuring and other integration
charges described below, selling, general, and administrative expenses would
have been 30.9% and 31.8% of sales for the quarter and year, respectively.
Transaction costs, including monitoring fees of $0.6 million and increased
pension expense and employee costs in sales force impacted the second quarter of
1998. In addition, the first six months of 1998 were impacted by bonuses and
compensation expense on stock options for BDPH's management that became
exercisable upon the sale and sales bonuses together totaling $1.5 million.
Restructuring and other integration costs. The Company recorded
restructuring charges and other integration costs of $1.9 million for the second
quarter and $8.7 million for six months ended June 27, 1998 in anticipation of
the Company's planned exit of two distribution centers and the finishing and
bookmaking operations at one manufacturing facility and the consolidation of the
Company's and Imperial's administrative functions. The charge also provided for
the restructuring of the Company's headquarters and sales force. The charge
included asset write-downs of $825,000 for impaired assets at the affected
distribution centers, $5.8 million related to severance and other employee
related benefits, $0.6 million for lease termination costs and $1.5 million of
other charges relating to the Integration Plan. The restructuring affected
approximately 320 employees.
Transaction costs. Transaction costs totaling $4.0 million were
incurred in the first six months of 1998, comprised primarily of legal and
underwriter fees.
Taxes. Income tax expense was $0.3 million and $0.1 million for the
quarter and six months ended June 27, 1998, respectively, compared to $3.9
million and $6.6 million for the same periods in 1997. The reduction in income
tax expense between the periods is not proportional to the reduction in income
before taxes primarily due to deferred income taxes provided on undistributed
earnings of the foreign subsidiaries in 1998 and a valuation allowance which
reduced the income tax benefit of the loss on domestic operations in 1998.
Pro Forma Liquidity and Capital Resources
In connection with the Recapitalization and the Imperial acquisition,
on March 13, 1998, (i) Blackstone contributed $84.6 million to the equity of
MergerCo (predecessor to the Company); (ii) the Company borrowed $198.0 million
in term loans under the Company's senior credit facilities (the"Senior Credit
Facilities"), and (iii) the Company issued $125.0 million 11% Senior
Subordinated Notes due 2008 (the "Notes"). The Company's Senior Credit
Facilities provide an aggregate amount of $300.0 million comprised of (x) term
loans in the aggregate principal amount of $225.0 million, of which $27.0
million is available for up to 18 months from March 13, 1998 on a deferred draw
basis, and (y) a $75.0 million six-year Revolving Credit Facility.
The Company's primary liquidity requirements are for debt service under
the Senior Credit Facilities and the Notes, and for working capital, product
development (sample books and design and engraving) and other capital
expenditures. IHDG historically funded these requirements through internally
generated cash flow. Imperial historically funded these requirements through
borrowings under its credit facilities and advances from C&A. At June 27, 1998,
the Company's consolidated indebtedness was $346.9 million, consisting of $198.0
million in Term Loans, $23.9 million under the Revolving Credit Facility and
$125.0 million of the Notes. To provide additional financing to fund the
Recapitalization and the Imperial acquisition, Blackstone contributed $84.6
million to the Company. The Company anticipates total capital expenditures for
1998 and 1999 of approximately $35.0 million and $44.0 million, respectively. In
1998, the anticipated capital expenditures consist of (i) approximately $20.0
million in North America, substantially all of which is related to the
Integration Plan, (ii) approximately $12.7 million in the U.K., approximately
$5.7 million of which will be used to upgrade the Company's U.K. facilities in
order to comply with new Environmental Laws, and (iii) approximately $2.3
million relating to Vernon Plastics Inc., a subsidiary of the Company ("Vernon
Plastics") and the commercial wallcovering operations. In 1999, the Company
anticipates capital expenditures of (i) approximately $20.8 million in North
America, substantially all of which is related to implementation of the
Integration Plan, (ii) approximately $20.7 million in the U.K., and (iii)
approximately $2.5 million relating to Vernon Plastics and the commercial
wallcovering operations. Management
19
<PAGE>
estimates that upon completion of the Company's integration of IHDG and Imperial
in North America, the annual capital expenditures required to maintain the
Company's facilities will be between $7.0 million and $10.0 million per year.
The Company's ability to make capital expenditures is subject to certain
restrictions under the Senior Credit Facilities.
In conjunction with the Imperial acquisition, the Integration Plan has
been adopted that includes the consolidation and rationalization of operations.
As part of the Integration Plan, the Company plans to close Imperial facilities
in Plattsburgh, New York and Ashaway, Rhode Island, dispose of certain assets,
and reduce the salary and hourly workforce by approximately 530 employees. The
Integration Plan is expected to be substantially complete by the end of 1999.
The liabilities accrued under purchase accounting relating to the Integration
Plan for the Imperial acquisition were $12.4 million.
Additionally, as part of the consolidation and rationalization of
operations, the Company recorded restructuring charges and other integration
costs of $8.7 million for the six months ended June 27, 1998 in anticipation of
the Company's planned exit of two distribution centers and the finishing and
bookmaking operations at one manufacturing facility and consolidation of the
Company's and Imperial's administrative functions. The charge also provided for
the restructuring of the Company's headquarters and sales force, the write-down
of certain assets to be disposed of to net realizable value, lease and other
contractual agreement buyouts, and a reduction in the salary and hourly
workforce by approximately 320 employees. The plan is expected to be
substantially complete by end of 2000. In addition, the Company recorded $4.6
million for inventory write-downs which has been reported with cost of goods
sold for the first six months ended June 27, 1998. The Company expects to incur
non-cash costs of $5.4 million in the six months ended June 27, 1998 to
integrate the operations of IHDG and Imperial.
Certain benefits that may result from head count reductions and fixed
cost savings are anticipated to be fully realized in 2000 as a result of the
implementation of the Company's Integration Plan. During 1997, the Company
incurred $39.0 million of fixed costs and compensation expense relating to
facilities to be closed and positions to be eliminated. Management estimates
that these costs will be eliminated by the year 2000, but will be partially
offset by $10.4 million of incremental overhead costs, primarily at the
Company's Knoxville, Tennessee facility. Total cumulative net fixed costs
savings from the Integration Plan are estimated at $28.6 million by the end of
2000, with $18.0 million estimated expected to be realized in 1999 and $5.0
million in 1998.
The Company's principal source of cash to fund its liquidity needs will
be net cash from operating activities and borrowings under the Revolving Credit
Facility and the Deferred Draw Term Loan. As of June 27, 1998, after giving
effect to the Transactions, the Revolving Credit Facility and the Deferred Draw
Term Loan would have provided $78.1 million of additional borrowings available
to be drawn, subject to the satisfaction of customary conditions. Amounts
available under the Revolving Credit Facility and the Deferred Draw Term Loan
may be used for working capital and general corporate purposes, subject to
certain limitations under the Senior Credit Facilities. Assuming the successful
implementation of its Integration Plan, the Company believes that these funds
will be sufficient to meet its current and future financial obligations,
including the payment of principal and interest on the Notes, working capital,
capital expenditures and other obligations. No assurance can be given, however,
that this will be the case. The Company's future operating performance and
ability to service or refinance the Notes and to repay, extend or refinance the
Senior Credit Facilities will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control.
Recently Issued Accounting Standards
The Financial Accounting Standards Board has recently issued two new
accounting standards, Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information," Statement No. 132, "Employees' Disclosures
about Pensions and Other Postretirement Benefits," Statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities," and SOP98-1 "Accounting for
the Costs of Computer Software Developed for or Obtained for Internal-Use."
These statements will affect the disclosure requirements for the 1998 reporting
period. The Company is currently evaluating the effect of these new statements.
20
<PAGE>
Year 2000 Compliance
Many existing computer programs utilized globally use only two digits
in a data field to identify the year and to perform time calculations. These
programs, if not corrected, could fail or create errors by or at the Year 2000.
This "Year 2000" issue is believed to affect virtually all companies and
organizations, including this Company.
The Company relies on a significant number of computer programs and
computer technology for its key operations, including product design, sales
order processing, manufacturing, inventory management, distribution, finance,
and various administrative functions. The Company's sales order processing and
production planning systems generally use proprietary applications, while
third-party applications are used more extensively for manufacturing, finance
and other administrative functions.
Following the Recapitalization, the Company is currently performing a
comprehensive study of all of its computer systems, including both internally
developed programs and software purchased from outside vendors, to identify Year
2000 compliance and other operating issues. As part of its Integration Plan, the
Company has selected and is in the process of converting all computer systems to
computer systems utilized by Sunworthy (the Canadian wallcoverings business
formerly owned by Borden) for its critical business functions. Preliminary
testing indicates that the selected systems are substantially Year 2000
compliant. The conversion program is on schedule for phased implementation to be
completed by the end of the first quarter of 1999. The $320,000 paid to software
vendors during the first six months of 1998 for the conversion to the Sunworthy
system has been capitalized and the Company does not expect significant
additional third-party costs related to that conversion.
The Company is also conducting a comprehensive Year 2000 study of its
other computer systems and technologies which it expects to complete by the fall
of 1998. This study will include identification of Year 2000 issues and
strategies for addressing such issues that affect third-party software
applications. Third-party providers will also be contacted and appropriate
representations will be sought to the effect that Year 2000 issues associated
with the software provided by them to the Company have been or will be timely
addressed. The Company is in the process of initiating formal communications
with all of its significant suppliers and customers to determine the extent to
which the Company is vulnerable to the failure of such suppliers and customers
to remedy their own Year 2000 problems. The Company plans to develop formal
contingency plans by the end of 1998 where appropriate and expects to be in a
position to estimate the future costs of resolving Year 2000 issues at such
time.
Notwithstanding that the Company is proceeding with the implementation
of its own compliance program, including ascertaining Year 2000 compliance of
third parties, the costs of achieving compliance or the inability of the Company
or its material suppliers and customers to effectuate solutions to their
respective Year 2000 issues on a timely and cost effective basis could have a
material adverse on the Company.
Forward-Looking Statements
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are subject to a number of risks and uncertainties, many of which are beyond the
Company's control. All statements other than statements of historical facts
included in this report, including the statements under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and located
elsewhere herein regarding the Company's financial position, plans to increase
revenues, reduce expenses and take advantage of synergies and any statements
regarding other future events or future prospects of the Company, are
forward-looking statements. When used in this report, the words "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain such words. These forward-looking statements
speak only as of the date hereof. The Company is not undertaking any obligation
to update or revise publicly any forward-looking statements, whether as a result
of new information, future events or otherwise. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct or that savings or other benefits anticipated in the forward-looking
statements will be achieved. Holders of the Company's securities are cautioned
not to place undue reliance on these forward-looking statements. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on their behalf are expressly qualified in their entirety by the
cautionary statements.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The combined Company is a party to various litigation matters
incidental to the conduct of its business. Management believes that the outcome
of any of the matters in which it is currently involved is not reasonably likely
to have a material adverse effect on the Company's consolidated financial
condition or results of operations.
The Company has been identified as a potentially responsible party
("PRP) at the Solvents Recovery Service of New England ("SRSNE") Superfund Site
by the United States Environmental Protection Agency ("US EPA"). SRSNE operated
a solvent reclaiming facility in Southington, Connecticut. The facility
allegedly released various materials to soil and groundwater. US EPA added the
facility to the National Priorities List which is the inventory of sites
designated for cleanup under the federal Superfund law. In 1992, the Company
received a notice of potential liability from US EPA because the Company
allegedly sent material to SRSNE for recycling. Following the notice, the
Company joined with other PRPs in executing various administrative orders issued
by US EPA. These orders directed various site investigation and cleanup efforts.
The currently projected estimate of total site remediation costs is
approximately $50 million. The potential liability of individual PRPs is based
on its proportionate share of materials allegedly sent to the SRSNE site.
Although this proportionate share could vary in response to the insolvency of
certain group members or the addition of new members, the Company's current
proportionate share of the total projected remediation costs is estimated to be
approximately $900,000.
On May 17, 1998, the Massachusetts Department of Environmental
Protection issued a Notice of Responsibility which identified Vernon Plastics as
a PRP for the release of oil and/or hazardous materials at the Ridge Hill Road
site in Freetown, Massachusetts and the Ledge site in Dartmouth, Massachusetts.
Allegedly, materials that Vernon Plastics and 75 other PRPs sent to the Re-Solve
site, a former recycling facility operated by Re-Solve, Inc., were subsequently
sent to the Ridge Hill Road site and the Ledge site for disposal. The Notice of
Responsibility for the Ridge Hill Road site and the Ledge site requests that the
PRPs characterize environmental conditions at both sites. Vernon Plastics has
paid $1,000 toward the development and implementation of these plans. In 1980,
the US EPA designated Re-Solve site as a Superfund site and sent Vernon Plastics
a notice letter in 1983. Vernon Plastics voluntarily entered into a settlement
agreement as a de minimis party with the US EPA and the State of Massachusetts
in 1989, and paid $106,000 to the US EPA to resolve its liability share of
response costs for this site. The Company cannot estimate with any certainty the
future costs it may incur to resolve its involvement at the Ridge Hill Road site
or the Ledge site, because investigation and remediation activity at the sites
are in the preliminary stages. Based on the number of PRPs identified for these
two sites and Vernon Plastics' status as de minimis party at Re-Solve site, the
Company does not expect that its liability for these two sites will have a
material adverse effect, individually or in the aggregate, on it operations,
liquidity or financial condition.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
II - 1
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit No. Description
----------- -----------
27. Financial Data Schedule
b. Reports on Form 8-K
-------------------
None.
II - 2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf by the
undersigned, thereunto duly authorized.
THE IMPERIAL HOME DECOR GROUP INC.
Date: September 28, 1998 By: /s/ Scott R. Levin
----------------------------------------
Scott R. Levin
Executive Vice President--Administration and
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
II - 3
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