<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the Quarterly Period Ended September 26, 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 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
November 9, 1998:
5,937,500 Common Shares
<PAGE> 2
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>
SEPT. 26, DEC. 31,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents......................................................... $ 3,109 $ 3,795
Accounts receivable, less allowance for doubtful accounts
of $3,524 and $1,758, respectively......................................... 99,536 55,160
Inventories:
Finished and in-process goods............................................. 94,503 52,012
Raw materials and supplies................................................ 10,115 7,467
--------- ---------
Total inventories......................................................... 104,618 59,479
Other current assets......................................................... 25,127 20,382
--------- ---------
Total Current Assets:........................................................... 232,390 138,816
--------- ---------
Property, plant and equipment, net of accumulated depreciation of $65,580 and
$58,729, respectively........................................................ 109,241 66,740
Assets held for resale.......................................................... 4,190 ---
Goodwill........................................................................ 10,752 10,868
Other non-current assets........................................................ 45,032 23,210
--------- ---------
$ 401,605 $ 239,634
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Bank loan.................................................................... $ --- $ 1,529
Notes payable under revolving credit facility................................ 44,935 ---
Accounts payable............................................................. 41,832 31,310
Income taxes payable......................................................... 10,068 6,249
Other current liabilities.................................................... 54,655 22,470
--------- ---------
Total Current Liabilities....................................................... 151,490 61,558
--------- ---------
Long-term debt.................................................................. 323,000 ---
Other long-term liabilities..................................................... 27,146 11,346
Commitments and Contingencies (Note 10) --- ---
--------- ---------
501,636 72,904
--------- ---------
Shareholders' Equity (Deficiency):
Common stock................................................................. 59 200
Preferred stock.............................................................. --- 194,189
Paid-in capital.............................................................. (64,349) (69,242)
Accumulated translation adjustment........................................... 372 (672)
Retained earnings (deficit).................................................. (34,814) 15,676
Owner's investment........................................................... --- 27,878
Minimum pension liability adjustment......................................... (1,299) (1,299)
--------- ---------
Total Shareholders' Equity (Deficiency) (100,031) 166,730
--------- ---------
$ 401,605 $ 239,634
========= =========
</TABLE>
2
<PAGE> 3
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 NINE MONTHS ENDED
------------------------- -------------------------
SEPT. 26, SEPT. 27, SEPT. 26, SEPT. 27,
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $104,011 $92,821 $319,041 $290,328
Cost of goods sold (including amortization of
inventory step-up of $2,898 and $11,560 and
an additional write-off of excess inventories
of $9,997 and $14,554 for the three and nine
months ended September 26, 1998,
respectively) .............................. 77,493 61,120 223,808 185,630
-------- ------- -------- --------
Gross margin................................... 26,518 31,701 95,233 104,698
Distribution expense........................... 5,147 5,276 16,576 17,049
Marketing expense.............................. 19,505 13,764 58,751 46,386
General and administrative expense............. 8,455 4,493 26,159 14,965
Restructuring charges and other integration costs 7,187 --- 15,927 ---
-------- ------- -------- --------
Operating income (loss)........................ (13,776) 8,168 (22,180) 26,298
Merger costs................................... --- --- 4,000 ---
Interest (income) expense, net (including
amortization of deferred financing
costs of $539 and $1,276 for the three months
and nine months ended September 26, 1998,
respectively).............................. 9,259 (212) 19,161 (368)
-------- ------- -------- --------
Income (loss) before income taxes.............. (23,035) 8,380 (45,341) 26,666
Income tax expense (benefit)................... (285) 2,485 (161) 9,075
-------- ------- -------- --------
Net income (loss).............................. $(22,750) $ 5,895 $(45,180) $ 17,591
======== ======= ======== ========
</TABLE>
3
<PAGE> 4
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------
SEPT 26, SEPT. 27,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................... $(45,180) $ 17,591
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities, net of
acquisition:
Depreciation and amortization............................ 11,417 6,785
Amortization of deferred financing costs................. 1,276 ---
Accounts receivable...................................... (2,330) (2,670)
Inventories, net......................................... 14,560 4,238
Accounts payable......................................... (7,130) (7,837)
Current and deferred foreign income taxes................ (1,035) 3,892
Other assets............................................. (8,509) 27
Other liabilities........................................ 5,417 2,293
-------- --------
Cash (used in) provided by operating activities.......... (31,514) 24,319
-------- --------
Cash flows from investing activities:
Capital expenditures............................................ (18,135) (10,275)
Acquisition of Imperial Wallcoverings, Inc...................... (72,200) ---
-------- --------
Cash used in investing activities........................ (90,335) (10,275)
-------- --------
Cash flows from financing activities:
Repayment of borrowings on bank loan............................ (1,529) ---
Borrowings under revolving credit facility...................... 44,935 ---
Borrowings under long-term debt arrangements.................... 323,000 ---
Debt issuance fees.............................................. (17,938) ---
Equity contribution............................................. 84,500 ---
Borden recapitalization cash distribution....................... (314,432) ---
Dividends paid.................................................. (2,635) (14,128)
Changes in owners' investment................................... 5,288 10,104
-------- --------
Cash provided by (used in) financing activities.......... 121,189 (4,024)
-------- --------
Effect of exchange rate changes on cash................................ (26) ---
-------- --------
Increase (decrease) in cash and equivalents............................ (686) 10,020
Cash and equivalents at beginning of period............................ 3,795 6,768
-------- --------
Cash and equivalents at end of period.................................. $ 3,109 $ 16,788
======== ========
</TABLE>
4
<PAGE> 5
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 The Imperial Home Decor Group Inc., formerly known as Borden Decorative
Products Holdings, Inc. ("BDPH"), 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 nine months ended September 26, 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 Inc.
("Borden") and (ii) the acquisition of Imperial Wallcoverings, Inc. and its
affiliate (together, "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:
- The transfer of substantially all the assets and liabilities
of Sunworthy (the Canadian wallcoverings business of Borden)
to a wholly owned subsidiary of BDPH;
- The equity contribution of $84.5 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");
- The merger of MergerCo with and into BDPH;
- 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, plus a $4.9 million post-closing adjustment
under the Recapitalization Agreement; and
- The cancellation and settlement of existing stock options for
$1.3 million which resulted in a charge to operations of
$0.7 million 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> 6
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Imperial Acquisition
The principal components of the Imperial Acquisition were:
- The acquisition of all the outstanding capital stock of
Imperial Wallcoverings, Inc. by BDPH;
- The acquisition of substantially all the assets and
liabilities of Imperial Wallcoverings (Canada), Inc. by a
wholly owned subsidiary of BDPH;
- The payment by BDPH to C&A of the cash purchase price for the
Imperial Acquisition of $71.2 million plus an $1.6 million
post-closing adjustment pursuant to the Imperial Acquisition
Agreement; and
- 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 $4.2 million in
assets held for resale, $12.5 million in accruals, and $5.0 million in deferred
tax liabilities, and (3) a reduction of $16.5 million in property, plant and
equipment.
The resulting preliminary purchase price allocation was as follows (in
thousands):
<TABLE>
<S> <C>
Cash........................................... $ 206
Accounts receivable............................ 38,241
Inventories.................................... 60,654
Other current assets........................... 1,980
Property, plant and equipment.................. 33,524
Assets held for resale......................... 4,190
Other non-current assets....................... 2,521
Accounts payable and accrued expenses.......... (46,985)
Deferred income taxes.......................... (5,474)
Other long-term liabilities.................... (9,057)
-------
Total..................................... $79,800
=======
</TABLE>
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>
NINE MONTHS ENDED
--------------------------------
SEPT. 26, 1998 SEPT. 27, 1997
-------------- ---------------
<S> <C> <C>
Net sales............................................................... $352,068 $ 415,680
Net loss before cumulative effect in change in accounting policy........ 60,474 12,078
</TABLE>
6
<PAGE> 7
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 ($44.9
million borrowed since the closing date and outstanding at September 26, 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. At
September 26, 1998, interest rates are as follows: Revolving Credit
Facility--8.27%; Term Loan A--8.1875%; Term Loan B--8.44%; and Term Loan
C--8.3125%. A commitment fee of 0.5% per annum is paid on the unused portion of
the revolving credit facility and the unused portion of Term Loan A.
The Senior Credit Facilities contain a number of covenants that, among
other things, limit the Company's ability to incur additional indebtedness, pay
dividends, dispose of certain assets, create liens, make capital expenditures,
make certain investments or acquisitions and otherwise restrict corporate
activities. The Senior Credit Facilities also require the Company to comply with
certain financial ratios and tests, under which the Company will be required to
achieve certain financial and operating results.
3. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
presentation utilized in the quarter and nine months ended September 26, 1998.
7
<PAGE> 8
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. 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 2000. The liabilities accrued under
purchase accounting relating to the Integration Plan for the Imperial
Acquisition were $12.5 million.
Additionally, as part of the consolidation and rationalization of
operations, the Company recorded restructuring charges and other integration
costs of $7.2 million and $15.9 million for the quarter and nine months ended
September 26, 1998.
In the third quarter, as a result of market conditions in Eastern
Europe and Russia, the Company reduced its workforce at its U.K. operations. A
restructuring charge of $2.0 million was recorded to provide for severance costs
for approximately 110 U.K. employees. The U.K. restructuring will be
substantially complete by the end of 1998.
In connection with the Integration Plan, a $1.2 million restructuring
charge was recorded in the third quarter to provide for severance and other
employee related benefits in North America. The Company incurred other expenses
of $4.0 million for the third quarter related to its overall Integration Plan
which consisted of one-time charges associated with the Integration Plan for
items such as consulting and legal services, relocations of employees and
temporary staffing.
Of the $15.9 million restructuring charge and integration costs
recorded in the first nine months of 1998, charges totaling $8.7 million
relating to the Integration Plan were recorded in the first six months of 1998
and were taken 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 and sales force. This $8.7 million charge also
provided for 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 liabilities accrued under purchase accounting and for the IHDG
restructuring and other integration costs are as follows (in thousands):
<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 $2,220 $ 277 $12,516
Cash Expenditures.................. --- (1,663) (779) (553) (31) (3,026)
------- ------ ------ ------ ------- ------
Balance at September 26, 1998...... $ --- 4,426 $3,151 $1,667 $ 246 $ 9,490
------- ------ ------ ------ ------- ------
IHDG RESTRUCTURING CHARGES AND OTHER
INTEGRATION COSTS:
Expensed through September 26, 1998 $1,025 8,572 $ --- $ 648 $ 5,682 $15,927
Write down of property to net
Realizable value............... (1,025) --- --- --- --- (1,025)
Cash expenditures.................. --- (4,569) --- --- (5,682) (10,251)
------ ------ ------ ------ ------- ------
Balance at September 26, 1998...... $ 0 $4,003 $ --- $ 648 $ 0 $ 4,651
====== ====== ====== ====== ======= ======
</TABLE>
8
<PAGE> 9
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. CERTAIN NON-CASH CHARGES
The Company incurred non-cash charges of $12.9 million and $26.8
million for the quarter and nine months ended September 26, 1998, respectively.
The charges in the third quarter consisted of $2.9 million for the amortization
of the inventory step-up and $10.0 million for an inventory write-down both of
which were reported with cost of goods sold in the accompanying condensed
consolidated statements of operations for the quarter ended September 26, 1998.
For the nine months, the charges were $11.6 million for the amortization of
inventory step-up and $14.6 million for inventory write-downs which were
included in costs of goods sold, and $0.7 million for charges related to
management options which were included in general and administrative expenses.
6. SUPPLEMENTAL INFORMATION
Other current assets, non-current assets, current liabilities and
long-term liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPT. 26,
1998
----------
<S> <C>
Other current assets:
Sample books ........................................................... $ 8,526
Design and engraving costs ............................................. 11,006
Other .................................................................. 5,595
-------
$25,127
-------
Other non-current assets:
Prepaid pension assets ................................................. $16,709
Deferred debt issuance cost, net ....................................... 16,662
Other .................................................................. 11,661
-------
$45,032
-------
Other current liabilities:
Accrued restructuring and other integration costs ...................... $ 7,594
Customer allowances and credits ........................................ 13,513
Wages and payroll taxes ................................................ 10,661
Interest payable ....................................................... 3,077
Other .................................................................. 19,810
-------
$54,655
-------
Other long-term liabilities:
Deferred income taxes .................................................. $ 9,797
Non-pension post-employment benefit obligation ......................... 10,072
Accrued restructuring and other integration costs....................... 6,547
Other .................................................................. 730
-------
$27,146
-------
</TABLE>
7. 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
$1.1 million 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. At September 26, 1998 the Canadian net deferred income tax asset was
$1.2 million and the U.K. net deferred income tax liability was $10.4 million.
9
<PAGE> 10
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. 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 nine months ended September 26, 1998 and
September 27, 1997, in thousands, was as follows.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------------
SEPT. 26, 1998 SEPT. 27, 1997
---------------- ----------------
<S> <C> <C>
Net (loss) income.............................................................. $ (45,180) $ 17,591
Foreign currency translation adjustments ...................................... 1,044 (5,107)
Comprehensive (loss) income ................................................... $ (44,136) $ 12,484
</TABLE>
9. 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 determined the impact
adoption of Statement 131 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.
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.
10. 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 $1.2 million for potential exposures as of
September 26, 1998, including $0.9 million for the Solvents Recovery Service of
New England superfund site in Southington, Connecticut. In the opinion of the
10
<PAGE> 11
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 adverse 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.
11. 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. During the nine months ended September 26, 1998, the Company
recognized $0.8 million in expense related to this monitoring agreement.
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.
12. 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 the Company, the Guarantor Subsidiaries, and the
Company's other subsidiaries (the "Non-Guarantor Subsidiaries"). Such financial
information is consolidated in the presentation below because (i) the Guarantor
Subsidiaries have fully and unconditionally guaranteed the Notes on a joint and
several basis and (ii) management of the Company believes that 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.
Investments in subsidiaries are accounted for by the Company on the
equity method of accounting. Earnings of subsidiaries are, therefore, reflected
in the 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.
* * * * * *
11
<PAGE> 12
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
SEPTEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
---------- ----------- -------- -------- ---------
Assets
Current Assets:
<S> <C> <C> <C> <C>
Cash and equivalents...................... $ --- $ 2,339 $ 770 $ 3,109
Accounts receivable....................... --- 53,440 46,096 99,536
Inventories............................... --- 60,238 43,496 $ 884 104,618
Other current assets...................... --- 12,081 13,046 25,127
---------- ----------- -------- --------- ---------
Total Current Assets.................. --- 128,098 103,408 884 232,390
Fixed assets, net.............................. --- 40,195 70,401 (1,355) 109,241
Assets held for resale......................... --- 4,190 --- 4,190
Goodwill....................................... --- 1,168 9,584 10,752
Other non-current assets....................... 16,662 5,405 22,965 45,032
Investment in subsidiaries..................... 84,796 --- --- (84,796) ---
---------- ----------- -------- --------- ---------
$ 101,458 $ 179,056 $206,358 $ (85,267) $ 401,605
========== =========== ======== ========= =========
Liabilities and Shareholders' Equity
(Deficiency)
Current Liabilities:
Notes payable under revolving credit $ 39,200 $ --- $ 5,735 $ $ 44,935
facility................................
Accounts payable.......................... 11 12,524 29,297 41,832
Income tax payable........................ --- --- 10,068 10,068
Other current liabilities................. 2,889 23,921 27,845 54,655
Intercompany payable/(receivable)......... (38,395) 53,203 (14,808) ---
---------- ------------ -------- --------- ---------
Total Current Liabilities............. 3,705 89,648 58,137 151,490
Long-term debt................................. 323,000 323,000
Other long-term liabilities.................... --- 16,938 380 31 17,349
Deferred income tax............................ --- --- 9,797 9,797
Shareholder's equity (deficiency).............. (225,247) 72,470 138,044 (85,298) (100,031)
---------- ------------ -------- --------- ---------
$ 101,458 $ 179,056 $206,358 $ (85,267) $ 401,605
========== ============ ======== ========= =========
</TABLE>
12
<PAGE> 13
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
------- ------------- ------------ ----------- ------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
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 assets....................... --- 1,214 21,996 23,210
Investment in subsidiaries..................... 43,144 --- --- (43,144) 0
-------- -------- --------- --------- ---------
$ 43,144 $ 54,998 $ 184,636 $ (43,144) $ 239,634
======== ======== ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities:
Bank loan facility.................... $ --- $ --- $ 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 (deficiency).............. 43,144 39,329 127,401 (43,144) 166,730
-------- -------- --------- --------- ---------
$ 43,144 $ 54,998 $ 184,636 $ (43,144) $ 239,634
======== ======== ========= ========= =========
</TABLE>
13
<PAGE> 14
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $ --- $60,961 $ 65,254 $(22,204) $104,011
Cost of goods sold......................... --- 46,712 52,878 (22,097) 77,493
-------- ------- -------- -------- --------
Gross margin............................... --- 14,249 12,376 (107) 26,518
Distribution expense....................... --- 1,464 3,683 5,147
Marketing Expense.......................... --- 11,616 7,889 19,505
General and administrative expense......... --- 3,726 4,729 8,455
Restructuring charges and other integration
costs...................................... --- 4,339 2,848 7,187
-------- ------- -------- -------- --------
Operating income........................... (6,896) (6,773) (107) (13,776)
Interest (income) expense, net............. 3,616 1,269 4,374 9,259
-------- ------- -------- -------- --------
Income before income taxes................. (3,616) (8,165) (11,147) (107) (23,035)
Equity income.............................. (22,750) 22,750
Income tax expense......................... --- 1 (286) (285)
-------- ------- -------- -------- --------
Net income (loss).......................... (26,366) (8,166) (10,861) 22,643 (22,750)
======= ======= ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $ --- $35,777 $70,459 $ (13,415) $92,821
Cost of goods sold........................ --- 25,245 49,290 (13,415) 61,120
------- ------ ------ ------- -------
Gross margin.............................. --- 10,532 21,169 31,701
Distribution expense...................... --- 1,327 3,949 5,276
Marketing expense......................... --- 6,254 7,510 13,764
General and administrative expense........ --- 1,233 3,260 4,493
------- ------ ------ ------- -------
Operating income.......................... --- 1,718 6,450 8,168
Interest (income) expense, net............ --- (799) 587 (212)
------- ------ ------ ------- -------
Income before income taxes................ --- 2,517 5,863 8,380
Equity income............................. 5,895 --- --- (5,895) ---
Income tax expense........................ --- 826 1,659 2,485
------- ------ ------ ------- -------
Net income (loss)......................... $ 5,895 $1,691 $4,204 $(5,895) $ 5,895
======= ====== ====== ======= =======
</TABLE>
14
<PAGE> 15
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales................................. $ $168,188 $224,827 $(73,974) $319,041
Cost of goods sold........................ 129,364 168,045 (73,601) 223,808
-------- --------- -------- -------- --------
Gross margin.............................. --- 38,824 56,782 (373) 95,233
Distribution expense...................... --- 4,814 11,762 16,576
Marketing expense......................... --- 31,458 27,293 58,751
General and administrative expense........ --- 9,767 16,392 26,159
Restructuring charges and other integration
costs..................................... 11,067 4,860 15,927
-------- --------- -------- -------- --------
Operating income (loss)................... --- (18,282) (3,525) (373) (22,180)
Merger costs.............................. 4,000 4,000
Interest (income) expense, net............ 6,590 2,726 9,845 19,161
-------- --------- -------- -------- --------
Income before income taxes................ (10,590) (21,008) (13,370) (373) (45,341)
Equity income............................. (45,180) --- --- 45,180 ---
Income tax expense........................ --- 304 (465) (161)
-------- --------- -------- -------- --------
Net income (loss)......................... $(55,770) ($21,312) ($12,905) 44,807 ($45,180)
-------- --------- -------- -------- --------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net sales................................. $ --- $ 116,628 $226,887 $(53,187) $290,328
Cost of goods sold........................ --- 82,776 156,041 (53,187) 185,630
------- --------- -------- -------- --------
Gross margin.............................. --- 33,852 70,846 104,698
Distribution expense...................... --- 4,358 12,691 17,049
Marketing expense......................... --- 21,046 25,340 46,386
General and administrative expense........ 3,855 11,110 14,965
------- --------- -------- --------
Operating income.......................... --- 4,593 21,705 26,298
Interest (income) expense, net............ (2,180) 1,812 (368)
------- --------- -------- -------- --------
Income before income taxes................ --- 6,773 19,893 26,666
------- --------- -------- --------
Equity income............................. 17,591 --- --- (17,591) ---
Income tax expense........................ 2,569 6,506 9,075
------- --------- -------- -------- --------
Net income (loss)......................... $17,591 $ 4,204 $ 13,387 $(17,591) $ 17,591
======= ========= ======== ======== ========
</TABLE>
15
<PAGE> 16
THE IMPERIAL HOME DECOR GROUP INC.
FORMERLY KNOWN AS
BORDEN DECORATIVE PRODUCTS HOLDINGS INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 26, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash provided by (used in) operating
activities.................................. $ (34,615) $ (5,963) $ 9,064 $ (31,514)
Cash flow used in investing activities:
Capital expenditures ....................... -- (9,556) (8,579) (18,135)
Acquisition of Imperial .................... (72,200) -- -- (72,200)
-------- ---------
Cash used in investing activities ............... (72,200) (9,556) (8,579) (90,335)
-------- --------- --------- ---------
Cash flow provided by (used in) financing
activities:
Repayment of borrowing on bank loan ........ -- -- (1,529) (1,529)
Borrowings under revolving credit
facility .................................. 39,200 -- 5,735 44,935
Borrowings under long-term debt arrangements 323,000 -- -- 323,000
Debt issuance fees ......................... (17,938) -- -- (17,938)
Equity contribution ........................ 84,500 -- -- 84,500
Borden recapitalization cash
distribution .............................. (312,782) -- (1,650) (314,432)
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 ................................. 106,815 17,629 (3,255) 121,189
-------- --------- --------- ---------
Effect of exchange rate change on cash .......... (26) (26)
Increase (decrease) in cash and equivalents ..... -- 2,110 (2,796) (686)
Cash and equivalents at beginning of period ..... -- 229 3,566 3,795
-------- --------- --------- --------- ---------
Cash and equivalents at end of period ........... $ $ 2,339 $ 770 $ -- $ 3,109
======== ========= ========= ========= =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 27, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Cash provided by operating activities.... $ --- $2,312 $22,007 $24,319
Cash flow used in investing activities:
Capital expenditures................. --- (2,958) (7,317) (10,275)
Cash flow provided by (used in) financing
activities:
Dividends paid....................... --- (3,117) (11,011) (14,128)
Changes in owner's investment........ --- 2,929 7,175 10,104
------ ------- -------
Net cash provided by (used in) financing
activities........................... --- (188) (3,836) (4,024)
------ ------- -------
Increase (decrease) in cash and equivalents --- (834) 10,854 10,020
Cash and equivalents at beginning of period --- 1,345 5,423 6,768
------ ------- ------- -------
Cash and equivalents at end of period..... $ $ 511 $16,277 $ -- $16,788
======= ======= ======= ======= =======
</TABLE>
16
<PAGE> 17
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 (the "Imperial Acquisition"). 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, non-continuous 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 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. The Integration Plan is expected to be
substantially complete by the end of 2000.
The implementation of the Integration Plan is proceeding on schedule.
During the third quarter of 1998, the Company ceased manufacturing at its
Ashaway and Plattsburgh facilities, consolidated the Company's and Imperial's
sales and customer service organizations and began consolidating its finishing,
warehouse and sample book operations. As of September 26, 1998, the Company has
reduced its North American workforce by approximately 300 hourly and salary
employees, which represents 13% of total North American employees and 35% of the
total workforce reduction planned by the end of 2000. In addition to the head
count reductions in the Integration Plan, the Company has also reduced the
number of its hourly and salary employees in the U.K. by approximately 105, or
7% of its U.K. workforce, in response to lower volumes as a result primarily of
the economic deterioration in Eastern Europe and Russia.
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 26, 1998 COMPARED TO THE QUARTER
AND NINE MONTHS ENDED SEPTEMBER 27, 1997
RESULTS OF OPERATIONS
The Imperial Acquisition closed on March 13, 1998. Accordingly, IHDG's
results for the 1998 third quarter included Imperial's results and included
approximately 28 weeks of Imperial's results for the first nine months ended
September 26, 1998.
Net Sales. Net sales increased by $11.2 million, from $92.8 million to
$104.0 million, or 12.1%, and $28.7 million, from $290.3 million to $319.0
million, or 9.9%, for the quarter and nine months ended September 26, 1998,
respectively, compared to the comparable periods in the prior year. The Imperial
Acquisition accounted for sales of $32.4 million for the third quarter
17
<PAGE> 18
ended September 26, 1998 and $74.4 million for the nine months ended September
26, 1998. This increase was partially offset by a North American trade sales
decline of $5.5 million for the quarter and $16.2 million for the nine months as
a result of an overall weaker wallpaper market and a reduction in wallcovering
offerings by certain national account customers, Walmart, Target, and Hechinger.
Trade sales for the U.K. business decreased $16.2 million and $28.2 million for
the quarter and nine months, respectively, principally due to weakness in the
export market where the strength of the pound sterling and poor economic
conditions in Eastern Europe and Russia affected sales.
Sales of flexible vinyl films and sheeting at Vernon Plastics increased
$0.4 million to $11.3 million for the quarter ended September 26, 1998. The
increase resulted from sales produced using a new extrusion production process
that was not fully operational in 1997. For the nine months in 1998, sales
declined $1.3 million to $37.6 million due to a shift in customer demand to
lower priced commodity products in the pool liner and industrial fabrics product
lines.
Gross Margin. Gross margin was 25.5% for the third quarter and 29.8%
for the nine months ended September 26, 1998, compared to 34.2% and 36.1% for
the same periods in 1997. In the third quarter of 1998, gross margin was
impacted by a $10.0 million charge for excess inventories and $2.9 million of
amortization related to the step-up of Imperial Wallcoverings inventory to fair
market value. For the first nine months of 1998, margin was impacted by a $14.6
million charge for excess inventories and $11.6 million of amortization related
to the step-up. The Company recorded the charges 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, assessment of product and marketing strategies for existing
and acquired collections and weakness in the wallpaper market. Without the
amortization of the step-up and charge for excess inventories, margin would
have been 37.9% and 36.6% for the quarter and nine months ended
September 26, 1998, respectively.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were 38.8% and 36.8% of sales for the quarter and nine
months ended September 26, 1998, respectively, compared to 25.4% and 27.1% 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 31.8% of sales for the quarter and nine months ended.
Monitoring fees and other transaction costs of $0.6 million and increases in
advertising impacted the third quarter. The first nine months of 1998 were
impacted by increases in advertising and $1.2 million of monitoring fees and
other transaction costs. In addition, bonuses and compensation expense on stock
options for BDPH's management that became exercisable upon the consummation of
the Recapitalization together totaling $0.8 million resulted in increased
expenses.
Restructuring and other integration costs. The Company recorded
restructuring charges and other integration costs of $7.2 million for the
quarter and $15.9 million for the nine months ended September 26, 1998.
In the third quarter, as a result of market conditions in Eastern
Europe and Russia, the Company reduced its workforce at its U.K. operations. A
restructuring charge of $2.0 million was recorded to provide for severance costs
for approximately 110 U.K. employees. The U.K. restructuring is expected to be
substantially complete by the end of 1998.
In connection with the Integration Plan, a $1.2 million restructuring
charge was recorded to provide for severance and other employee related benefits
in North America. The Company incurred expenses of $4.0 million for the quarter
related to its Integration Plan which consisted of one-time charges associated
with the Integration Plan for items such as consulting and legal services,
relocations of employees and temporary staffing.
Of the $15.9 million restructuring charge and integration costs
recorded in the first nine months of 1998, charges totaling $8.7 million
relating to the Integration Plan were recorded in the first six months of 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 and sales
force. This $8.7 million charge also provided for the write-down of certain
assets to be disposed of to net realizable value, lease and other contractual
18
<PAGE> 19
agreement buyouts, and a reduction in the salary and hourly workforce by
approximately 320 employees.
Transaction costs. Transaction costs totaling $4.0 million were
incurred in the first nine months of 1998 comprised primarily of legal and
underwriting fees.
Taxes. Income tax expense (benefit) was $(0.3) million and $(0.2)
million for the quarter and nine months ended September 26, 1998, respectively,
compared to $2.5 million and $9.1 million for same periods in 1997. The
reduction in income tax expense between the periods is not proportional to the
reduction in income before income taxes primarily due to deferred income taxes
provided on the undistributed earnings of a foreign subsidiary in 1998. In
addition, a valuation allowance reduced the income tax benefit of the loss on
domestic operations.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Recapitalization and the Imperial Acquisition,
on March 13, 1998, (i) Blackstone contributed $84.5 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 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. During the period from March 13,
1998 through September 26, 1998, the Company funded these requirements through
borrowings under the Senior Credit Facilities. At September 26, 1998, the
Company's consolidated indebtedness was $367.9 million, consisting of $198.0
million in Term Loans, $44.9 million under the Revolving Credit Facility and
$125.0 million of the Notes.
For the nine months ended September 26, 1998, the Company's capital
expenditures totaled $18.1 million. The Company anticipates additional capital
expenditures of $12.5 million for 1998. The total of actual and anticipated
capital expenditures for 1998 consist of (i) approximately $19.7 million in
North America, substantially all of which is related to the Integration Plan,
(ii) approximately $9.3 million in the U.K., approximately $4.5 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 $1.6 million relating to Vernon
Plastics Inc., a subsidiary of the Company ("Vernon Plastics"), and the
commercial wallcovering operations. Management has revised its Capital
Expenditure Plan for 1999 in light of current market conditions and the progress
made on the Integration Plan. Management estimates that 1999 capital
expenditures will be between $20.0 to $25.0 million which will be used primarily
for continuing the implementation of the Integration Plan, increasing the
Company's Gallery Program and maintaining its facilities. The Company's ability
to make capital expenditures is subject to certain restrictions under the Senior
Credit Facilities.
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 September 26, 1998, after giving
effect to the Transactions, the Revolving Credit Facility and the Deferred Draw
Term Loan would have provided $57.1 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 for maintenance and implementation of the Integration
19
<PAGE> 20
Plan 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 three 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."
Statements 131 and 132 will affect the disclosure requirements for the 1998
reporting period; Statement 133 and SOP 98-1 may affect the Company's future
earnings or financial position beginning in fiscal 1999. The Company is
currently evaluating the effect of these new statements.
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 $431,000 paid to software
vendors during the first nine 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 end
of 1998. This study will include identification of Year 2000 issues and
strategies for addressing such issues that affect third-party software
applications. Significant 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 effect on the Company.
20
<PAGE> 21
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, including the risk that the Integration Plan may not be fully
implemented; competitive factors and pricing pressures; general economic
conditions in the U.S. and abroad; market demand for home decorating products;
impact of present and future laws; adverse changes in governmental rules or
policies; availability of financing or equity investments to fund operations or
capital expenditures; fluctuations in raw materials prices and availability of
supply. 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 -- General,"
"--Liquidity and Capital Resources," "--Year 2000 Compliance," Part II,
Item 1 "Legal Proceedings" and located elsewhere herein regarding the Company's
financial position 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The 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 paid
$1,000 toward the development and implementation of these plans.
21
<PAGE> 22
In 1980, the US EPA designated the 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBIT NO. DESCRIPTION
27. Financial Data Schedule
b. REPORTS ON FORM 8-K
None.
22
<PAGE> 23
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: November 10, 1998 By: /s/ Scott R. Levin
-----------------------------------------------
Scott R. Levin
Executive Vice President--Administration and
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
23
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