<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/a
Amendment #1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 26, 1999
-----------------
THE IMPERIAL HOME DECOR GROUP INC.
23645 MERCANTILE ROAD, CLEVELAND, OHIO 44122
(216) 464-3700
-----------------
INCORPORATED IN DELAWARE REGISTRATION NO.: 333-58913 I. R. S. NO.: 51-0370302
SECURITIES SUBJECT TO THE REPORTING REQUIREMENTS OF SECTION 15(d) OF THE ACT:
11% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B
---------------
Registrant 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 and
has been subject to such filing requirements for the past 90 days.
Number of shares outstanding of common stock at August 6, 1999: 5,937,500
Common Shares
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<PAGE> 2
Part I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE IMPERIAL HOME DECOR GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 26, DEC. 26,
1999 1998
---------------- -----------------
(As restated,
See Note 1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents........................................................ $ 2,379 $ 1,238
Accounts receivable, less allowance for doubtful accounts
of $4,178 and $3,950, respectively....................................... 108,194 96,495
Inventories................................................................ 105,924 103,577
Other current assets....................................................... 10,289 7,158
---------------- -----------------
Total Current Assets............................................................ 226,786 208,468
Property, plant and equipment, net of accumulated depreciation of $62,584
and $68,496, respectively.................................................. 113,907 111,225
Assets held for resale.......................................................... 2,440 4,190
Goodwill........................................................................ 9,845 10,516
Deferred design, engraving and sample book costs............................... 35,862 32,791
Other non-current assets........................................................ 30,897 33,550
---------------- -----------------
Total $ 419,737 $ 400,740
---------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt.......................................... $ 1,250 $ 1,250
Notes payable under revolving credit facilities............................ 54,214 30,170
Accounts payable........................................................... 64,194 52,903
Other current liabilities.................................................. 73,111 65,975
---------------- -----------------
Total Current Liabilities....................................................... 192,769 150,298
Long-term debt.................................................................. 348,750 348,750
Deferred income taxes........................................................... 6,656 7,494
Other long-term liabilities..................................................... 10,831 10,456
Commitments and contingencies (Note 8)..........................................
---------------- -----------------
Total Liabilities 559,006 516,998
---------------- -----------------
Shareholders' Equity (Deficiency):
Common stock............................................................... 59 59
Paid in capital............................................................ (63,108) (63,108)
Retained earnings (deficit)................................................ (72,995) (47,578)
Accumulated other comprehensive loss....................................... (3,225) (5,631)
---------------- -----------------
Total Shareholders' Equity (Deficiency) (139,269) (116,258)
---------------- -----------------
Total $ 419,737 $ 400,740
================ =================
</TABLE>
2
<PAGE> 3
THE IMPERIAL HOME DECOR GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .................................................... $ 112,246 $ 119,096 $ 218,617 $ 215,030
Cost of goods sold (including non-cash charges of
$1,852 for the three and six months ended June 26,
1999 and $7,425 and $13,221 for the three and six
months ended June 27, 1998, respectively) ............... 71,255 78,962 136,351 146,315
--------- --------- --------- ---------
Gross margin ................................................. 40,991 40,134 82,266 68,715
Operating expenses:
Distribution ............................................ 8,914 5,338 16,472 11,429
Marketing ............................................... 20,858 22,758 41,496 39,246
General and administrative .............................. 6,620 8,745 15,896 17,704
Restructuring charges and other integration costs ....... 6,567 1,854 11,950 8,740
--------- --------- --------- ---------
Operating loss ............................................... (1,968) 1,439 (3,548) (8,404)
Merger costs ................................................. -- -- -- 4,000
Interest expense, net (including amortization of deferred
financing costs of $631 and $1,260 for the three and six
months ended June 26, 1999, respectively; and $637 and
$737 for the three and six months ended June 27, 1998,
respectively) ........................................... 9,798 8,554 19,383 9,902
--------- --------- --------- ---------
Income (loss) before income taxes ............................ (11,766) (7,115) (22,931) (22,306)
Income tax (benefit) provision ............................... (1,724) 257 (2,487) 124
--------- --------- --------- ---------
Net income (loss) ............................................ $ (10,042) $ (7,372) $ (20,444) $ (22,430)
========= ========= ========= =========
</TABLE>
3
<PAGE> 4
THE IMPERIAL HOME DECOR GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 26, JUNE 27,
1999 1998
--------- ---------
(As restated,
See Note 1)
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) ................................................... $ (20,444) $ (22,430)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................... 7,590 7,578
Amortization of deferred financing costs .................... 1,260 737
Deferred foreign income taxes ............................... (2,949) (78)
Change in operating assets and liabilities, net of acquisition:
Accounts receivable ......................................... (12,194) (6,479)
Inventories, net ............................................ (2,358) 874
Accounts payable ............................................ 12,369 3,443
Other assets ................................................ (2,039) (2,951)
Other liabilities ........................................... 6,174 5,677
--------- ---------
Cash used in operating activities ........................... (12,591) (13,629)
--------- ---------
Cash flows from investing activities:
Capital expenditures ................................................ (9,807) (9,259)
Acquisition of Imperial Wallcoverings, Inc., including direct
costs ............................................................. -- (73,800)
--------- ---------
Cash used in investing activities ........................... (9,807) (83,059)
--------- ---------
Cash flows from financing activities:
Net borrowings under revolving credit facility ...................... 23,759 22,318
Borrowings under long-term debt arrangements ........................ -- 323,000
Debt issuance fees .................................................. -- (19,220)
Equity contribution and issuance of common stock .................... -- 84,553
Borden recapitalization cash distribution ........................... -- (314,432)
Dividends paid ...................................................... -- (2,635)
Changes in owners' investment ....................................... -- 6,835
--------- ---------
Cash provided by financing activities ....................... 23,759 100,419
--------- ---------
Effect of exchange rate changes on cash ..................................... (220) (1,508)
--------- ---------
Increase (decrease) in cash and equivalents ................................. 1,141 2,223
Cash and equivalents at beginning of period ................................. 1,238 3,795
--------- ---------
Cash and equivalents at end of period ....................................... $ 2,379 $ 6,018
========= =========
</TABLE>
4
<PAGE> 5
THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of The Imperial Home Decor Group Inc. ("IHDG" or "the Company"), 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 annual financial statements. In the opinion of
management, in all material respects, 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 26, 1998. The results of operations for the three and six
months ended June 26, 1999 and June 27, 1998 are not necessarily indicative of
the results to be expected for the full year.
Subsequent to the issuance of the Company's consolidated financial
statements as of and for the three and six month periods ended June 26, 1999,
the Company's Management determined that certain intercompany balances had not
been properly eliminated in consolidation. As a result, the financial statements
as of June 26, 1999, have been restated from the amounts previously reported to
reduce inventory and accounts payable balances by $10.0 million.
Certain prior year amounts have been reclassified to conform to the
presentation utilized in the three and six months ended June 26, 1999. The
reclassification has no effect on operating results.
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 $125.0
million (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 (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 $84.6 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");
- The merger of MergerCo with and into BDPH;
- The conversion of all the preferred stock and certain common stock of
BDPH, except for 11% of BDPH common stock which was retained by
Borden, into the right to receive a total of $314.4 million in cash;
and
- The cancellation and settlement of existing stock options for $1.3
million which was paid from such $314.4 million and resulted in a
charge to operations of $0.7 million for the excess of the amount paid
over that previously accrued.
5
<PAGE> 6
THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
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. Transaction costs of
$4.0 million related to this merger, comprised primarily of professional fees
and expenses, are reported as merger costs.
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 $72.8 million; 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 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, 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
and equipment and other non-current assets. The principal components of this
allocation were (1) a net increase of $5.4 million in inventories, (2) the
recording of $4.2 million in assets held for resale, $15.1 million in accruals,
and $5.0 million in deferred tax liabilities, and (3) a reduction of $17.7
million in property and equipment.
The resulting purchase price allocation was as follows:
<TABLE>
<S> <C>
Cash $ 206
Accounts receivable 37,894
Inventories 60,152
Other current assets 1,980
Property and equipment 33,522
Assets held for resale 4,190
Other non-current assets 2,521
Accounts payable and accrued expenses (47,772)
Deferred income taxes (5,474)
Other long-term liabilities (7,419)
---------------
Total $ 79,800
==============
</TABLE>
The following unaudited pro forma consolidated results of operations for
the three and six months ended June 27, 1998 have been prepared as if the
Imperial Acquisition had occurred as of the beginning of 1998:
Net Sales: $248,030
Net Loss: 27,043
6
<PAGE> 7
THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
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 11% Senior Subordinated Notes due 2008, series B (the " Old Notes").
The Old Notes were exchanged in a registered offering for a like amount of notes
("the Notes") having identical terms but that are freely transferable, subject
to certain restrictions.
The Notes mature on March 15, 2008 and the Company may not redeem the
Notes prior to March 15, 2003. On or after that date, the Company may redeem the
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 are 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 million ($52.4
million borrowed since the closing date and outstanding at June 26, 1999) and
(ii) term loans consisting of (a) a $65.0 million six-year tranche A term loan
facility, (b) a $115.0 million seven-year tranche B term loan facility and (c) a
$45.0 million eight-year tranche C loan facility, (collectively, the "Term
Loans"). The Term Loans require principal payments on a semi-annual basis.
Interest rates for the Revolving Credit Facilities and the Term Loans
are variable with each calculated using one of several interest rate options. At
June 26, 1999 the weighted average interest rates were as follows: Revolving
Credit Facility - 7.55%; Term Loans - 7.79%. A commitment fee of .5% is paid on
the unused portion of the revolving credit facility.
The Senior Credit Facilities contain 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. RESTRUCTURING CHARGES AND OTHER INTEGRATION COSTS
In conjunction with the Imperial Acquisition, a plan (the "Integration
Plan") to integrate the Company and Imperial in North America was adopted that
includes the closing of inefficient manufacturing and warehouse facilities,
consolidating the Company's finishing and distribution facilities, substantially
reducing the North America hourly and salary workforce and consolidating the
Company's administrative, marketing and sales functions.
As it relates to the Imperial Acquisition, the Integration Plan includes
closure of facilities in Plattsburgh, New York, Ashaway, and Rhode Island,
disposition of certain assets and reduction of the salary and hourly workforce
by 530 employees. In late 1998, manufacturing at the Plattsburgh facility had
ceased. In 1998, operations ceased at the Company's Ashaway facility and in June
1999, the Ashaway land and building was sold. In Plattsburgh and Ashaway,
approximately 490 employees have been severed. The consolidation of distribution
operations under the Integration Plan, which will result in complete closure of
the Plattsburgh facility, is expected to occur by the end of 2000. The
liabilities accrued under purchase accounting relating to the Integration Plan
for the Imperial Acquisition were $11.1 million.
7
<PAGE> 8
THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
Additionally, as part of the consolidation and rationalization of
operations, we recorded restructuring charges and other integration costs of
$6.6 million and $12.0 million for the three and six months ended June 26, 1999
compared to $1.9 million and $8.7 million in the same period a year ago. Since
the inception of the Integration Plan in March 1998, $33.1 million in
restructuring charges and other integration costs have been expensed. Of these
charges, $30.7 million relates to the closure of two distribution centers and
the consolidation of our finishing and bookmaking operations, administrative,
marketing and sales functions. These charges 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 Plan is expected to be
substantially complete by the end of 2000.
In April 1999, we announced plans to exit a non-core facility in the
U.K., which is no longer able to compete in a declining packaging market and is
operating at a loss. A charge of $1.2 million was recorded in the second quarter
of 1999 to provide severance costs to 35 employees at this facility. An
additional charge of $0.3 million was recorded to cover site closure costs in
addition to a $0.4 million charge in 1998 related to permanent impairment of
long-lived assets at this non-core facility. A further charge of $1.6 million
was recorded in the second quarter of 1999 to provide for severance costs
relating to the elimination of 77 full-time employees in the U.K. core
businesses due to lower sales resulting from adverse market conditions
particularly in the U.K., Eastern Europe and Russia. In addition, the Company
expects to eliminate 24 temporary positions at no severance cost and 11 retirees
between now and year end will not be replaced.
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
EMPLOYEE CLOSURE AGREEMENT
BENEFITS COSTS BUYOUTS OTHER TOTAL
----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
IMPERIAL PURCHASE ACCOUNTING:
Liabilities accrued under purchase
accounting at December 26, 1998....... $ 1,519 $ 2,668 $ 1,300 $ 91 $ 5,578
Cash expenditures....................... (910) (548) (30) (1,488)
----------- ------------- ------------- ----------- -----------
Balance at June 26, 1999................ $ 609 $ 2,120 $ 1,270 $ 91 $ 4,090
=========== ============= ============= =========== ===========
IHDG RESTRUCTURING CHARGES AND
OTHER INTEGRATION COSTS:
Liabilities accrued at December 26, 1998 $ 3,256 $ 648 $ 50 $ 3,954
U.K. Restructuring - expensed in 1999... 2,810 2,810
Expensed in 1999........................ 132 9,008 9,140
Cash expenditures....................... (2,024) (9,013) (11,037)
----------- ------------- ----------- -----------
Balance at June 26, 1999................ $ 4,174 $ 648 $ 45 $ 4,867
=========== ============= =========== ===========
</TABLE>
4. CERTAIN NON-CASH CHARGES
The Company incurred non-cash charges related to inventory write-downs
during the periods presented of $4.6 million for the six months ended June 27,
1998 and $1.9 million for the three and six months ended June 26, 1999. In 1998,
the Company reported non-cash charges related to amortization of the inventory
step-up of $7.4 million and $8.7 million for the three and six months,
respectively. These charges were reported with cost of goods sold in the
accompanying condensed consolidated statements of operations.
8
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THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
5. SUPPLEMENTAL INFORMATION
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 26, Dec. 26,
1999 1998
----------------- ----------------
<S> <C> <C>
Finished and in-process goods, net............................................... $ 97,227 $ 94,145
Raw materials and supplies, net.................................................. 8,697 9,432
---------------- ----------------
Inventories, net $ 105,924 $ 103,577
================ ================
</TABLE>
6. INCOME TAXES
A valuation allowance of approximately $18.1 million has been recognized
as management determined that it is more likely than not that the deferred tax
assets for the U.S. and Canadian operations will not be realized.
7. NEW ACCOUNTING PRONOUNCEMENTS
In 1999, we adopted Statement of Position ("SOP") 98-1; "Accounting for
the Costs of Computer Software Developed for or Obtained for Internal Use." The
SOP requires the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
The effect of adopting the SOP was not material to operating results.
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 two 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. A liability is recorded when it is possible
to reasonably estimate the Company's liability with respect to environmental
matters. The Company has recorded an accrual of $1.5 million for potential
exposures as of June 26, 1999, including $.9 million for the Solvents Recovery
Service of New England superfund site in Southington, Connecticut and other
superfund sites, $.3 million for the Ashaway facility and $.3 million for the
Haverhill facility. The amount for the Ashaway facility pertains to a release,
which was discovered in December of 1998, from an underground storage tank,
which was believed to be removed but more recently discovered to be abandoned in
place. The Haverhill facility amount relates to the Company's investigation and
remediation of releases of phthalate compounds from above-ground storage tanks
into soil and groundwater beneath the facility. 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 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 presently believes, based on its examination of such matters,
experience to date and discussions with counsel, that such liability will not
have a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
9
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THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
9. COMPREHENSIVE INCOME
Comprehensive income/(loss) for the six months ended June 26, 1999 and
June 27, 1998 was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 26, JUNE 27,
1999 1998
---------------------- --------------------
<S> <C> <C>
Net loss $ (20,444) $ (22,430)
Foreign currency translation adjustments 2,406 (657)
----------------- ------------------
Comprehensive loss $ (18,038) $ (23,087)
================= =================
</TABLE>
10. OPERATING SEGMENTS AND GEOGRAPHIC REPORTING
The Company has two primary operating segments: wallcovering products and
flexible vinyl films and sheeting. The wallcovering products segment includes
residential and commercial wallcoverings and heat transfer paper. This segment
operates worldwide but primarily in the United States, Canada, and the United
Kingdom. The flexible vinyl films and sheetings product segment includes
calendered, flexible PVC sheeting, printed sheeting and laminated products. This
segment operates in the United States and Canada.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------------
JUNE 26, JUNE 27,
1999 1998
----------------- -----------------
<S> <C> <C>
Net Sales:
Wallcoverings products $ 190,082 $ 188,749
Vinyl films and sheetings 28,535 26,281
----------------- ------------------
$ 218,617 $ 215,030
================= =================
Operating Income (Loss):
Wallcovering products $ (6,222) $ (9,000)
Vinyl films and sheetings 2,674 596
----------------- ------------------
$ (3,548) $ (8,404)
================= =================
Identifiable Assets:
Wallcovering products $ 390,554 $ 387,518
Vinyl films and sheetings 29,183 27,691
----------------- -----------------
$ 419,737 $ 415,209
================= =================
</TABLE>
10
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THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
11. 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. The following is the 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 elsewhere in this report 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.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 26, 1999
(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 ............. $ 1,458 $ 921 $ 2,379
Accounts receivable .............. 56,030 52,164 108,194
Inventories ...................... 62,372 44,613 $ (1,061) 105,924
Other current assets ............. 3,263 7,026 10,289
--------- --------- --------- --------- ---------
Total current assets ........... 123,123 104,724 (1,061) 226,786
Property and equipment, net ............ 47,590 67,592 (1,275) 113,907
Assets held for resale ................. 2,440 2,440
Goodwill ............................... 1,108 8,737 9,845
Deferred design, engraving and sample
book costs ....................... 24,296 11,566 35,862
Other non-current assets ............... $ 15,842 138 14,917 30,897
Investment in subsidiaries ............. 78,456 (78,456)
--------- --------- --------- --------- ---------
TOTAL $ 94,298 $ 198,695 $ 207,536 $ (80,792) $ 419,737
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 1,250 $ 1,250
Notes payable under revolving
credit facilities ................ 36,000 $ 18,214 54,214
Accounts payable ................. 11 $ 22,780 41,403 64,194
Other current liabilities ........ 7,928 26,713 38,310 $ 160 73,111
Intercompany payable/(receivable) (49,503) 49,681 (180) 2
--------- --------- --------- --------- ---------
Total current liabilities ... (4,314) 99,174 97,747 162 192,769
Long-term debt ......................... 348,750 348,750
Deferred income taxes .................. 6,656 6,656
Other long-term liabilities ............ 10,288 516 27 10,831
Shareholders' equity (deficiency) ...... (250,138) 89,233 102,617 (80,981) (139,269)
--------- --------- --------- --------- ---------
TOTAL $ 94,298 $ 198,695 $ 207,536 $ (80,792) $ 419,737
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 13
THE IMPERIAL HOME DECOR GROUP INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 26, 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 ............... $ 774 $ 464 $ 1,238
Accounts receivable ................ 50,641 45,854 96,495
Inventories ........................ 58,821 46,855 $ (2,099) 103,577
Other current assets ............... 3,209 3,949 7,158
--------- --------- --------- --------- ---------
Total current assets ........... 113,445 97,122 (2,099) 208,468
Property and equipment, net ............... 41,255 71,297 (1,327) 111,225
Assets held for resale .................... 4,190 4,190
Goodwill .................................. 1,148 9,368 10,516
Deferred design, engraving and sample
book costs ............................. 17,627 15,164 32,791
Other non-current assets .................. $ 17,102 127 16,321 33,550
Investment in subsidiaries ................ 93,508 (93,508)
--------- --------- --------- --------- ---------
TOTAL ..................................... $ 110,610 $ 177,792 $ 209,272 $ (96,934) $ 400,740
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long term debt .. $ 1,250 $ 1,250
Notes payable under revolving credit
facilities ........................ 20,000 $ 10,170 30,170
Accounts payable ................... 11 $ 17,822 35,070 52,903
Other current liabilities .......... 7,409 24,147 34,201 $ 218 65,975
Intercompany payable/(receivable) .. (38,897) 43,605 (4,643) (65) --
--------- --------- --------- --------- ---------
Total current liabilities ..... (10,227) 85,574 74,798 153 150,298
Long-term debt ............................ 348,750 348,750
Deferred income taxes ..................... 7,494 7,494
Other long-term liabilities ............... 9,943 486 27 10,456
Shareholders' equity (deficiency) ......... (227,913) 82,275 126,494 (97,114) (116,258)
--------- --------- --------- --------- ---------
TOTAL $ 110,610 $ 177,792 $ 209,272 $ (96,934) $ 400,740
========= ========= ========= ========= =========
</TABLE>
13
<PAGE> 14
THE IMPERIAL HOME DECOR GROUP INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 26, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales .......................... $ 67,201 $ 83,134 $ (38,089) $ 112,246
Cost of goods sold ................. 39,287 70,831 (38,863) 71,255
--------- --------- --------- ---------
Gross margin ....................... 27,914 12,303 774 40,991
Operating expenses:
Distribution .................. 4,317 4,597 8,914
Marketing ..................... 13,273 7,585 20,858
General and administrative .... 3,704 2,889 27 6,620
Restructuring charges and other
integration costs 2,492 4,080 (5) 6,567
--------- --------- --------- ---------
Operating income (loss) ............ 4,128 (6,848) 752 (1,968)
Merger costs........................
Equity (income) loss ............... $ 7,802 (7,802)
Interest (income) expense, net ..... 3,692 1,104 5,002 9,798
--------- --------- --------- --------- ---------
Income (loss) before income taxes .. (11,494) 3,024 (11,850) 8,554 (11,766)
Income tax (benefit) provision ..... (1,724) (1,724)
--------- --------- --------- --------- ---------
Net income (loss) .................. $ (11,494) $ 3,024 $ (10,126) $ 8,554 $ (10,042)
========= ========= ========= ========= =========
</TABLE>
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
Operating expenses:
Distribution ............... 1,648 3,690 5,338
Marketing .................. 12,277 10,481 22,758
General and administrative . 3,928 4,817 8,745
Restructuring charges and
other integration costs .. 1,854 1,854
--------- --------- --------- ---------
Operating income (loss) ......... (1,886) 3,591 (266) 1,439
Merger costs.....................
Equity (income) loss ............ $ 5,567 (5,567)
Interest (income) expense, net .. 1,539 1,491 5,524 8,554
--------- --------- --------- --------- ---------
Income (loss) before income taxes (7,106) (3,377) (1,933) 5,301 (7,115)
Income tax (benefit) provision .. 303 (46) 257
--------- --------- --------- --------- ---------
Net income (loss) ............... $ (7,106) $ (3,680) $ (1,887) $ 5,301 $ (7,372)
========= ========= ========= ========= =========
</TABLE>
14
<PAGE> 15
THE IMPERIAL HOME DECOR GROUP INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 26, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales .......................... $ 129,559 $ 153,934 $ (64,876) $ 218,617
Cost of goods sold ................. 73,201 129,129 (65,979) 136,351
--------- --------- --------- ---------
Gross margin ....................... 56,358 24,805 1,103 82,266
Operating expenses:
Distribution .................. 7,427 9,045 16,472
Marketing ..................... 24,973 16,523 41,496
General and administrative .... 7,911 7,958 27 15,896
Restructuring charges and other
integration costs ............ 6,951 5,004 (5) 11,950
--------- --------- --------- ---------
Operating income (loss) ............ 9,096 (13,725) 1,081 (3,548)
Merger costs........................
Equity (income) loss ............... $ 15,052 (15,052)
Interest (income) expense, net ..... 7,173 2,166 10,044 19,383
--------- --------- --------- --------- ---------
Income (loss) before income taxes .. (22,225) 6,930 (23,769) 16,133 (22,931)
Income tax (benefit) provision ..... (2,487) (2,487)
--------- --------- --------- --------- ---------
Net income (loss) .................. $ (22,225) $ 6,930 $ (21,282) $ 16,133 $ (20,444)
========= ========= ========= ========= =========
</TABLE>
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
Operating expenses:
Distribution ............... 3,349 8,080 11,429
Marketing .................. 19,842 19,404 39,246
General and administrative . 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
Equity (income) loss ............ 15,190 (15,190)
Interest (income) expense, net .. 2,974 1,457 5,471 9,902
--------- --------- --------- --------- ---------
Income (loss) before income taxes (22,164) (12,842) (2,224) 14,924 (22,306)
Income tax (benefit) provision .. 303 (179) 124
--------- --------- --------- --------- ---------
Net income (loss) ............... $ (22,164) $ (13,145) $ (2,045) $ 14,924 $ (22,430)
========= ========= ========= ========= =========
</TABLE>
15
<PAGE> 16
THE IMPERIAL HOME DECOR GROUP INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 26, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities: ...... $(16,000) $ 8,492 $ (5,083) $(12,591)
-------- -------- -------- -------- --------
Cash flows used in investing activities:
Capital expenditures ................. (7,808) (1,999) (9,807)
-------- -------- -------- -------- --------
Cash flows provided by financing activities:
Net borrowings under revolving credit
facilities ......................... 16,000 7,759 23,759
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash .... (220) (220)
-------- -------- -------- -------- --------
Increase (decrease) in cash and equivalents 684 457 1,141
Cash and equivalents at beginning of period 774 464 1,238
-------- -------- -------- -------- --------
Cash and equivalents at end of period ...... $ -- $ 1,458 $ 921 $ -- $ 2,379
======== ======== ======== ======== ========
</TABLE>
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 flows from operating activities: ..... $(22,951) $ (2,267) $ 11,589 $(13,629)
--------- --------- -------- ---------
Cash flows used in investing activities:
Capital expenditures ................ (4,216) (5,043) (9,259)
Acquisition of Imperial
Wallcoverings, Inc.,
including direct costs ............ (73,800) (73,800)
--------- --------- -------- --------
Cash used in investing activities ......... (73,800) (4,216) (5,043) (83,059)
--------- --------- -------- --------
Cash flows provided by (used in)
financing
activities:
Net borrowings under
revolving credit facilities ..... 18,650 3,668 22,318
Borrowings under long-term debt
arrangements ..................... 323,000 323,000
Debt issuance fees ................ (19,220) (19,220)
Equity contribution ............... 84,553 84,553
Borden recapitalization cash
distribution ..................... (314,432) (314,432)
Dividends paid .................... (2,635) (2,635)
Change in owner's investment ...... 6,835 6,835
--------- --------- -------- --------
Net cash provided by (used in) financing
activities ....................... 96,751 3,668 100,419
--------- --------- --------- ---------
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>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion of the financial condition and results of
operations of the Company includes explanations of:
- What our earnings and costs were for the three and six months ended
June 26, 1999 and June 27, 1998;
- Why the earnings for the periods presented differed;
- How and why this affects the general financial condition of the
Company;
- Capital expenditures and future sources of funds for capital
expenditures and liquidity; and
- Which of the charges and expenses included in the Company's financial
results are one-time charges relating to the Integration Plan and
restructuring and other integration costs.
We encourage you to refer to the Condensed Consolidated Statements of
Operations included as part of this report. These statements of operations
present the results of our operations for the three and six months ended June
26, 1999 and June 27, 1998. In this section we discuss changes in specific
statement of operations line items from period to period. By reading this
section and by referring to the financial statement as you do so, we believe you
will better understand information which may be helpful to you in making
decisions about your investment in the Company.
The Company as it currently exists is the result of the recapitalization
of the Company and the combination of its residential wallcoverings and PVC
sheeting businesses with the wallcoverings businesses of Imperial. Before the
recapitalization and combination, the Company was substantially wholly owned by
Borden and was known as Borden Decorative Products Holding, Inc. and Imperial
was owned by Collins & Aikman Corporation. The Company's results of operations
for the six months ended June 27, 1998 include approximately 15 weeks of
Imperial's results of operations due to the acquisition of Imperial in March
1998. Because of the recapitalization and Imperial acquisition, the Company's
results of operations and financial condition discussed in this report are not
necessarily indicative of the Company's future results of operations.
In 1998, we adopted a plan to integrate the Company's and Imperial's
operations in North America. For a description of the elements of the
Integration Plan, the progress in completing the various elements of it and the
related costs, see Footnote 3 to the Condensed Consolidated Financial Statements
under Item 1. As described in greater detail below, costs incurred in 1998 and
1999 in connection with the implementation of the Integration Plan and other
restructuring and integration costs and transaction costs substantially impacted
our results of operations.
FOR THE THREE AND SIX MONTHS ENDED JUNE 26, 1999 COMPARED TO THE THREE AND SIX
MONTHS ENDED JUNE 27, 1998.
RESULTS OF OPERATIONS
NET SALES. Net sales were $112.2 million and $218.6 million for the
three and six months ended June 26, 1999, respectively, compared to $119.1
million and $215.0 million for the same periods in 1998, representing a decrease
of $6.9 million, or 5.8%, and an increase of $3.6 million, or 1.7%,
respectively. For the six months ended June 26, 1999, our consolidated results
reflect the inclusion of a full six months of Imperial sales in 1999, an
increase of $21.1 million. For the three and six month periods, we experienced
sales declines in the U.K., Eastern Europe and Russia of $4.0 and $15.1 million,
respectively, due to adverse market conditions in those geographic areas. Weaker
foreign currencies in the periods presented versus the same periods a year ago
resulted in lower reported sales of $2.4 million and $4.7 million for the three
and six months ended June 26, 1999, respectively. In North America, declines
during recent periods were stabilized. North American sales were flat for the
three months where increased promotional activity offset a generally weaker
North American wallcoverings market.
17
<PAGE> 18
Vernon Plastics' sales of flexible vinyl films and sheeting increased by
16.6%, or $2.4 million, for the quarter to $16.6 million and 8.6%, or $2.3
million, to $28.6 million for the first six months of 1999
GROSS MARGIN. Gross margin was 36.5% of net sales for the three months
and 37.6% of net sales for the six months ended June 26, 1999 compared to 33.7%
and 32.0% of net sales for the same periods in 1998. We incurred non-cash
charges related to inventory write-downs during the periods presented of $4.6
million for the six months ended June 27, 1998 and $1.9 million for the three
and six months ended June 26, 1999 (see "Liquidity and Capital Resources -
General"). In 1998, we reported non-cash charges related to amortization of the
inventory step-up of $7.4 million and $8.7 million for the three and six months,
respectively. Without these non-cash charges, gross margin would have been 38.2%
and 38.5% of net sales for the three and six months ended June 26, 1999 compared
to 39.9% and 38.1% of net sales for the comparable periods in1998.
In the three-month period, higher promotional activity combined with
lower volumes in the U.K., Eastern Europe and Russia depressed margins. The
increase in margin excluding non-cash charges in the six-month period was
principally due to the change in product mix resulting from the Imperial
acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses (which are the sum of distribution expense, marketing
expense and general, administrative and other expense) were $36.4 million, or
32.4% of net sales, and $73.9 million, or 33.8% of net sales, for the three and
six months ended June 26, 1999, respectively, compared to $36.8 million, or
30.9% of net sales, and $68.4 million, or 31.8% of net sales, for the same
periods in 1998. This six-month period increase was primarily attributable to
the inclusion in the 1999 period of the full six months of Imperial expenses of
$16.7 million offset by other expense reductions. The three month period
reflects increased distribution expense as a result of lower recovery of freight
costs coupled with higher distribution costs pending completion of the
Integration Plan, partially offset by efforts to manage expenses to mitigate the
effect of the sales decline in the periods presented.
RESTRUCTURING AND OTHER INTEGRATION COSTS. We recorded restructuring
charges and other integration costs totaling $6.6 million for the three months
and $12.0 million for six months ended June 26, 1999 compared to $1.9 million
and $8.7 million for the same periods in 1998. The restructuring and other
integration costs in 1998 were the result of our closing two distribution
centers, consolidation of the finishing and bookmaking operations at one
manufacturing facility and the consolidation of the Company's and Imperial's
administrative functions, marketing activities and business systems. In 1999,
charges include $2.8 million for write-down of assets to be disposed of to their
net realizable value, buyouts of leases and other contractual agreements, and a
reduction in the salary and hourly workforce by approximately 112 employees in
our U.K. operations.
The Company's Integration Plan is expected to be complete by the end of
2000. The costs of this plan are, in general, expected to decrease during this
period. The Integration Plan is intended to substantially improve our results
of operations. However, there cannot be any assurance that this will be the
case.
MERGER COSTS. We incurred costs of approximately $4.0 million in the six
months ended June 27, 1998 relating to the Recapitalization, which consisted
primarily of legal and underwriting fees.
TAXES. Income tax benefit was $1.7 million and $2.5 million for the
three and six months ended June 26, 1999, respectively, compared to income tax
expense of $0.3 million and $0.1 million for the comparable periods in 1998. The
decrease in income tax between the periods is not proportional to the reduction
in income before taxes primarily due to a valuation allowance which reduced the
income tax benefit of the loss on operations in both periods.
NET LOSS. As a result of the factors set forth above, we recorded a net
loss of $10.0 million for the three months and $20.4 million for the six months
ended June 26, 1999 compared to net loss of $7.4 million and $22.4 million for
the comparable periods in 1998.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our primary sources of liquidity have been cash flow from operations and
borrowings under the Senior Credit Facilities. Pursuant to our operating
strategy, we maintain minimal cash balances and are substantially dependent
upon, among other things, the availability of adequate working capital financing
to support normal operations.
We are highly leveraged as a result of the Recapitalization and the
Imperial Acquisition. Since those transactions, we have incurred substantial
losses as a result of significant sales decline and duplication of costs among
various facilities pending completion of the Integration Plan.
Our liquidity decreased during the first half of 1999 due primarily to
the losses we incurred ($20.4 million) and increases in accounts receivable
($11.7 million) and inventory ($2.3 million). The increase in inventories was
primarily attributable to seasonal factors and below-plan sales. We intend to
review our overall inventory levels during the remainder of the year and
accelerate our disposition of surplus and obsolete inventories to facilitate our
warehouse consolidation outlined in the Integration Plan. We may take further
non-cash charges against inventories to the extent appropriate. The increase in
receivables is generally attributable to seasonal factors and credit and other
issues with particular accounts, which we are seeking to address.
We financed our losses, increased investment in working capital, capital
expenditures and other cash requirements during the first half of the year
through cash from operations, bank borrowings and increases in accounts payable.
The total availability under our Senior Credit Facility as of June 26, 1999 was
$22.8 million. We will be working during the remainder of the year to decrease
our level of investment in working capital and improve our results of operations
and presently expect to have sufficient cash resources to continue to finance
our operations. If we are unsuccessful in improving our results of operations
and liquidity, we would need to seek modification of our covenants under our
Senior Credit Facility and/or additional equity or debt capital and we cannot be
sure that covenant modifications or additional equity or debt capital would be
available or, if so, as to the timing and terms.
CREDIT FACILITIES
Our Senior Credit Facilities provide up to $300.0 million in loans to
the Company. The Senior Credit Facilities consist of aggregate principal amount
of $225.0 million of term loans and a $75.0 million six-year revolving credit
facility. As of June 26, 1999, our consolidated indebtedness was $404.2 million
consisting of:
- $225.0 million of term loans;
- $52.4 million of revolving credit loans;
- $125.0 million of senior subordinated notes; and
- $1.8 million in an unsecured overdraft facility.
The Senior Credit Facilities contain covenants requiring, among other
things, that we maintain a minimum interest coverage ratio and maximum net
leverage ratio. In the calculation of these ratios we may give effect, subject
to certain limitations, to certain cost savings expected to result from the
implementation of the Integration Plan. Under the Senior Credit Facilities, we
could be required to repay our loans or take other actions if the minimum
interest coverage ratio and maximum net leverage ratio are not maintained. At
June 26, 1999 we were in compliance with the minimum interest coverage ratio,
maximum net leverage ratio and other financial covenants of the Senior Credit
Facilities. We believe that the available credit under the Senior Credit
Facilities and cash from operations will be sufficient to meet our current and
foreseeable future financial obligations, assuming we successfully carry out the
Integration Plan, further improve our levels of operations and achieve planned
working capital reductions in inventory and receivables. However, as noted
above, if we are unsuccessful in decreasing our level of investment in working
capital, implementing the Integration Plan and improving our results of
operations, we would not continue to comply with these Senior Credit Facilities
covenants and would need to seek covenant modifications and/or additional debt
19
<PAGE> 20
or equity capital. The indenture for the notes contains covenants that, among
other things, limit our ability to make additional borrowings. However, we are
permitted under the indenture to incur additional borrowings available under
the Senior Credit Facilities, including, as modified or extended, to refinance
indebtedness, to incur certain transactional indebtedness and to incur up to an
additional $10.0 million of indebtedness outstanding at any time above the
additional borrowings otherwise permitted.
CAPITAL EXPENDITURES
Our capital expenditures for six months ended June 26, 1999 totaled $9.8
million and we have entered into operating leases for new equipment that would
have cost approximately $4.1 million had it been purchased outright. We
presently estimate that the Company's total capital expenditures for 1999 will
be approximately $18.0 million, primarily to continue to carry out the
Integration Plan, increase the Imperial Gallery program and maintain our
facilities. We continue to revise our capital expenditure plan for 1999 in light
of current operations and market conditions and the progress on the Integration
Plan. Our ability to make capital expenditures is subject to some restrictions
in the Senior Credit Facilities and the indenture relating to the senior
subordinated notes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1999, we adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed for or Obtained for Internal Use." The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The effect of
adopting the SOP was not material to operating results.
YEAR 2000 COMPLIANCE
Many existing computer programs in use throughout the world identify the
year and perform time calculations based on only the last two digits of the
year. These programs could fail or create errors before or at the Year 2000 if
not corrected. This "Year 2000" issue is believed to affect almost all companies
and organizations, including us.
We rely on a significant number of computer programs and computer
technology for our key operations, including:
- Product design;
- Sales order processing;
- Manufacturing;
- Inventory management;
- Distribution;
- Finance; and
- Various administrative functions.
Our sales order processing and production planning systems generally use
proprietary applications. In contrast, we use third party applications for our
manufacturing, finance and other administrative functions.
We have been carrying out a comprehensive study of all of our computer
systems to identify Year 2000 compliance and other operating issues. This
includes programs developed internally and software purchased from outside
vendors. As part of our Integration Plan, we selected the computer systems
utilized by the wallcoverings business formerly owned by Borden for our critical
business functions. We are currently in the process of converting our other
primary computer systems to that system, which we believe is Year 2000
compliant based on testing procedures performed to date. The conversion of the
Company's computer systems is on schedule and is expected to be completed for
20
<PAGE> 21
the U.K. operations and for Vernon Plastics by the end of the third quarter of
1999 and for the North American operations by the end of the fourth quarter of
1999. We do not expect any material costs for software purchases related to
this conversion.
We also conducted a comprehensive Year 2000 study of our other computer
systems and technologies. This study identified Year 2000 issues as well as
strategies for addressing those that affect third-party software or equipment
applications and processing and manufacturing systems. We have also contacted
third-party providers and have sought appropriate representations that Year 2000
issues associated with the software they provide to us have been addressed on
time. Costs incurred through June 26, 1999 related to the systems conversion as
discussed above amounted to approximately $2.3 million, including hardware and
software for systems integration projects which would have occurred
notwithstanding the Year 2000 issues. We estimate future costs of resolving Year
2000 issues of approximately $.4 million, including costs incurred to enhance
functionality and increase capacity for our business systems.
We are implementing our own Year 2000 compliance program as described
above. However, our inability or the inability of our material suppliers and
customers to find and put into place solutions to their respective Year 2000
issues on time and on a cost effective basis could have a material adverse
effect on us. We are in the process of developing formal contingency plans for
dealing with the Year 2000 issue. Accordingly, while we believe that we are
taking appropriate actions in this area, there can be no assurance that the Year
2000 issue will not have a material adverse effect on our financial condition or
results of operations.
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 our
control. These risks and uncertainties include:
- The risk that the Integration Plan may not be fully implemented;
- Competitive factors, pricing pressures and other market conditions;
- General economic conditions in the U.S. and abroad;
- Market demand for home decorating products;
- The Year 2000 issue;
- Our losses from operations in recent periods;
- Limitations on the availability of working capital and other financing;
- 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; and
- Fluctuations in raw materials prices and availability of supply.
For further discussion of risks and uncertainties, see Item 7 under the heading
"Risk Factors" in the Company's Annual Report on Form 10-K for the year ended
December 26, 1998. 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," and "- -Year 2000 Compliance," and located
elsewhere in this report 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
21
<PAGE> 22
statements speak only as of the date of this report. 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 these
forward-looking statements are reasonable, it can give no assurance that these
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 person acting on its behalf are
expressly qualified in their entirety by the foregoing cautionary statements.
SIGNATURES
THE IMPERIAL HOME DECOR GROUP INC.
Date:09/02/1999 By: Scott R. Levin
______________
Scott R. Levin
Executive Vice President--Administration and
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
22
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