<PAGE> 1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 25, 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 November 5, 1999:
5,937,500 Common Shares
- --------------------------------------------------------------------------------
<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>
SEPT. 25, DEC. 26,
1999 1998
-------------- -------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents....................................................... $ 2,140 $ 1,238
Accounts receivable, less allowance for doubtful accounts
of $3,451and $3,950, respectively....................................... 92,914 96,495
Inventories................................................................ 111,444 103,577
Other current assets....................................................... 9,978 7,158
-------------- -------------
Total Current Assets............................................................ 216,476 208,468
Property, plant and equipment, net of accumulated depreciation of $66,840
and $68,496, respectively............................................... 113,999 111,225
Assets held for resale.......................................................... 2,440 4,190
Goodwill........................................................................ 10,054 10,516
Deferred design, engraving and sample book costs................................ 36,378 32,791
Other non-current assets........................................................ 30,310 33,550
-------------- -------------
Total $ 409,657 $ 400,740
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt....................................... $ 3,000 $ 1,250
Notes payable under revolving credit facilities......................... 64,187 30,170
Accounts payable........................................................ 55,359 52,903
Other current liabilities............................................... 62,045 65,975
-------------- -------------
Total Current Liabilities....................................................... 184,591 150,298
Long-term debt.................................................................. 347,000 348,750
Deferred income taxes........................................................... 6,412 7,494
Other long-term liabilities..................................................... 8,997 10,456
Commitments and contingencies (Note 8)..........................................
-------------- -------------
Total Liabilities 547,000 516,998
-------------- -------------
Shareholders' Equity (Deficiency):
Common stock............................................................ 59 59
Paid in capital......................................................... (63,108) (63,108)
Retained earnings (deficit)............................................. (69,330) (47,578)
Accumulated other comprehensive (income) loss........................... (4,964) (5,631)
-------------- -------------
Total Shareholders' Equity (Deficiency) (137,343) (116,258)
-------------- -------------
Total $ 409,657 $ 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 NINE MONTHS ENDED
----------------------------------- ------------------------------
SEPT. 25, SEPT. 26, SEPT. 25, SEPT. 26,
1999 1998 1999 1998
-------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 97,501 $ 104,011 $ 316,118 $ 319,041
Cost of goods sold (including non-cash charges of $1,852
for the nine months ended Sept. 25, 1999 and $12,895
and $26,116 for the three and nine months ended
Sept. 26, 1998, respectively)........................... 56,877 77,493 193,228 223,808
-------------- --------------- ------------- --------------
Gross margin............................................. 40,624 26,518 122,890 95,233
Operating expenses:
Distribution................................... 5,614 5,147 22,086 16,576
Marketing...................................... 16,590 19,505 58,086 58,751
General and administrative..................... 6,037 8,455 21,933 26,159
Restructuring charges and other integration costs 4,128 7,187 16,078 15,927
-------------- --------------- ------------- --------------
Operating income (loss).................................. 8,255 (13,776) 4,707 (22,180)
Merger costs............................................. - - - 4,000
Interest expense, net (including amortization of
deferred financing costs of $630 and $1,890 for the
three and nine months ended Sept. 25, 1999, respectively;
and $539 and $1,276 for the three and nine months ended
Sept. 26, 1998, respectively)........................... 10,049 9,259 29,432 19,161
-------------- --------------- ------------- --------------
Income (loss) before income taxes........................ (1,794) (23,035) (24,725) (45,341)
Income tax (benefit) provision........................... (486) (285) (2,973) (161)
-------------- ------------- ------------- ------------
Net income (loss)........................................ $ (1,308) $ (22,750) $ (21,752) $ (45,180)
============== ============= ============= ============
</TABLE>
3
<PAGE> 4
THE IMPERIAL HOME DECOR GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------
SEPT. 25, SEPT 26,
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss)................................................... $ (21,752) $ (45,180)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................... 10,235 11,417
Amortization of deferred financing costs.................... 1,890 1,276
Deferred foreign income taxes............................... (3,342) (1,035)
Change in operating assets and liabilities, net of acquisition:
Accounts receivable......................................... 3,854 (2,330)
Inventories, net............................................ (7,226) 14,560
Accounts payable............................................ 2,596 (7,130)
Other assets................................................ (858) (8,509)
Other liabilities........................................... (9,661) 6,699
------------------ ------------------
Cash used in operating activities........................... (24,264) (30,232)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures................................................ (10,929) (18,135)
Acquisition of Imperial Wallcoverings, Inc., including
direct costs...................................................... - (73,800)
------------------ ------------------
Cash used in investing activities........................... (10,929) (91,935)
------------------ -------------------
Cash flows from financing activities:
Net borrowings under revolving credit facility...................... 35,636 43,406
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....................... 35,636 121,507
------------------ ------------------
Effect of exchange rate changes on cash..................................... 459 (26)
------------------ ------------------
Increase (decrease) in cash and equivalents................................. 902 (686)
Cash and equivalents at beginning of period................................. 1,238 3,795
------------------ ------------------
Cash and equivalents at end of period....................................... $ 2,140 $ 3,109
================== ==================
</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 nine
months ended September 25, 1999 and September 26, 1998 are not necessarily
indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to the
presentation utilized in the three and nine months ended September 25, 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:
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
===========
6
<PAGE> 7
THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
The following unaudited pro forma consolidated results of operations for
the nine months ended September 26, 1998 have been prepared as if the Imperial
Acquisition had occurred as of the beginning of 1998:
Net Sales: $352,068
Net Loss: 60,474
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 ($64.1
million borrowed since the closing date and outstanding at September 25, 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
September 25, 1999 the weighted average interest rates were as follows:
Revolving Credit Facility -7.80%; Term Loans -8.04%. 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
contemplated closure of facilities in Plattsburgh, New York and Ashaway, 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 491 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
$4.1 million and $16.1 million for the three and nine months ended September 25,
1999 compared to $7.2 million and $15.9 million in the same period a year ago.
Since the inception of the Integration Plan in March 1998, $37.2 million in
restructuring charges and other integration costs have been expensed. Of these
charges, $32.7 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 Integration 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 was no longer able to compete in a declining packaging market and
was 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 in 1999 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. The Company has not
replaced 9 retirees and expects to eliminate 41 temporary positions at no
severance.
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........................ (1,031) (549) (30) (1,610)
--------- --------- --------- --------- ---------
Balance at September 25, 1999............ $ 488 $ 2,119 $ 1,270 $ 91 $ 3,968
========= ========= ========= ========= =========
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......................... 184 13,084 13,268
Cash expenditures........................ (4,085) (13,116) (17,201)
--------- --------- --------- ---------
Balance at September 25, 1999............ $ 2,165 $ 648 $ 18 $ 2,831
========= ========= ========= =========
</TABLE>
4. CERTAIN NON-CASH CHARGES
The Company incurred non-cash charges related to inventory write-downs
during the periods presented of $10.0 million and $14.6 million for the three
and nine months ended September 26, 1998 and $1.9 million for the nine months
ended September 25, 1999, which occurred in the second quarter. In 1998, the
Company reported non-cash charges related to amortization of the inventory
step-up of $2.9 million and $11.5 million for the three and nine months,
respectively. These charges were reported with cost of goods sold in the
accompanying condensed consolidated statements of operations.
8
<PAGE> 9
THE IMPERIAL HOME DECOR GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
5. SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):
Sept. 25, Dec. 26,
1999 1998
----------------- ----------------
<S> <C> <C>
Finished and in-process goods, net.............................. $ 101,316 $ 94,145
Raw materials and supplies, net................................. 10,128 9,432
---------------- ----------------
Inventories, net $ 111,444 $ 103,577
================ ================
</TABLE>
6. INCOME TAXES
A valuation allowance of approximately $26.7 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 September 25, 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
<PAGE> 10
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 nine months ended September 25,
1999 and September 26, 1998 was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------
SEPT. 25, SEPT. 26,
1999 1998
------------------ --------------
<S> <C> <C>
Net loss $ (21,752) $ (45,180)
Foreign currency translation adjustments 667 1,044
------------------ --------------
Comprehensive loss $ (21,085) $ (44,136)
================== ==============
</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>
NINE MONTHS ENDED
---------------------------------------
SEPT. 25, SEPT. 26,
1999 1998
---------------- ---------------
<S> <C> <C>
Net Sales:
Wallcoverings products $ 275,368 $ 281,456
Vinyl films and sheetings 40,750 37,585
---------------- ---------------
$ 316,118 $ 319,041
================ ===============
Operating Income (Loss):
Wallcovering products $ 1,445 $ (23,560)
Vinyl films and sheetings 3,262 1,380
---------------- ---------------
$ 4,707 $ (22,180)
================ ===============
Identifiable Assets:
Wallcovering products $ 383,554 $ 376,834
Vinyl films and sheetings 26,103 24,771
---------------- ---------------
$ 409,657 $ 401,605
================ ===============
</TABLE>
10
<PAGE> 11
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
SEPTEMBER 25, 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......................... $ 1,840 $ 300 $ 2,140
Accounts receivable.......................... 52,131 40,783 92,914
Inventories.................................. 67,440 44,665 $ (661) 111,444
Other current assets......................... 2,646 7,333 (1) 9,978
---------- ---------- ---------- ----------
Total current assets....................... 124,057 93,081 (662) 216,476
Property and equipment, net........................ 46,812 68,962 (1,775) 113,999
Assets held for resale............................. 2,440 2,440
Goodwill........................................... 1,089 8,965 10,054
Deferred design, engraving and sample
book costs............................ 26,331 10,047 36,378
Other non-current assets........................... $ 15,212 127 14,972 (1) 30,310
Investment in subsidiaries......................... 82,710 (82,710) -
---------- ---------- ---------- ---------- ----------
TOTAL $ 97,922 $ 200,856 $ 196,027 $ (85,148) $ 409,657
========== ========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt............ $ 3,000 $ 3,000
Notes payable under revolving credit
facilities................................ 45,400 $ 18,787 64,187
Accounts payable............................. 11 $ 16,740 38,608 55,359
Other current liabilities.................... 4,783 27,263 29,838 $ 161 62,045
Intercompany payable/(receivable)............ (52,326) 48,906 3,421 (1) -
---------- ---------- ---------- ---------- ----------
Total current liabilities.................. 868 92,909 90,654 160 184,591
Long-term debt..................................... 347,000 347,000
Deferred income taxes.............................. 6,412 6,412
Other long-term liabilities........................ 8,520 450 27 8,997
Shareholders' equity (deficiency).................. (249,946) 99,427 98,511 (85,335) (137,343)
---------- ---------- ---------- ---------- ----------
TOTAL $ 97,922 $ 200,856 $ 196,027 $ (85,148) $ 409,657
========== ========== ========== ========== ==========
</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 SEPTEMBER 25, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 67,188 $ 62,634 $ (32,321) $ 97,501
Cost of goods sold.................. 38,350 51,246 (32,719) 56,877
----------------- ----------------- ----------------- ----------------
Gross margin........................ 28,838 11,388 398 40,624
Operating expenses:
Distribution................... 1,677 3,937 5,614
Marketing...................... 10,758 5,832 16,590
General and administrative..... 2,123 3,947 (33) 6,037
Restructuring charges and
other integration costs 2,855 742 531 4,128
----------------- ----------------- ----------------- ----------------
Operating income (loss)............. 11,425 (3,070) (100) 8,255
Equity (income) loss................ $ (4,254) 4,254
Interest expense, net............... 4,062 1,168 4,819 10,049
-------------- ----------------- ----------------- ----------------- ----------------
Income (loss) before income taxes... 192 10,257 (7,889) (4,354) (1,794)
Income tax (benefit) provision...... (486) (486)
-------------- ----------------- ----------------- ----------------- ----------------
Net income (loss)................... $ 192 $ 10,257 $ (7,403) $ (4,354) $ (1,308)
============== ================= ================= ================= ===============
</TABLE>
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
Operating expenses:
Distribution..................... 1,464 3,683 5,147
Marketing........................ 11,616 7,889 19,505
General and administrative....... 3,726 4,729 8,455
Restructuring charges and other
integration costs............... 4,339 2,848 7,187
----------------- ----------------- ----------------- ----------------
Operating income (loss)............. (6,896) (6,773) (107) (13,776)
Equity (income) loss................ $ 22,750 (22,750)
Interest expense, net............... 3,616 1,269 4,374 9,259
-------------- ----------------- ----------------- ----------------- ----------------
Income (loss) before income taxes... (26,366) (8,165) (11,147) 22,643 (23,035)
Income tax (benefit) provision...... 1 (286) (285)
-------------- ----------------- ----------------- ----------------- ----------------
Net income (loss)................... $ (26,366) $ (8,166) $ (10,861) $ 22,643 $ (22,750)
============== ================= ================= ================= ================
</TABLE>
14
<PAGE> 15
THE IMPERIAL HOME DECOR GROUP INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 25, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-
PARENT GUARANTOR GUARANTOR ELIMINATION
COMPANY SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------ ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Net sales........................... $ 196,747 $ 216,568 $ (97,197) $ 316,118
Cost of goods sold.................. 111,551 180,375 (98,698) 193,228
----------------- ----------------- ----------------- ----------------
Gross margin........................ 85,196 36,193 1,501 122,890
Operating expenses:
Distribution..................... 9,104 12,982 22,086
Marketing........................ 35,731 22,355 58,086
General and administrative....... 10,034 11,905 (6) 21,933
Restructuring charges and
other integration costs......... 9,806 5,746 526 16,078
----------------- ----------------- ----------------- ----------------
Operating income (loss)............. 20,521 (16,795) 981 4,707
Merger costs........................
Equity (income) loss................ $ 10,798 (10,798) -
Interest expense, net............... 11,235 3,334 14,863 29,432
----------------- ----------------- ----------------- ----------------- ----------------
Income (loss) before income taxes... (22,033) 17,187 (31,658) 11,779 (24,725)
Income tax (benefit) provision...... (2,973) (2,973)
----------------- ----------------- ----------------- ----------------- ----------------
Net income (loss)................... $ (22,033) $ 17,187 $ (28,685) $ 11,779 $ (21,752)
================= ================= ================= ================= ================
</TABLE>
NINE 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........................... $ 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
Operating expenses:
Distribution..................... 4,814 11,762 16,576
Marketing........................ 31,458 27,293 58,751
General and administrative....... 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
Equity (income) loss................ 45,180 (45,180)
Interest expense, net............... 6,590 2,726 9,845 19,161
----------------- ----------------- ----------------- ----------------- ----------------
Income (loss) before income taxes... (55,770) (21,008) (13,370) 44,807 (45,341)
Income tax (benefit) provision...... 304 (465) (161)
----------------- ----------------- ----------------- ----------------- ----------------
Net income (loss)................... $ (55,770) $ (21,312) $ (12,905) $ 44,807 $ (45,180)
================= ================= ================= ================= ================
</TABLE>
15
<PAGE> 16
THE IMPERIAL HOME DECOR GROUP INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 25, 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: $ (27,150) $ 8,717 $ (5,305) $ (526) $ (24,264)
-------------- -------------- ----------------- --------------- -----------------
Cash flows used in investing activities:
Capital expenditures.................. (7,651) (3,804) 526 (10,929)
-------------- -------------- ----------------- --------------- -----------------
Cash flows provided by financing activities:
Net borrowings under revolving credit
facilities.......................... 27,150 - 8,486 - 35,636
-------------- -------------- ----------------- --------------- -----------------
Effect of exchange rate changes on cash..... - - 459 - 459
-------------- -------------- ----------------- --------------- -----------------
Increase (decrease) in cash and equivalents. - 1,066 (164) - 902
Cash and equivalents at beginning of period. 774 464 - 1,238
-------------- -------------- ----------------- --------------- -----------------
Cash and equivalents at end of period....... $ - $ 1,840 $ 300 $ - $ 2,140
============== ============== ================= =============== =================
</TABLE>
NINE 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>
Cash flows from operating activities: $ (43,501) $ 11,666 $ 1,603 $ (30,232)
------------- ------------- ---------------- --------------
Cash flows used in investing activities:
Capital expenditures.................. (9,556) (8,579) (18,135)
Acquisition of Imperial Wallcoverings,
Inc., including direct costs........ (73,800) (73,800)
------------- ------------- ---------------- --------------
Cash used in investing activities........... (73,800) (9,556) (8,579) (91,935)
------------- ------------- ---------------- --------------
Cash flows provided by (used in) financing
activities:...........................
Net borrowings under revolving credit
facilities......................... 39,200 4,206 43,406
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............................ 117,301 - 4,206 121,507
------------- ------------- ---------------- --------------
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>
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 nine months ended
September 25, 1999 and September 26, 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;
- The Company's financial condition and liquidity requirements; 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 nine months ended
September 25, 1999 and September 26, 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 nine months ended September 26, 1998 include approximately 28 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 and Imperial's
operations in North America. In 1999, we announced a plant closing and headcount
reductions designed to restructure our U.K. operations due to sales declines in
the U.K., Russia and Eastern Europe. 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.
While we are highly leveraged and have made substantial progress in
implementing the Integration Plan and improving our results of operations, we
have experienced substantial losses since the recapitalization of the Company
and the Imperial Acquisition in 1998, we have substantially exhausted our
borrowing capacity under our existing credit facilities. We have begun a program
to decrease our investment in working capital and otherwise preserve our cash
resources, consider the divestiture of non-core assets and pursue other possible
sources of financing. There can be no assurance that these efforts will be
successful. Additional information on this topic is contained in our discussion
of our liquidity and capital resources described below.
17
<PAGE> 18
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 25, 1999 COMPARED TO THE THREE AND
NINE MONTHS ENDED SEPTEMBER 26, 1998.
RESULTS OF OPERATIONS
NET SALES. Net sales were $97.5 million and $316.1 million for the three
and nine months ended September 25, 1999, respectively, compared to $104.0
million and $319.0 million for the same periods in 1998, representing a decrease
of $6.5 million, or 6.3%, and $2.9 million, or 0.9%, respectively. The
nine-month period in 1999 reflects the inclusion in our results of a full nine
months of Imperial sales, an increase of $21.1 million. For the three and nine
month periods in 1999, we experienced sales declines in the U.K., Eastern Europe
and Russian markets of $3.5 and $15.1 million, respectively. The decreases were
due to adverse market conditions in those geographic areas although other
European markets were up slightly in the same periods. Weaker foreign currencies
in the periods presented versus the same periods a year ago resulted in lower
reported sales of $1.3 million and $3.7 million for the three and nine months
ended September 25, 1999, respectively. In North America, market declines in
dealer sales reflect the continued general weakness in the wallcoverings
market.
Vernon Plastics' sales of flexible vinyl films and sheeting increased by
8.1%, or $0.9 million, for the three months ended September 25, 1999 to $12.2
million and 8.4%, or $3.2 million, to $40.8 million for the first nine months of
1999, primarily a result of resurgence in customer demand in the pool liner
product line.
GROSS MARGIN. Gross margin was 41.7% of net sales for the three months
and 38.9% of net sales for the nine months ended September 25, 1999 compared to
25.5% and 29.8% of net sales for the same periods in 1998. We incurred non-cash
charges related to inventory write-downs that were recorded as cost of goods
sold during the periods presented of $1.9 million for the nine months ended
September 25, 1999 and $10.0 million and $14.6 million for the three and nine
months ended September 26, 1998, respectively. In 1998, we reported non-cash
charges related to amortization of the inventory step-up of $2.9 million and
$11.5 million for the three and nine months, respectively, that were also
recorded as cost of goods sold. Without these non-cash charges, gross margin
would have been 41.7% and 39.5% of net sales for the three and nine months ended
September 25, 1999 compared to 37.9% and 38.0% of net sales for the comparable
periods in 1998.
The increase in margin excluding non-cash charges in the three and nine
month periods was principally due to the change in product mix resulting from
the Imperial acquisition and the change in customer mix to more profitable
accounts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses (which are the sum of distribution expense, marketing
expense, general and administrative and other expense) were $28.2 million, or
29.0% of net sales, and $102.1 million, or 32.3% of net sales, for the three and
nine months ended September 25, 1999, respectively, compared to $33.1 million,
or 31.8% of net sales, and $101.5 million, or 31.8% of net sales, for the same
periods in 1998. This nine-month period increase was primarily attributable to
the inclusion in the 1999 period of the full nine months of Imperial expenses of
$16.7 million offset by other expense reductions. The three-month period
reflects lower marketing expenses, particularly in product development, and
reduced general and administrative costs resulting from efforts to control
expenses to mitigate the effect of the recent sales declines. These expense
reductions were partially offset by increased distribution expense as a result
of lower recovery of freight costs coupled with higher distribution costs
pending completion of the Integration Plan.
RESTRUCTURING AND OTHER INTEGRATION COSTS. We recorded restructuring
charges and other integration costs totaling $4.1 million for the three months
and $16.1 million for nine months ended September 25, 1999 compared to $7.2
million and $15.9 million for the same periods in 1998. The restructuring and
other integration costs in 1998 and 1999 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, these 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 112
employees in our U.K. operations.
The Company's Integration Plan is expected to be complete by the end of
2000. A substantial portion of the costs to implement the Integration Plan have
already been incurred. The Integration Plan and other restructuring initiatives
are 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
nine months ended September 26, 1998 relating to the Recapitalization, which
consisted primarily of legal and underwriting fees.
18
<PAGE> 19
TAXES. Income tax benefit was $0.5 million and $3.0 million for the
three and nine months ended September 25, 1999, respectively, compared to income
tax benefits of $0.3 million and $0.2 million for the comparable periods in
1998. The change in income tax between the periods is not proportional to the
change 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 $1.3 million for the three months and $21.8 million for the nine months
ended September 25, 1999 compared to net loss of $22.8 million and $45.2 million
for the comparable periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Our primary sources of liquidity have been cash flow from operations and
borrowings under the Senior Credit Facilities. We have historically maintained
minimal cash balances and instead depended on working capital borrowings to
finance operations. The total availability under our Senior Credit Facilities as
of September 25, 1999 and November 5, 1999 was $11.0 million and $3.2 million,
respectively, and we had cash on hand at such dates of $2.1 million and
$2.5 million, respectively. In this period, principal and interest payments
totaling $6.6 million were made, sale and leaseback transactions totaling $4.8
were executed and accounts payable levels were reduced.
While we have made substantial progress in implementing the Integration
Plan and improving our results of operations, we have experienced substantial
losses since the recapitalization of the Company and the Imperial Acquisition in
1998 and have substantially exhausted our borrowing capacity under our existing
credit facilities. We will continue our program to decrease our investment in
working capital and otherwise preserve our cash resources and to continue to
improve our results of operations, including by further implementation of the
Integration Plan and other restructuring initiatives. We are also considering
the divestiture of non-core assets and are pursuing possible sources of equity
or debt financing.
There can be no assurance that these efforts will be successful.
In addition, if we are unsuccessful in improving our results of
operations, we would need to seek modification of our covenants under our Senior
Credit Facilities and/or additional equity or debt capital. We cannot be sure
that the lenders under our Senior Credit Facilities would agree to covenant
modifications or that equity or debt financing would be available or the timing
and terms thereof.
Our liquidity decreased during the first nine months of 1999 due
primarily to the losses we incurred ($21.8 million) and increased inventories
($7.2 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.
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 September 25, 1999, our consolidated indebtedness was $414.2
million consisting of:
- $225.0 million of term loans;
- $64.1 million of revolving credit loans;
- $125.0 million of senior subordinated notes; and
19
<PAGE> 20
- $.1 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
September 25, 1999 we were in compliance with the minimum interest coverage
ratio, maximum net leverage ratio and other financial covenants of the Senior
Credit Facilities. However, as noted above, if we are unsuccessful in decreasing
our level of investment in working capital and otherwise preserving our cash
resources, improving our results of operations (including by further
implementing the Integration Plan and other restructuring initiatives and
selling certain non-core assets), we would not continue to comply with these
Senior Credit Facilities covenants and would need to seek covenant modifications
and/or additional debt 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 nine months ended September 25, 1999
totaled $10.9 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 our financial condition, 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;
20
<PAGE> 21
- 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 the U.K.
operations, the Vernon Plastics operations and 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 September 25, 1999 related to the systems
conversion as discussed above amounted to approximately $2.8 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 we will not be able to carry out our program for
improving our financial condition;
- Availability of financing or equity investments to fund operations and
capital expenditures;
- The risk that our lenders do not agree to covenant modifications that
will be required unless we are successful in improving our financial
condition;
- 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;
21
<PAGE> 22
- 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; 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 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: November 9th, 1999 By: /s/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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