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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1998
Commission File Number 333-58989-01
DECORA, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 93-1028300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MILL STREET
FORT EDWARD, NY 12828
(address of principal executive office) (Zip code)
Registrant's telephone number
(including area code) (518) 747-0681
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
At November 9, 1998 there were 16,000 shares of Common Stock of the registrant
outstanding. This document consists of 15 pages.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
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PAGE
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Balance Sheets
as of September 30, 1998
and March 31, 1998 3-4
Condensed Statements of Income
for the Three and Six Months ended
September 30, 1998 and 1997 5
Condensed Statements of
Cash Flows for the Six Months ended
September 30, 1998 and 1997 6
Notes to Unaudited Condensed
Financial Statements 7
Item 2 Management's Discussion and Analysis of
Results of Operations 10
PART II OTHER INFORMATION 13
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORA, INCORPORATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
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(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,223 $ 356
Restricted cash 246 125
Accounts receivable, less allowance 5,900 5,937
Inventories 13,471 6,154
Deferred income taxes 320 320
Prepaid expenses and other current assets 457 332
-------- --------
Total current assets 35,617 13,224
Property and equipment, net 10,923 6,990
Due from affiliates -- 18,227
Goodwill and other intangibles, net 66,168 10,522
Other assets 1,655 1,255
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Total assets $114,363 $ 50,218
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See accompanying Notes to Unaudited Condensed Financial Statements
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DECORA, INCORPORATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
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(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 3,575 $ 3,233
Accrued liabilities 7,208 3,118
Current portion of long-term debt 327 327
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Total current liabilities 11,110 6,678
Long-term debt 2,295 28,774
Deferred income taxes 546 546
Due to affiliates 82,993 --
-------- --------
Total liabilities 96,944 35,998
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Shareholder's equity:
Common stock 160 160
Additional paid-in capital 3,658 3,658
Retained earnings 13,601 10,402
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Total shareholder's equity 17,419 14,220
-------- --------
Total liabilities and shareholder's equity $114,363 $ 50,218
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</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements
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DECORA, INCORPORATED
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1998 1997 1998 1997
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(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 21,784 $ 10,308 $ 39,279 $ 19,455
Cost of goods sold (see Note 2) 12,656 7,898 24,450 14,454
-------- -------- -------- --------
Gross profit 9,128 2,410 14,829 5,001
Selling, general and administrative
expenses 4,050 1,281 6,065 2,704
Non-recurring charges -- 672 -- 672
-------- -------- -------- --------
Operating income 5,078 457 8,764 1,625
Interest expense, net (281) 361 68 715
-------- -------- -------- --------
Income before income taxes
and extraordinary item 5,359 96 8,696 910
Income tax provision 2,143 38 3,478 364
-------- -------- -------- --------
Income before extraordinary item 3,216 58 5,218 546
Extraordinary item, net of income
taxes (see Note 2) -- -- (2,019) --
-------- -------- -------- --------
Net income $ 3,216 $ 58 $ 3,199 $ 546
======== ======== ======== ========
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See accompanying Notes to Unaudited Condensed Financial Statements
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DECORA, INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1998 1997
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(IN THOUSANDS)
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Cash flows from operating activities:
Net income $ 3,199 $ 546
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item, net of income taxes 2,019 --
Depreciation and amortization 1,667 1,192
Amortization of debt discount and fees 62 33
Net changes in current assets and liabilities 1,648 309
Other, net (668) --
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Net cash provided by operating activities 7,927 2,080
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Cash flows from investing activities:
Rubbermaid Acquisition (63,312) --
Purchase of property and equipment (1,180) (466)
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Net cash used in investing activities (64,492) (466)
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Cash flows from financing activities:
Repayment of long-term debt (27,279) (2,039)
Net cash paid for debt penalties and fees (2,387) --
Intercompany transfers 101,219 816
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Net cash provided by (used in) financing activities 71,553 (1,223)
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Net increase in cash and cash equivalents 14,988 391
Cash and cash equivalents at beginning of period 481 128
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Cash and cash equivalents at end of period $ 15,469 $ 519
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</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements
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NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
NOTE 1 - Integration of Financial Statements Reported on Form S-4
The Unaudited Condensed Financial Statements should be read in conjunction with
Decora, Incorporated's (the "Company") Audited Financial Statements for the
fiscal year ended March 31, 1998 included in Amendment No. 1 to Form S-4
Registration Statement under the Securities Act of 1933 for Decora Industries,
Inc. (the "Parent") and the Company dated September 4, 1998. The Company, a
wholly-owned subsidiary of the Parent, is a leading manufacturer and marketer of
self-adhesive consumer decorative and surface coverings and other specialty
industrial products. The Company considers its operations to constitute a single
business segment.
In the opinion of the Company, the accompanying Unaudited Condensed Financial
Statements contain all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the interim
periods.
Certain reclassifications of prior year amounts have been made to conform to the
current year presentation.
NOTE 2 - Acquisitions, Extraordinary Item and Acquisition Related One-time
Charge to Cost of Goods Sold
Acquisitions
On April 29, 1998, the Company acquired certain assets, which had constituted
Rubbermaid's Decorative Coverings Group (the "DCG"), for a purchase price of
approximately $62.5 million (the "Rubbermaid Acquisition"). The assets acquired
included inventory, certain manufacturing equipment, tradenames and all other
rights to three product lines: (i) the Con-Tact self-adhesive line, which is
manufactured by the Company, (ii) the Shelf Liner light-adhesive line, which was
manufactured by Rubbermaid, and (iii) the Grip Liner non-adhesive covering line,
which is manufactured by a third party pursuant to the terms of an exclusive
manufacturing agreement.
The acquisition cost for the DCG of approximately $64.6 million (purchase price
of $62.5 million, adjusted for acquisition related closing costs of
approximately $3.6 million, less amounts related to transition services of $1.5
million) was allocated to the assets acquired as follows:
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Inventory $ 7,500,000
Property and equipment 1,000,000
Intangible assets:
Con-Tact tradename 20,300,000
Customer relationships 27,400,000
Goodwill 8,400,000
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In order to finance the Rubbermaid Acquisition, the Parent issued senior secured
notes (the "Notes") which were fully and unconditionally guaranteed by the
Company. A portion of the Note proceeds was advanced to and used by the
Company for the Rubbermaid Acquisition (approximately $58,300,000) and to
refinance existing Company debt and related fees (approximately $29,023,000). At
the same time, the Company entered into a three year, $15.0 million secured
revolving line of credit (the "Credit Facility"). Its availability is based on a
factor of the amount of accounts receivable and inventory held by the Company.
As of September 30, 1998, the Credit Facility had not been utilized.
Direct financing transaction costs incurred of approximately $152,000 were
deferred and are being amortized, using the effective interest rate method, over
the term of the credit facility.
Extraordinary Item
As noted above, in conjunction with the Rubbermaid Acquisition, the Company
repaid existing debt, including an $18.0 million subordinated loan bearing a
coupon of 13%. As a result of the repayment of the subordinated loan and other
debt, the Company paid a one-time prepayment penalty of approximately $2.2
million and wrote off unamortized deferred loan costs of approximately $1.1
million. Consequently, an extraordinary charge of approximately $2.0 million
(net of income taxes) was recorded in the six months ended September 30, 1998.
Acquisition Related One-time Charge to Cost of Goods Sold
The results for the six months ended September 30, 1998 were also impacted by a
one-time non-cash charge of approximately $797,000 for the step-up in basis of
certain DCG inventory acquired in the Rubbermaid Acquisition. This charge
related primarily to inventory sold by Decora to Rubbermaid prior to the
Rubbermaid Acquisition.
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NOTE 3 - Inventories
Inventories at September 30, 1998 and March 31, 1998 consisted of the following:
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SEPTEMBER 30, MARCH 31,
1998 1998
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(IN THOUSANDS)
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Raw Materials $ 2,609 $ 3,131
Work-in-Process 4,401 1,626
Finished Goods 6,461 1,397
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$13,471 $ 6,154
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NOTE 4 - Related Party Transactions
The Company paid management fees to the Parent of approximately $250,000 and
$500,000 during the three and six months ended September 30, 1998, respectively,
and $200,000 and $400,000 during the three and six months ended September 30,
1997, respectively, which are included in selling, general and administrative
expenses on the statements of income. These fees relate to various operating and
management services, including centralized cash management.
The "due from affiliates" represents the net intercompany transactions between
the Company, the Parent and the Parent's German subsidiary. The net balance due
from/(due to) affiliates was approximately ($82,993,000) and $18,227,000 at
September 30, 1998 and March 31, 1998, respectively. The Parent's sources of
income are limited to the management fees received from the Company, the
dividends, if any, that it receives from its foreign subsidiaries and
intercompany loans.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED SEPTEMBER 30, 1997.
The Company's Condensed Financial Statements for the three months ended
September 30, 1998 include the operations arising from the April 29, 1998
Rubbermaid Acquisition. Net sales for the three months ended September 30, 1998
were $21,784 as compared with net sales of $10,308 for the three months ended
September 30, 1997. The increase of $11,476 resulted principally from the
Rubbermaid Acquisition.
Gross profit was $9,128 for the three months ended September 30, 1998 as
compared with $2,410 for the three months ended September 30, 1997. The increase
of $6,718 reflects the impact of the Rubbermaid Acquisition and the fact that
the Company now sells directly to retailers.
Selling, general and administrative expenses were $4,050 for the three months
ended September 30, 1998 as compared with $1,281 in the three months ended
September 30, 1997. The increase of $2,769 was a result of the change from being
primarily a contract manufacturer to being a vertically integrated manufacturer
and marketer of Con-Tact products following the Rubbermaid Acquisition.
Interest expense (income) was ($281) for the three months ended September 30,
1998 as compared with $361 in the prior year quarter. The decrease of $642 is
principally due to advances received from the Parent which repaid existing debt,
with the balance being invested in interest bearing accounts.
The Company recognized income before income taxes and extraordinary item of
$5,359 in the three months ended September 30, 1998, as compared with $96 in the
three months ended September 30, 1997. This increase is principally a result of
the increase in earnings resulting from the Rubbermaid Acquisition. The results
in the prior year were also impacted by $672 of non-recurring charges.
Net income of $3,216 for the three months ended September 30, 1998 was $3,158
higher than the three months ended September 30, 1997 of $58 as a result of the
above-noted changes and a $2,105 increase in the provision for income taxes.
SIX MONTHS ENDED SEPTEMBER 30, 1998 VS. SIX MONTHS ENDED SEPTEMBER 30, 1997.
The Company's Condensed Financial Statements for the six months ended September
30, 1998 include the operations arising from the Rubbermaid Acquisition. Net
sales for the six months ended September 30, 1998 were $39,279 (reflecting the
Rubbermaid Acquisition since April 29, 1998) as compared with net sales of
$19,455 for the six months ended September 30, 1997 (which do not reflect the
Rubbermaid Acquisition). The increase of $19,824 resulted principally from the
Rubbermaid Acquisition.
Gross profit was $14,829 for the six months ended September 30, 1998 as compared
with $5,001 for the six months ended September 30, 1997. The increase of $9,828
reflects the impact of the Rubbermaid Acquisition and the fact that the Company
now sells directly to retailers. The
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increase in gross profit for the six months ended September 30, 1998 was
partially offset by a one-time non-cash charge of $797 for the step-up in basis
of DCG inventory acquired in the Rubbermaid Acquisition. Excluding the impact of
this one-time charge, total Company gross profit would have been $15,626.
Selling, general and administrative expenses were $6,065 for the six months
ended September 30, 1998 as compared with $2,704 in the six months ended
September 30, 1997. The increase of $3,361 was a result of the incremental sales
and marketing costs incurred relative to the change from being primarily a
contract manufacturer to being a vertically integrated manufacturer and marketer
of Con-Tact products following the Rubbermaid Acquisition.
Interest expense, net was $68 for the six months ended September 30, 1998 as
compared with $715 in the prior year. The decrease of $647 is principally due to
advances received from the Parent which repaid existing debt and which were
invested in interest bearing accounts.
The Company recognized income before income taxes and extraordinary item of
$8,696 in the six months ended September 30, 1998, as compared with income of
$910 in the six months ended September 30, 1997. This increase is principally a
result of the increase in earnings resulting from the Rubbermaid Acquisition.
Net income of $3,199 for the six months ended September 30, 1998 was $2,653
higher than the six months ended September 30, 1997 as a result of the
above-noted changes, an extraordinary charge of $2,019 in the current year
period and a $3,144 increase in the provision for income taxes.
Year 2000. Many existing computer systems, communication systems, machines and
other items, whether large or small, which utilize microprocessors and/or
software use only two digits rather than four digits to process date-related
transactions. As a result, many of these items will not be able to correctly
process a transaction with the year 2000 date, as the "00" could cause the
program or system to fail or create erroneous results before, on or after
January 1, 2000 (the "Year 2000 Issue"). The Company has employees who have the
task of identifying potential Year 2000 Issues and overseeing the implementation
of solutions with respect to these issues where possible.
The Company recently completed Phase I of a program to replace its primary
management information and communication systems with full Year 2000 compliance.
This included hardware and software required to operate its telephone systems
and its accounting systems (including general ledger, accounts receivable,
accounts payable). Phase II of this program, which is scheduled to be completed
in February 1999, will also convert manufacturing control systems to Year 2000
compliant systems. The combined hardware and software costs of Phases I & II are
estimated to be approximately $600,000.
In addition to its primary management information system, the Company utilizes
personal computers, which function either on a stand-alone basis or as
workstations on an integrated network. These computers utilize a variety of
operating systems and software packages ranging from Windows NT to DOS
platforms. The Company believes that the majority of these systems can and will
be made Year 2000 compliant prior to January 1, 2000 at little or no cost to the
Company through software updates provided by the respective software vendors.
Any full system replacements, which may be required, are not anticipated to have
a material impact on the cash flow of the Company and can be funded from
operating cash flow. The Company is in
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the process of reviewing other equipment and systems including, but not limited
to, fax machines, cellular telephones, security and other systems in order to
determine and remedy any potential Year 2000 Issues. The Company does not
separately track the incremental costs incurred for the investigation, analysis
and remedy of Year 2000 Issues. Such costs consist principally of related
payroll costs of certain members of its systems and operations groups.
The Company sells its products primarily to retailers, distributors and original
equipment manufacturers with a significant number of such transactions occurring
electronically. The Company also purchases raw materials from many vendors;
however, the majority of such purchasing transactions are not handled
electronically. If the Company, or any third party with whom the Company does
business, were to have a Year 2000 problem, the Company's business could be
seriously disrupted which could negatively affect the financial condition and
results of operations of the Company. This is particularly true in the case of
retail customers where high volume transactions would have to be converted to a
manual system until any Year 2000 Issue was resolved. The Company is in the
process of reviewing the Year 2000 compliance status with its vendors and
customers and to-date has not become aware of a situation which would have a
material adverse impact on the Company's operations and/or financial condition,
although no assurances can be given that such a problem does not exist, or will
not exist in the future. As the Company continues to evaluate the Year 2000
compliance status of its suppliers and vendors, it will also develop contingency
plans to deal with any potential problems that may arise in this analysis.
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DECORA, INCORPORATED
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in pending actions which, in the opinion of
management of the Company, are not material to the Company's financial condition
or results of operations. Although no assurances can be given regarding the
ultimate outcome of such matters, the Company has accrued amounts for defense
and settlement costs which the Company considers adequate.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included with this report:
(3) Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of the Company filed on March 5,
1990. (1)
3.2 By-Laws of the Company. (1)
(4) Instruments Defining the Rights of Security Holders
4.1 Form of Indenture dated as of April 29, 1998 among the Parent
as Issuer, the Company as Subsidiary Guarantor, future
Subsidiary Guarantors, and United States Trust Company of New
York as Trustee (the "Indenture"). (2)
4.2 Form of 11% Senior Secured Notes due 2005 ("Old Notes") issued
under the Indenture (included as Exhibit A to the Indenture).
(2)
4.3 Form of Series B 11% Senior Secured Notes due 2005 issued
under the Indenture in exchange for the Old Notes (included as
Exhibit B to the Indenture). (2)
4.4 Form of Guarantee of the Company dated as of April 29, 1998
(included as Exhibit G to the Indenture). (2)
(10) Material Contracts
10.1 Form of Payment and Deferral Agreement dated as of July 9,
1998 by and among the Company, the Parent and each of the
Holders listed in Schedule A attached thereto. (3)
(27) Financial Data Schedule
27.1 Financial Data Schedule
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(1) Previously filed as Exhibit to the Parent's and the Company's Form
S-4 Registration Statement No. 333-58989 on July 13, 1998 (the
"Registration Statement").
(2) Previously filed as Exhibit to the Parent's Report on Form 10-K for
the fiscal year ended March 31, 1998.
(3) Previously filed as Exhibit to Amendment No. 1 to the Registration
Statement filed on September 4, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended September 30, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECORA, INCORPORATED
(REGISTRANT)
BY /s/ Timothy N. Burditt
---------------------------------
Timothy N. Burditt
VP Administration & Finance
DATED: November 23, 1998
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,469
<SECURITIES> 0
<RECEIVABLES> 6,101
<ALLOWANCES> (201)
<INVENTORY> 13,471
<CURRENT-ASSETS> 35,617
<PP&E> 20,928
<DEPRECIATION> (10,005)
<TOTAL-ASSETS> 114,363
<CURRENT-LIABILITIES> 11,110
<BONDS> 2,622
0
0
<COMMON> 160
<OTHER-SE> 17,259
<TOTAL-LIABILITY-AND-EQUITY> 114,363
<SALES> 39,279
<TOTAL-REVENUES> 39,279
<CGS> 24,450
<TOTAL-COSTS> 6,065
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 246
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 8,696
<INCOME-TAX> 3,478
<INCOME-CONTINUING> 5,218
<DISCONTINUED> 0
<EXTRAORDINARY> (2,019)
<CHANGES> 0
<NET-INCOME> 3,199
<EPS-PRIMARY> 199.94
<EPS-DILUTED> 199.94
</TABLE>
