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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 December 31, 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 X No
---
At February 15, 1999 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
PART I FINANCIAL INFORMATION
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Item 1 Financial Statements (unaudited)
Condensed Balance Sheets
as of December 31, 1998
and March 31, 1998 3-4
Condensed Statements of Income
for the Three and Nine Months ended
December 31, 1998 and 1997 5
Condensed Statements of
Cash Flows for the Nine Months ended
December 31, 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>
DECEMBER 31, 1998 MARCH 31, 1998
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,221 $ 356
Restricted cash 63 125
Accounts receivable, less allowance 7,312 5,937
Inventories 17,022 6,154
Deferred income taxes 320 320
Prepaid expenses and other current assets 265 332
-------- --------
Total current assets 32,203 13,224
Property and equipment, net 11,813 6,990
Due from affiliates -- 18,227
Goodwill and other intangibles, net 63,127 10,522
Other assets 935 1,255
-------- --------
Total assets $108,078 $ 50,218
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</TABLE>
See accompanying Notes to Unaudited Condensed Financial Statements
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DECORA, INCORPORATED
CONDENSED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDER'S EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 5,708 $ 3,233
Accrued liabilities 4,149 3,118
Current portion of long-term debt 331 327
-------- --------
Total current liabilities 10,188 6,678
Long-term debt 2,021 28,774
Deferred income taxes 546 546
Due to affiliates 76,816 --
-------- --------
Total liabilities 89,571 35,998
-------- --------
Shareholder's equity:
Common stock 160 160
Additional paid-in capital 3,658 3,658
Retained earnings 14,689 10,402
-------- --------
Total shareholder's equity 18,507 14,220
-------- --------
Total liabilities and shareholder's equity $108,078 $ 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)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales $ 14,861 $ 8,308 $ 54,140 $ 27,763
Cost of goods sold (see Note 2) 10,273 6,255 34,723 20,709
-------- -------- -------- --------
Gross profit 4,588 2,053 19,417 7,054
Selling, general and
administrative expenses 2,608 912 8,673 3,616
Non-recurring charges -- -- -- 672
-------- -------- -------- --------
Operating income 1,980 1,141 10,744 2,766
Interest expense, net 165 848 233 1,563
-------- -------- -------- --------
Income before income taxes
and extraordinary item 1,815 293 10,511 1,203
Income tax provision 727 118 4,205 482
-------- -------- -------- --------
Income before extraordinary item 1,088 175 6,306 721
Extraordinary item, net of income
taxes (see Note 2) -- -- (2,019) --
-------- -------- -------- --------
Net income $ 1,088 $ 175 $ 4,287 $ 721
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</TABLE>
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>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
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(IN THOUSANDS)
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Cash flows from operating activities:
Net income $ 4,287 $ 721
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item, net of income taxes 2,019 -
Depreciation and amortization 2,584 1,629
Amortization of debt discount and fees 62 84
Net changes in current assets and liabilities 981 (244)
Other, net (617) -
-------- --------
Net cash provided by operating activities 9,316 2,190
-------- --------
Cash flows from investing activities:
Rubbermaid Acquisition (65,491) -
Purchase of property and equipment (2,443) (642)
-------- --------
Net cash used in investing activities (67,934) (642)
-------- --------
Cash flows from financing activities:
Increase in long-term debt - 18,000
Repayment of long-term debt (27,523) (4,376)
Net cash paid for debt penalties and fees (2,387) -
Intercompany transfers 95,331 (14,897)
-------- --------
Net cash provided by (used in) financing activities 65,421 (1,273)
-------- --------
Net increase in cash and cash equivalents 6,803 275
Cash and cash equivalents at beginning of period 481 128
-------- --------
Cash and cash equivalents at end of period $ 7,284 $ 403
======== ========
</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, Determination of Acquisition Cost, 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
(subject to a purchase price contingency of $2.5 million based on calendar 1998
DCG sales levels) of approximately $62.5 million (the "Rubbermaid Acquisition").
Based upon final 1998 sales of the DCG, the purchase price was adjusted downward
by $2.0 million to $60.5 million.
The assets acquired included inventory, manufacturing equipment, tradenames
including the Con-Tact trademark and all other rights to three product lines:
(i) the Con-Tact self-adhesive coverings line that was manufactured exclusively
for Rubbermaid by Decora, (ii) Shelf Liner, a proprietary product line that
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.
Determination of Acquisition Cost
The acquisition cost for the DCG of approximately $62.6 million (purchase price
of $60.5 million, adjusted for acquisition related closing costs of
approximately $3.6 million, less amounts related to transition services of $1.5
million paid to Rubbermaid) was allocated to the assets acquired as follows:
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<TABLE>
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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 6,400,000
</TABLE>
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
December 31, 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 nine months ended December 31, 1998.
Acquisition Related One-time Charge to Cost of Goods Sold
The results for the nine months ended December 31, 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 December 31, 1998 and March 31, 1998 consisted of the following:
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DECEMBER 31, 1998 MARCH 31, 1998
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(IN THOUSANDS)
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Raw Materials $ 1,807 $ 3,131
Work-in-Process 3,633 1,626
Finished Goods 11,582 1,397
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$17,022 $ 6,154
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</TABLE>
NOTE 4 - Related Party Transactions
The Company paid management fees to the Parent of approximately $250,000 and
$750,000 during the three and nine months ended December 31, 1998, respectively,
and $200,000 and $600,000 during the three and nine months ended December 31,
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/to 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 ($76,816,000) and
$18,227,000 at December 31, 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 DECEMBER 31, 1998 VS. THREE MONTHS ENDED DECEMBER 31, 1997.
The Company's Condensed Financial Statements for the three months ended December
31, 1998 include the operations arising from the April 29, 1998 Rubbermaid
Acquisition. Net sales for the three months ended December 31, 1998 were $14,861
as compared with net sales of $8,308 for the three months ended December 31,
1997. The increase of $6,553 resulted principally from the Rubbermaid
Acquisition.
Gross profit was $4,588 for the three months ended December 31, 1998 as compared
with $2,053 for the three months ended December 31, 1997. The increase of $2,535
reflects the impact of the Rubbermaid Acquisition and the fact that the Company
now sells directly to retailers.
Selling, general and administrative expenses were $2,608 for the three months
ended December 31, 1998 as compared with $912 in the three months ended December
31, 1997. The increase of $1,696 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, net was $165 for the three months ended December 31, 1998 as
compared with $848 in the prior year quarter. The decrease of $683 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
$1,815 in the three months ended December 31, 1998, as compared with $293 in the
three months ended December 31, 1997. This increase is principally a result of
the increase in earnings resulting from the Rubbermaid Acquisition.
Net income of $1,088 for the three months ended December 31, 1998 was $913
higher than the three months ended December 31, 1997 of $175 as a result of the
above-noted changes and a $609 increase in the provision for income taxes.
NINE MONTHS ENDED DECEMBER 31, 1998 VS. NINE MONTHS ENDED DECEMBER 31, 1997.
The Company's Condensed Financial Statements for the nine months ended December
31, 1998 include the operations arising from the Rubbermaid Acquisition. Net
sales for the nine months ended December 31, 1998 were $54,140 (reflecting the
Rubbermaid Acquisition since April 29, 1998) as compared with net sales of
$27,763 for the nine months ended December 31, 1997 (which do not reflect the
Rubbermaid Acquisition). The increase of $26,377 resulted principally from the
Rubbermaid Acquisition.
Gross profit was $19,417 for the nine months ended December 31, 1998 as compared
with $7,054 for the nine months ended December 31, 1997. The increase of $12,363
reflects the impact of the Rubbermaid Acquisition and the fact that the Company
now sells directly to retailers. The increase in gross profit for the nine
months ended December 31, 1998 was
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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 $20,214.
Selling, general and administrative expenses were $8,673 for the nine months
ended December 31, 1998 as compared with $3,616 in the nine months ended
December 31, 1997. The increase of $5,057 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 $233 for the nine months ended December 31, 1998 as
compared with $1,563 in the prior year. The decrease of $1,330 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
$10,511 in the nine months ended December 31, 1998, as compared with income of
$1,203 in the nine months ended December 31, 1997. This increase is principally
a result of the increase in earnings resulting from the Rubbermaid Acquisition.
Net income of $4,287 for the nine months ended December 31, 1998 was $3,566
higher than the nine months ended December 31, 1997 as a result of the
above-noted changes, an extraordinary charge of $2,019 in the current year
period and a $3,723 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 Phases I and II 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) and manufacturing control systems at a cost of
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 is completing its survey to detect non-compliant systems
and 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 the process of reviewing other equipment and systems in order to
determine and remedy any potential Year 2000 Issues.
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Certain manufacturing equipment has date-sensitive controllers which are not
Year 2000 compliant and will have to be upgraded, replaced or decommissioned.
The Company anticipates resolving these issues by September 1999 at a cost which
is anticipated to be within ordinary maintenance expenditure levels. 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)
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(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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended December 31, 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: February 16, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,284
<SECURITIES> 0
<RECEIVABLES> 7,482
<ALLOWANCES> (170)
<INVENTORY> 17,022
<CURRENT-ASSETS> 32,203
<PP&E> 22,191
<DEPRECIATION> (10,378)
<TOTAL-ASSETS> 108,078
<CURRENT-LIABILITIES> 10,188
<BONDS> 2,352
0
0
<COMMON> 160
<OTHER-SE> 18,347
<TOTAL-LIABILITY-AND-EQUITY> 108,078
<SALES> 54,140
<TOTAL-REVENUES> 54,140
<CGS> 34,723
<TOTAL-COSTS> 43,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 289
<INTEREST-EXPENSE> 233
<INCOME-PRETAX> 10,511
<INCOME-TAX> 4,205
<INCOME-CONTINUING> 6,306
<DISCONTINUED> 0
<EXTRAORDINARY> (2,019)
<CHANGES> 0
<NET-INCOME> 4,287
<EPS-PRIMARY> 267.94
<EPS-DILUTED> 267.94
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