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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
April 29, 1998
DECORA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-16072 68-0003300
(Commission File Number) (IRS Employer Identification No.)
One Mill Street, Fort Edward, New York 12828
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 747-6255
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 29, 1998, Decora Industries, Inc. (the "Company"), through its
wholly-owned subsidiary, Decora Incorporated ("Decora"), acquired assets which
constitute Rubbermaid Incorporated's Decorative Coverings Group (the "Rubbermaid
Acquisition"). The assets purchased included the rights to three product lines:
(i) the Con-Tact(R) self-adhesive line, which is currently manufactured by
Decora, (ii) the Shelf Liner light-adhesive line, which is currently
manufactured by Rubbermaid, and (iii) the Grip Liner non-adhesive covering line,
which is currently manufactured by a third party pursuant to the terms of an
exclusive manufacturing agreement. The acquired assets include machinery and
equipment, inventory, the Con-Tact(R) trade name, shelf space and a non-compete
agreement. The Company acquired assets which are used to manufacture the Shelf
Liner product line and will relocate these operations to available space in its
Fort Edward, New York facility.
The Rubbermaid Acquisition will enable the Company, which has previously
relied on Rubbermaid for the distribution of Con-Tact(R) and related products
which the Company manufactures, to integrate the marketing, sales and
distribution of the Con-Tact(R) product line, as well as the other two product
lines, with its manufacturing capability. The Company believes that it can
derive many benefits from this integration of its manufacturing capability with
its new sales, marketing and distribution function, including (i) control over
decisions regarding placement of products within distribution channels, (ii) a
focused approach to managing Con-Tact(R) as a distinct product category and
(iii) the ability to capture the full manufacturer-to-retailer gross margin
(although the Company will also experience a corresponding significant increase
in selling, general and administrative expenses).
No infrastructure or employees were transferred to Decora as part of the
Rubbermaid Acquisition. Instead, Decora will establish its own national sales
and marketing organization and distribution, order entry, customer service,
billing and collection functions in an attempt to provide a smooth operational
transition from Rubbermaid to the Company upon expiration of a nine-month
transition services period. Most of the Company's new national sales, marketing
and distribution team will be located in a new office in Cleveland, Ohio. In
January 1998, the Company hired Earl A. Wearsch, who has had significant
management, marketing and sales experience with decorative home furnishings,
including many years as a senior manager in charge of marketing the Glidden
brand of paints, to serve as Executive Vice President of the Company and as
President and General Manager of Decora. The Company has also retained Mercer
Management Consulting, Inc. to help develop and implement a distribution and
information systems strategy for the Decorative Coverings Group products and has
retained a consumer marketing consulting group to help in the development and
execution of new marketing strategies.
In order to facilitate the transition, Decora has a two-year, royalty free
license for use of the name "Rubbermaid" on the Decorative Coverings Group
products. During the transition services period, Rubbermaid will provide
warehousing, shipping, order entry, customer service, billing and collection
functions and will manufacture Shelf Liner products for Decora until such
manufacturing operations are transferred to Decora's existing operations in Fort
Edward, New York. Decora has estimated the value of the transition services at
approximately $1.5 million. Decora will pay Rubbermaid separately on a cost
basis for Shelf Liner products manufactured by Rubbermaid.
The Rubbermaid Acquisition follows another recent acquisition by the
Company, through a wholly-owned German subsidiary, of 73.2% of the outstanding
shares of Konrad Hornschuch AG ("Hornschuch") on October 1, 1997 (the
"Hornschuch Acquisition"). Through its German subsidiary, the Company currently
owns approximately 75% of the outstanding shares of Hornschuch and intends to
make a tender offer for the outstanding balance of Hornschuch's shares within
the next year (the "Hornschuch Minority Tender Offer").
As a result of the Hornschuch Acquisition and the Rubbermaid Acquisition,
the consolidated Company will become a vertically integrated manufacturer,
seller, marketer and distributor of self-adhesive decorative and surface
covering consumer products, which are sold primarily under the Con-Tact(R) and
d-c-fix(R) brands. The Company conducts business primarily through its Decora
and Hornschuch subsidiaries, which operate in the United States and Europe,
respectively. In the United States, which is the primary market for the
Con-Tact(R) brand, Decora will now sell Con-Tact(R) and the other Decorative
Coverings Group products directly to leading retailers such as Kmart, Target,
The Home Depot and Wal-Mart. In Germany, Italy and the Czech Republic,
Hornschuch sells d-c-fix(R) products directly to major retail chains such as
Brico, Metro and Stinnes. In the remainder of Western Europe, Eastern Europe,
South America, Africa, the Middle East and the Far East, products under both
brands are sold and distributed through a network of approximately 65
wholesalers, independent distributors and agents.
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Before applicable adjustments based on date of closing and inventory
levels at date of closing, the purchase price (including certain transition
services) for the Decorative Coverings Group assets was $62.5 million, subject
to further adjustment. Of this amount, $57.5 million was payable (subject to
adjustment) at the closing and is subject to further adjustment either upward or
downward on January 31, 1999 by a maximum of $2.5 million depending on actual
sales levels of the product lines for the calendar year ending December 31,
1998. The remaining $5.0 million will be paid in nine equal monthly
installments, partly for transition services performed by Rubbermaid and partly
as additional purchase price.
Concurrently with the Rubbermaid Acquisition, (i) the Company completed a
private offering (the "Offering") of $112.75 million aggregate principal amount
of 11% Senior Secured Notes due 2005 (the "Notes"), which were sold at a
discount for gross proceeds of approximately $110.1 million, (ii) Decora entered
into a new $15.0 million credit facility with its principal lender (the "Decora
Credit Facility") and (iii) Hornschuch borrowed an additional DM18.0 million
(approximately $10.0 million) under its bank credit facilities (the "Hornschuch
Credit Facilities") and loaned the proceeds to Decora pursuant to a secured
intercompany loan (the "Intercompany Note"). The proceeds of the Offering, the
Intercompany Note and the estimated $1.5 million of initial borrowings under the
Decora Credit Facility have been, and will be, used as follows:
(i) $57.5 million (pre-adjustment) was used, and an additional $5.0
million will be used, to acquire the Decorative Coverings Group assets and for
certain transition services in connection with the Rubbermaid Acquisition (not
including up to an additional $2.5 million which could be payable to Rubbermaid
depending on calendar year 1998 net sales); (ii) approximately $1.5 million will
be used to relocate certain manufacturing operations of the Decorative Coverings
Group; (iii) $32.7 million was used to repay outstanding indebtedness (including
$3.6 million of accrued interest and prepayment premium) and to terminate all
commitments under the prior credit facility from Decora's principal lender
(collectively, the "Refinancing"); (iii) approximately $9.3 million will be used
in connection with the Hornschuch Minority Tender Offer (assuming that all of
the outstanding minority shares of Hornschuch are purchased); (iv) $6.9 million
was used to pay fees and expenses of the Rubbermaid Acquisition, the Offering,
the Refinancing and the other transactions described herein and (v) the balance
will be used for general corporate purposes, including working capital.
The Rubbermaid Acquisition, the Offering, the Refinancing, the $1.5
million of initial borrowings under the Decora Credit Facility and the
additional DM18.0 million (approximately $10.0 million) borrowing under the
Hornschuch Credit Facility and the lending of such amount to Decora under the
Intercompany Note are referred to in Item 7 below collectively as the
"Transactions."
Concurrently with the closing of the Intercompany Note financing, Decora
and Hornschuch entered into a distribution agreement giving Decora the exclusive
right to distribute Hornschuch's products in North America. The agreement has a
three-year term and will renew automatically for additional one-year periods
unless either party gives six months' advance notice of its intention not to
renew. Decora concurrently entered into a license agreement with Hornschuch
giving Hornschuch the right to use the Con-Tact(R) trademark, free of any
royalty payments, in connection with Hornschuch's sales of self-adhesive
decorative coverings in all countries of the world where Decora holds a
registered trademark, with the exception of North America and several countries
where Decora has assumed existing license agreements in connection with the
Rubbermaid Acquisition. This agreement likewise has a three-year term and will
renew automatically for additional one-year periods unless either party gives
six months' advance notice of its intention not to renew.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(B) PRO FORMA FINANCIAL INFORMATION.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma condensed consolidated statement of
operations for the twelve months ended December 31, 1997 is based upon the
individual consolidated statements of operations of the Company and Hornschuch
and give effect to the Hornschuch Acquisition as if it had occurred on April 1,
1996.
The Company has accounted for the Hornschuch Acquisition using the
purchase method of accounting under which tangible and identifiable intangible
assets acquired and liabilities assumed are recorded at their respective fair
values. Adjustments to the unaudited pro forma condensed consolidated statement
of operations include such adjustments that are directly attributable to the
Hornschuch Acquisition and which are expected to have a continuing impact on the
Company. Allocations of the purchase price in the Hornschuch Acquisition have
been determined based on estimates of fair value and, therefore, are subject to
change. Differences between the amounts included herein and the final
allocations are not expected to be material.
This unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of the results of operations which would have been
attained had the Hornschuch Acquisition been consummated on January 1, 1997 or
which may be attained in the future. Such statement should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's historical financial statements
included in the Company's Form 10-K for its year ended March 31, 1997 and Form
10-Q for the quarter ended December 31, 1997.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY HORNSCHUCH
FOR THE TWELVE FOR THE NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, PRO FORMA PRO FORMA
1997(a) 1997 ADJUSTMENTS CONSOLIDATED
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<S> <C> <C> <C> <C>
Net sales ........................... $ 64,871 $ 89,964 $ 154,835
Cost of goods sold .................. 47,621 66,168 $ 208(c) 113,173
(824)(d)
--------- --------- --------- ---------
Gross profit ........................ 17,250 23,796 616 41,662
Selling, general and
administrative expenses .......... 11,462 21,558 104(c) 33,445
321(e)
Non-recurring charges ............... 1,461 -- -- 1,461
--------- --------- --------- ---------
Operating income .................... 4,327 2,238 191 6,756
Interest expense .................... 2,897 1,298 2,537(f) 6,732
--------- --------- --------- ---------
Income before income taxes
and minority interest ............ 1,430 940 (2,346) 24
Income tax (benefit) provision ...... (669)(b) 476 (1,026)(g) (1,219)
Minority interest in earnings
of subsidiary .................... 201 -- 123(h) 324
--------- --------- --------- ---------
Net income .......................... $ 1,898 $ 464 $ (1,443) $ 919
========= ========= ========= =========
</TABLE>
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(a) The results of operations of Hornschuch are included in the results of the
Company since the Hornschuch Acquisition on October 1, 1997.
(b) In the fourth quarter of fiscal 1997, the Company recognized $1,695 in
deferred tax benefits due to the reversal of its deferred tax asset
valuation allowance. That quarter is included in the Company's twelve
months ended December 31, 1997 as the first quarter of such period.
(c) Reflects the estimated increase in depreciation expense based on the
step-up in basis of property and equipment acquired.
(d) The nine months ended September 30, 1997 for Hornschuch reflects an
adjustment to pension expense to recognize amortization of an intangible
pension asset under U.S. generally accepted accounting principles.
Effective with the Hornschuch Acquisition, the intangible pension asset was
revalued in purchase accounting. This adjustment reflects the reversal of
the charge to cost of sales for the amortization of the pension asset.
(e) Reflects the amortization of intangibles including goodwill over an
estimated life of 40 years and an agreement not to compete over the
contract life of four years.
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(f) Reflects interest expense on indebtedness and amortization of related fees
and expenses incurred in connection with the Hornschuch Acquisition.
(g) Reflects the estimated income tax effect of the pro forma adjustments.
(h) Reflects the minority interest in Hornschuch's earnings.
UNAUDITED ADJUSTED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited adjusted pro forma consolidated financial information
included herein does not purport to be representative of the actual results of
operations or of the financial position that would have been attained had the
Transactions been consummated at the dates indicated or that may be attained in
the future. Most of the adjustments involve forward- looking statements that
involve risks and uncertainties, as set forth below under "Forward-Looking
Statements." Undue reliance should not be placed on the unaudited adjusted pro
forma consolidated financial information. Such information is based upon
assumptions that the Company believes are reasonable and should be read in
conjunction with the Company's historical financial statements included in the
Company's Form 10-K for its year ended March 31, 1997 and Form 10-Q for the
quarter ended December 31, 1997.
The following unaudited adjusted pro forma consolidated operations data
and unaudited adjusted other data for the twelve months ended December 31, 1997
include adjustments to the Company's unaudited pro forma condensed consolidated
statement of operations and other data for such period to reflect the
Transactions as if each had occurred on January 1, 1997 and to reflect
management's estimates of costs which will be incurred as a result of its
establishment of the Company's own sales and marketing organization and
distribution, order entry, customer service, billing and collection functions as
a result of the Rubbermaid Acquisition.
Net Sales. The Company had pro forma consolidated net sales of
$154,835,000. (See "Unaudited Pro Forma Condensed Consolidated Statement of
Operations" with respect to this and all other pro forma consolidated
information discussed herein.)
The Rubbermaid Decorative Coverings Group had net sales of $68,239,000.
Historical sales amounts for the acquired product lines represent actual sales
as captured within the Rubbermaid transaction system net of certain general
customer allowances for promotional support. These general customer allowances
are not product line specific. Gross sales amounts were estimated by adding the
allowance experience of the Rubbermaid Home Products Division, expressed as a
percentage of sales. The percentage was 5.6 for 1997. Net sales of the acquired
products represent gross sales amounts less estimated returns and allowances and
outbound freight costs. Returns and allowances were allocated based upon the
experience of the Rubbermaid Home Products Division as a whole, expressed as a
percentage of invoiced sales. An additional 0.3% was deducted as an estimate of
price discrepancies. Freight was estimated by allocating costs based upon the
size and weight of the decorative coverings products in proportion to other
Rubbermaid products which may have been contained in the same shipment. Freight
expense represented 4.2% of net sales for 1997. The Company's experience with
respect to actual customer allowances for promotional support, product returns
and allowances outbound freight costs and price discrepancies will likely vary
from the percentages noted above. The Company makes no representation as to the
amounts of such variations or whether they will be higher or lower than the
estimates used by Rubbermaid.
The Company had pro forma consolidated net sales, after adjustment for
the Transactions, of $192,166,000. An adjustment of $30,908,000 reflects the
elimination of sales made by the Company to the Decorative Coverings Group.
Cost of Goods Sold. The Company had pro forma consolidated cost of goods
sold of $113,173,000.
The Rubbermaid Decorative Coverings Group had cost of goods sold of
$48,890,000. Cost of goods sold includes direct cost of materials, labor,
overhead and warehousing, as incurred or allocated by Rubbermaid. Overhead
allocations were based upon machine time, percentage use of facilities and other
related factors. Warehousing costs were estimated based upon budgeted shipping
cost per carton and budgeted warehousing cost per cubic foot. Warehousing
expense was 3.0% of net sales in 1997. The Company's experience with respect to
actual cost of goods sold will likely vary from amounts used by Rubbermaid. The
Company makes no representation as to the amount of such variations or whether
they will be higher or lower than the allocations and amounts used by
Rubbermaid.
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The Company had pro forma consolidated cost of goods sold, after
adjustments for the Transactions, of $130,354,000. An adjustment of $31,553,000
reflects the elimination of cost of sales related to sales made by the Company
to the Decorative Coverings Group and the reduction of the Decorative Coverings
Group's cost of sales to the extent of the Company's gross profit included
therein. A $388,000 reduction in anticipated distribution cost reflects the
Company's estimate as compared to allocations made by Rubbermaid. An adjustment
of $232,000 reflects the estimated increase in depreciation expense based on the
step-up in basis of property and equipment acquired.
Gross Profit. The Company's pro forma consolidated gross profit was
$41,662,000. Gross profit of Rubbermaid's Decorative Coverings Group was
$19,349,000. The Company's pro forma consolidated gross profit, after net
adjustment for the Transactions of $801,000, was $61,812,000.
Selling, General and Administrative Expenses. The Company had pro forma
consolidated selling, general and administrative expenses of $33,445,000.
Rubbermaid's Decorative Coverings Group had selling, general and
administrative expenses of $557,000. Direct sales and marketing expenses of
Rubbermaid's Decorative Coverings Group include only those expenses incurred by
Rubbermaid directly attributable to the acquired product lines. The Company's
experience with such direct expenses will likely vary from Rubbermaid's.
The Company had pro forma consolidated selling, general and
administrative expenses, after adjustments for the Transactions, of $46,346,000.
Adjustments totaling $10,800,000 reflect the Company's estimates of additional
selling, general and administrative expenses which Decora must incur to
warehouse, market, distribute and sell products of the acquired product lines,
as follows: (i) The Company estimates it will add approximately 20 positions in
the areas of sales, marketing, accounting, customer service and systems support
at an estimated annual expense, including benefits, of approximately $2,700,000;
(ii) the Company estimates that it will incur incremental annual expenses of
approximately $7,600,000 relative to market research and promotional expenses,
advertising and merchandising and (iii) the Company estimates that it will incur
additional annual expense of approximately $500,000 for facilities, system
requirements and other miscellaneous items. An additional adjustment of
$1,544,000 reflects the amortization of goodwill, the Con-Tact(R) trademark, an
agreement not to compete and the other intangible assets acquired from
Rubbermaid. The amortization expense is based upon the estimated fair values of
the assets acquired using a weighted average estimated economic life of 35 years
and is based upon preliminary purchase accounting estimates. The actual fair
values of the assets to be acquired will be based upon appraisal studies that
are currently in process and the Company's evaluation of such assets. Therefore,
the amortization expense included in the adjusted pro forma information may
change based upon the final allocation of the purchase price and the final
determination of the respective economic lives.
Transaction Adjusted EBITDA. The Company had pro forma consolidated
Transaction Adjusted EBITDA of $26,522,000. Transaction Adjusted EBITDA
represents earnings before interest expense, income taxes, depreciation and
amortization, minority interest in earnings of subsidiary and non-recurring
charges. The Company's pro forma depreciation and amortization, after adjustment
for the Transactions, was $11,056,000.
Transaction Adjusted EBITDA should not be considered in isolation or as
a substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in conformity with U.S. generally
accepted accounting principals or as a measure of profitability or liquidity.
Transaction Adjusted EBITDA is included to provide additional information with
respect to the ability of the Company to satisfy its debt service, capital
expenditure and working capital requirements. While Transaction Adjusted EBITDA
is frequently used as a measure of operations and the ability to meet debt
service requirements, it is not necessarily comparable to other similarly titled
captions of other companies due to differences in methods of calculation.
Transaction Adjusted EBITDA and other financial data presented herein include
the results of the Company's German subsidiaries, including Hornschuch.
However, there are significant limitations on the ability of the Company to
access cash from its German subsidiaries.
Unaudited Adjusted Pro Forma Condensed Consolidated Balance Sheet. The
following unaudited pro forma condensed consolidated balance sheet as of
December 31, 1997 includes adjustments to the Company's unaudited historical
consolidated balance sheet as of December 31, 1997 as if the Transactions had
occurred on such date.
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UNAUDITED ADJUSTED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
A S S E T S
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
ADJUSTMENTS FOR PRO FORMA
THE RUBBERMAID THE OTHER CONSOLIDATED
COMPANY ACQUISITION(a) TRANSACTIONS AS ADJUSTED
--------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ........ $ 2,403 $ 18,009 (c) $ 20,412
Accounts receivable .............. 23,901 23,901
Inventories ...................... 25,497 $ 7,800 33,297
Prepaid expenses and other
current assets ................ 1,865 1,500 585 (c) 3,950
--------- --------- --------- ---------
Total current assets ....... 53,666 9,300 18,594 81,560
Property and equipment, net ......... 46,544 3,500 50,044
Notes receivable .................... 658 658
Intangibles, net .................... 24,329 54,000 78,329
Deferred income taxes ............... 4,935 1,280 (c) 6,355
140 (d)
Assets available for sale ........... 658 658
Other non-current assets, net ....... 1,158 4,100 (c) 4,908
(350)(d)
--------- --------- --------- ---------
Total assets ............... $ 131,948 $ 66,800 $ 23,764 $ 222,512
========= ========= ========= =========
</TABLE>
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LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------------------------------
ADJUSTMENTS FOR PRO FORMA
THE RUBBERMAID THE OTHER CONSOLIDATED
COMPANY ACQUISITION(a) TRANSACTIONS AS ADJUSTED
------- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable ...................... $ 8,304 $ 8,304
Accrued liabilities ................... 21,140 $ (585) (c) 20,555
Current portion of long-term debt ..... 8,551 (3,063) (c) 5,488
--------- --------- ---------
Total current liabilities .......... 37,995 (3,648) 34,347
Long-term debt ........................... 56,738 110,086 (b) 153,080
10,000 (b)
1,514 (b)
(25,258) (c)
Pension obligations ...................... 14,198 -- 14,198
--------- --------- ---------
Total liabilities ............ 108,931 92,694 201,625
Minority interest ........................ 6,769 6,769
Shareholders' equity
Preferred stock ....................... -- --
Common stock .......................... 73 73
Additional paid-in capital ............ 33,777 33,777
Accumulated deficit ................... (17,379) (3,200) (c) (19,509)
(350) (d)
1,280 (c)
140 (d)
Cumulative translation adjustment ..... (223) (223)
--------- --------- ---------
Total shareholders' equity ......... 16,248 2,130 14,118
--------- --------- ---------
Total liabilities and
shareholders' equity ...... $ 131,948 $ 90,564 $ 222,512
========= ========= =========
</TABLE>
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(a) Represents the estimated fair values of the Decorative Coverings Group
assets acquired in the Transactions, based upon preliminary purchase
accounting estimates. The actual fair values of the assets acquired, which
include machinery and equipment, inventory, the Con-Tact(R) trade name,
shelf space and a non-compete agreement, will be based upon appraisal
studies that are currently in process and the Company's evaluation of such
assets. Therefore, the fair values of the assets acquired, as allocated,
may change based upon the final allocation.
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(b) Sources of cash for the Transactions are as follows:
<TABLE>
<S> <C>
Gross proceeds from the issuance of the Notes ............ $110,086
Hornschuch Credit Facilities ............................. 10,000
Decora Credit Facility ................................... 1,514
--------
$121,600
</TABLE>
(c) Uses of cash for the Transactions are as follows:
<TABLE>
<S> <C>
Rubbermaid Acquisition(1) .................................................... $ 66,800
Refinancing (of which $3,063 relates to current portion) ..................... 28,321
Accrued and prepaid interest ................................................. 1,170
Prepayment penalty ($2,400) and unamortized debt discount ($800) (2) ......... 3,200
Expenses of the Offering ..................................................... 4,100
Hornschuch Minority Tender Offer ($9,300) and general
corporate purposes ($8,709) ............................................. 18,009
--------
$121,600
</TABLE>
(1) Includes $1,500 to be paid over the nine-month period following the
acquisition relative to transition services, $2,800 of estimated
transaction costs and $1,500 to relocate machinery and equipment
acquired. The purchase price is subject to certain adjustments based
upon the date of closing, inventory levels at the date of closing and
calendar 1998 net sales. Also, up to an additional $2,500 may be paid
in 1999 as contingent purchase price based upon calendar 1998 net
sales.
(2) These items, net of estimated income tax benefit of $1,280, will be
charged as extraordinary items during the period in which the
Transactions occurred.
(d) Reflects the write-off of unamortized financing costs related to the debt
being refinanced. The write-off of $350, net of estimated income tax
benefit of $140, will be charged as an extraordinary item during the period
in which the Transactions occurred.
FORWARD-LOOKING STATEMENTS
This report on Form 8-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. All statements other
than statements of historical facts, including, without limitation, the
statements regarding potential synergies, industry prospects, the Company's
financial position and estimated future costs relating to the operations of the
Decorative Coverings Group assets are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Factors that could cause actual results to differ
materially from the Company's expectations are disclosed in the Company's Form
10-K for its year ended March 31, 1997 and Form 10-Q for its quarter ended
December 31, 1997, and also include the following:
NEED TO DEVELOP NORTH AMERICAN DISTRIBUTION INFRASTRUCTURE. Decora did not
acquire the distribution or sales and marketing operations from Rubbermaid as
part of the Rubbermaid Acquisition, and Decora does not currently have
operations which can fulfill such distribution and sales and marketing
requirements. In addition, Rubbermaid has been unable to provide detailed
information with respect to its costs of marketing, sales and distribution with
respect to its Decorative Coverings Group from which the Company could assess
the costs of operating a comparable distribution and sales and marketing
infrastructure. For a nine-month transition period, Rubbermaid will continue to
provide warehousing, shipping, order entry, customer service, billing and
collection functions for Decora on a contractual basis, while marketing and
sales activities are being transferred immediately to Decora. During that
period, Decora will have to design and implement a complete distribution and
sales and marketing system, including the installation of systems and
infrastructure, the hiring of personnel and the transition of customer
interface. Decora has retained Mercer Management Consulting, Inc. to recommend
and oversee the implementation of an optimal distribution and information
systems strategy with the goal of helping Decora complete the transition within
the nine-month period. There can be no assurance that such transition will
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occur smoothly or be within management's cost estimates. The inability to
complete the transition as planned could result in increased investment
requirements, increased operating costs, loss of sales, loss of customers and
reduction in operating cash flow available to service required debt payments.
RELOCATION OF MANUFACTURING OPERATIONS. As part of the Rubbermaid
Acquisition, Decora acquired the assets utilized in manufacturing Rubbermaid's
Shelf Liner product line and will be required to relocate these manufacturing
operations prior to the end of the nine-month transition period. Decora plans to
relocate these operations to its existing manufacturing facility in Fort Edward,
New York at an estimated cost (including installation and start-up costs) of
$1.5 million. While Decora is experienced in the installation and operation of
production machinery, there are risks associated with the removal,
transportation, installation and start-up of such machinery which may increase
the estimated costs and result in an interruption of product supply.
Additionally, no assurance can be given that Decora's manufacturing costs
following the relocation will be the same as or less than those experienced by
Rubbermaid.
UNCERTAINTIES CONCERNING FUTURE OPERATING REQUIREMENTS AND COSTS. In
connection with the Rubbermaid Acquisition, Decora acquired assets which were
previously a part of the Rubbermaid Home Products and Specialty Products
Divisions. Because the Decorative Coverings Group was operated under
Rubbermaid's centralized sales, operations and cash management system, it is not
practicable to determine the nature and magnitude of indirect costs for certain
functions and services that were performed by centralized Rubbermaid departments
outside the defined scope of the Decorative Coverings Group (including all
advertising and other distribution, selling, general and administrative
expenses), or to reasonably estimate what such costs would have been had
Rubbermaid operated the Decorative Coverings Group on a stand-alone basis.
Decora's ability to estimate such costs accurately going forward is limited by,
among other factors, the absence of such information from Rubbermaid. The
failure to estimate such costs accurately could have a materially adverse effect
on Decora's ability to successfully implement its business strategy regarding
the Decorative Coverings Group and on the Company's business, financial
condition or results of operations.
DEPENDENCE ON SUPPLIER. Grip Tex, Inc. ("Grip Tex") manufactured the Grip
Liner product line for Rubbermaid pursuant to a manufacturing agreement which
expires August 15, 1998, subject to renewal by Rubbermaid on at least 60 days'
advance written notice (the "Grip Liner Agreement"). In the Rubbermaid
Acquisition, Rubbermaid assigned its rights and obligations under the Grip Liner
Agreement to Decora. However, Decora's ability to rely on Grip Tex as the
manufacturer of the Grip Liner products, both in the long term and in the short
term, will depend in part on whether the two companies succeed in developing a
positive working relationship under the Grip Liner Agreement. Although
management believes that alternative manufacturing sources are available for
this product line, any change in manufacturers or disruption in this source of
product could result in delays, additional costs and loss of sales, which could
damage customer relationships and could have a material adverse effect on the
Company's business, financial condition or results of operations. In addition,
since Grip Tex owns a patent used in producing the Grip Liner Prints product,
Decora may find it difficult or impossible to utilize any other manufacturer to
produce this product.
SALES DECLINE IN DECORATIVE COVERINGS GROUP PRODUCTS. Rubbermaid's sales
of Decorative Coverings Group products declined by 9% during the calendar year
1997 versus calendar year 1996, and Decora's calendar unit volume shipments of
Con-Tact(R) products to Rubbermaid have declined at an annual rate (measured as
the annual percentage decrease from December 31, 1994 to December 31, 1997) of
12% since December 31, 1994. Additionally, Rubbermaid estimated that sales of
the Decorative Coverings Group products for the quarter ended March 31, 1998
would be approximately 11% below budgeted sales and approximately 15% below
sales from the prior year's first quarter. Some of the decline may be
attributable to reduction in inventory levels by retail customers. The Company
will attempt to reverse the declining trend in sales not caused by inventory
reductions through new selling, marketing and merchandising strategies. However,
there can be no assurance that such decline can be reversed. Although the
purchase price for the Rubbermaid Acquisition will be adjusted downward by up to
$2.5 million if calendar year 1998 net sales of Decorative Coverings Group
products are below a certain level (although not on a dollar-for-dollar basis),
further declines could severely impact the Company's ability to fund its
operations, maintain its competitive position and pay its debt obligations.
DEPENDENCE ON LARGE CUSTOMERS. Giving effect to the Hornschuch Acquisition
and the Rubbermaid Acquisition, the most significant customers of the Company
consist of Laverna, Mercedes Benz and Metro through Hornschuch and Kmart, Target
and Wal-Mart through Decora. The loss of any one of these customers could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS. The Company incurred
substantial additional indebtedness in connection with the Rubbermaid
Acquisition. As a result of this additional indebtedness and the indebtedness
previously incurred to complete the Hornschuch Acquisition, the Company has
indebtedness which is substantial in relation to its shareholders' equity, as
well as interest and other debt service requirements that are significant
compared to its cash flow from operations. As of December 31, 1997, on an
adjusted pro forma basis, the Company would have had consolidated outstanding
indebtedness of approximately $158.6 million, which would have represented
91.8% of total capitalization. Because of the high level of the Company's
indebtedness, (i) a substantial portion of the Company's cash from operations
will be committed to the payment of debt service and will not be available to
the Company for other purposes; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
and general corporate purposes will be limited; (iii) a substantial decrease in
operating cash flow or an increase in expenses could make it difficult for the
Company to meet its debt service requirements and force it to modify its
operations; (iv) the Company's highly leveraged position may make it more
vulnerable to economic downturns; and (v) the indebtedness under certain credit
facilities of the Company and its subsidiaries are at variable rates of
interest, which will, to the extent not hedged, cause the Company to be
vulnerable to increases in interest rates. In addition, the agreements
governing indebtedness of the Company and its subsidiaries impose significant
operating and financial restrictions. Such restrictions may significantly
limit, among other things, the ability of the Company to incur additional
indebtedness, make prepayments of certain indebtedness, make investments, grant
liens, merge with or acquire any other entity, dispose of assets, change its
business and engage in certain other corporate activities. In addition, the
Company may be required to comply with specific financial ratios, including
loan to collateral value ratios. In the event that these requirements are not
met, lenders may be entitled to declare indebtedness immediately due and
payable. In addition, these financial restrictions could limit the ability of
the Company to respond to market conditions or meet unanticipated capital needs
or could otherwise restrict corporate activities. There can be no assurance
that such restrictions will not adversely affect the ability of the Company to
finance its future operations or capital needs.
(C) EXHIBITS.
2.1 Asset Purchase Agreement dated as of March 30, 1998 by and
between Rubbermaid Incorporated and Rubbermaid Specialty
Products, Inc., on the one hand, and Decora Industries,
Inc. and Decora, Incorporated, on the other hand(1)
- ----------
(1) Previously filed as an Exhibit to Registrant's Form 8-K dated March
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 hereunto duly authorized.
DECORA INDUSTRIES, INC.
(Registrant)
By: /s/ Timothy N. Burditt
----------------------------
Timothy N. Burditt
Principal Accounting Officer
Dated: April 29, 1998
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