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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended December 31, 1997
Commission File Number 0-16072
DECORA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0003300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Indentification No.)
ONE MILL STREET
FORT EDWARD, NY 12828
(address of principal executive office) (zip code)
Registrant's telephone number
(including area code) (518) 747-6255
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 30 days.
Yes [X] No [ ]
At February 6, 1998 there were 7,331,378 shares of Common Stock of the
registrant outstanding. This document consists of 16 pages.
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DECORA INDUSTRIES, INC.
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheet as of
December 31, 1997 and March 31, 1997 3-4
Condensed Consolidated Statement of Income for
the Three and Nine Months ended December 31,
1997 and 1996 5
Condensed Consolidated Statement of Cash Flows
for the Nine Months ended December 31, 1997 and 1996 6
Notes to Unaudited Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION 14
SIGNATURES 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1997 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,403 $ 243
Accounts receivable, less allowance 23,901 6,168
Inventories 25,497 5,439
Other current assets 1,865 847
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Total current assets 53,666 12,697
Property and equipment, net 46,544 7,781
Notes receivable 658 1,468
Goodwill 21,516 8,308
Other intangibles, net 2,813 2,616
Deferred income taxes 4,935 4,227
Assets held for sale 658 --
Other assets 1,158 357
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Total assets $131,948 $ 37,454
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</TABLE>
(continued)
See accompanying notes to unaudited condensed consolidated financial statements.
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,304 $ 2,267
Accrued liabilities 21,140 1,867
Current portion of long-term debt 8,551 2,310
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Total current liabilities 37,995 6,444
Long-term debt 56,738 16,507
Pension obligation 14,198 --
--------- ---------
Total liabilities 108,931 22,951
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Minority interests 6,769 --
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000 shares
authorized at December 31, 1997 and March 31, 1997 -- --
Common stock, $0.01 par value; 20,000 and 45,000
shares authorized and 7,133 and 35,469 shares issued
and outstanding at December 31, 1997 and
March 31, 1997, respectively 71 355
Additional paid-in capital 33,779 31,862
Accumulated deficit (17,379) (17,714)
Cumulative translation adjustment (223) --
--------- ---------
Total shareholders' equity 16,248 14,503
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Total liabilities and shareholders' equity $ 131,948 $ 37,454
========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $36,909 $ 9,533 $56,364 $32,575
Cost of goods sold 27,194 7,154 41,648 24,530
------- ------- ------- -------
Gross profit 9,715 2,379 14,716 8,045
Selling, general and administrative 7,153 1,382 9,720 4,111
expenses
Non-recurring charges -- -- 1,461 --
------- ------- ------- -------
Operating income 2,562 997 3,535 3,934
Interest expense 1,601 581 2,439 1,861
------- ------- ------- -------
Income before taxes and minority interest 961 416 1,096 2,073
Income tax provision 519 10 560 70
------- ------- ------- -------
Income before minority interest 442 406 536 2,003
Minority interest in earnings of subsidiary 201 -- 201 --
------- ------- ------- -------
Net income $ 241 $ 406 $ 335 $ 2,003
======= ======= ======= =======
Earnings per common share $ 0.03 $ 0.06 $ 0.05 $ 0.29
------- ------- ------- -------
Earnings per common share- assuming
dilution $ 0.03 $ 0.05 $ 0.04 $ 0.27
------- ------- ------- -------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 335 $ 2,003
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 3,544 1,554
Amortization of debt discount 84 118
Minority interest in subsidiaries' earnings 201 --
Provision for notes receivable 789 --
Net change in deferred tax asset 306 --
Net changes in current assets and liabilities 4,408 (2,174)
Other 371 --
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NET CASH FLOWS FROM OPERATING ACTIVITIES 10,038 1,501
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of shares (Note 2) (37,511) --
Capital expenditures (1,828) (204)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES (39,339) (204)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 39,205 3,086
Repayment of long-term debt (3,732) (4,010)
Decrease in short-term borrowings (4,612) --
Proceeds from issuance of common stock 812 30
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES 31,673 (894)
-------- --------
Effect of foreign exchange rate changes on cash and
and cash equivalents (212) --
-------- --------
Net increase in cash and cash equivalents 2,160 403
Cash and cash equivalents, beginning of period 243 188
-------- --------
Cash and cash equivalents, end of period $ 2,403 $ 591
======== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON CASH FINANCING ACTIVITIES:
During the nine months ended December 31, 1996, common stock in the amount of
$656 and notes payable in the amount of $874 were issued upon the conversion of
$1,642 of warrants held by a lender to purchase common stock in the Company's
subsidiary, Decora Incorporated.
See accompanying notes to unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Integration of Financial Statements Reported on Form 10-K
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with Decora Industries, Inc.'s (the "Company") audited
financial statements included in its Form 10-K for the fiscal year ended March
31, 1997, filed with the Securities and Exchange Commission (File No. 0-16072)
(the "Form 10-K"). In the opinion of the Company, the accompanying unaudited
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the Company's financial position as of
December 31, 1997 and March 31, 1997, and the results of its operations and its
cash flows for the periods presented. Certain reclassifications of prior year
amounts have been made to conform to the current year's presentation.
NOTE 2. ACQUISITION OF SHARES
On October l, l997, the Company acquired 73.2 percent of the voting stock (the
"Shares") of Konrad Hornschuch AG ("Hornschuch") into a newly formed subsidiary
Decora Industries Deutschland GmbH ("DI Deutschland"). The Shares were acquired
directly from Hornschuch's two largest shareholders in private transactions for
total consideration of DM 61,582,280, or approximately $35,000,000. The
remaining voting stock of Hornschuch is held by minority shareholders. Since
October 1st, the Company has increased its ownership through open market
purchases and, in addition to such purchases, intends to purchase the remaining
shares pursuant to the German Takeover Codex within 18 months of the initial
acquisition.
Hornschuch's revenues for calender year 1996 were DM 202,044,414 or
approximately $133,979,000. (converted at 1.51/ German Mark). Hornschuch is the
manufacturer and marketer of d-c fix(R), one of the most popular consumer self
adhesive and surface covering brands outside of North America. In addition to
d-c fix(R), Hornschuch's decorative and self-adhesive product range includes
complementary table coverings and other decorative kitchen and table oriented
products. Hornschuch also manufacturers decorative and functional films for use
by OEMs in the automotive, building, furniture, handbag, shoe and interior
decoration markets. The Company sells its products through its own sales and
distribution network within Germany and the European continent and elsewhere
around the world. This sales network consists of approximately 80
representatives including both the Company's sales people and independent sales
agents.
This acquisition establishes Decora as the largest independent manufacturer of
decorative, self-adhesive consumer products worldwide. Most of Hornschuch's and
Decora's self-adhesive products utilize the same raw materials, construction of
product and manufacturing processes. The Company plans to use the combined
manufacturing abilities and distribution network to cross-manufacture and
cross-merchandise in order to aid its global expansion plans. As a result,
Decora anticipates ongoing benefits from manufacturing synergies between the
U.S. and German operations following the acquisition in areas such as raw
material purchasing, manufacturing capacity utilization, research and
development and product development/refinement.
The purchase of the Shares was funded with a combination of debt and equity,
including a loan secured by the purchased Shares of approximately $21,205,000 to
DI Deutschland from a German bank (the"Bank Loan"), a subordinated loan of
$18,000,000 in the United States (the "Subordinated Loan") provided by a pension
fund (the"Pension Fund") and a private placement of the Company's common stock
in the amount of $750,000. The Pension Fund was also granted Series A warrants
which are currently exercisable for the purchase of common stock of the Company.
The total amount raised was sufficient to fund the purchase of up to 75% of the
shares of Hornschuch, repay an existing subordinated debt of $2.9 million and
pay a portion of the $3.4 million in closing costs associated with the
transaction.
The Subordinated Loan bears 13% interest with the first cash interest payment
due in September 1998 and three principal payments of $6,000,000 each due in
September 2003, 2004 and 2005. The Bank Loan bears
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interest at German Libor plus 2.50% and requires quarterly interest payments
beginning in December 1997. Principal payments of approximately $1,700,000 each
are due semi-annually in March 1999 through September 2004. The Series A
warrants granted to the Pension Fund include the right to purchase approximately
1,818,000 shares of common stock at $5.00 per share representing approximately
17.5% of the fully diluted common shares of the Company. The Pension Fund has
also nominated a member to the Board of Directors of the Company.
The accompanying consolidated statements of income include the results of the
Company and Hornschuch since the date of the acquisition. Pro forma unaudited
consolidated operating results for the three months ended December 31, 1996 and
for the nine months ended December 31, 1997 and 1996, respectively, assuming the
acquisition had been made as of April 1, 1996, are summarized below (in
thousands, except per share amounts). The income statements of Hornschuch for
the three months ended December 31, 1997 and 1996 have been converted at 1.77/
German Mark and 1.53/ German Mark , respectively, while the nine months ended
December 31, 1997 and 1996 have been converted at 1.76/ German Mark and 1.50/
German Mark, respectively.
<TABLE>
<CAPTION>
Three months ended Nine months ended December 31,
------------------ ------------------------------
December 31, 1996 1997 1996
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<S> <C> <C> <C>
Net sales $ 44,365 $ 115,327 $ 131,602
Net income (loss) $ 856 $ (856) $ 72
Earnings (loss) per common share $ 0.12 $ (0.12) $ 0.01
Earnings (loss) per common share-
assuming dilution $ 0.11 $ (0.11) $ 0.01
</TABLE>
These pro forma results have been prepared for comparative purposes only and
include adjustments as a result of applying purchase accounting and conversion
to generally accepted accounting principles in the United States, such as
additional depreciation expense and cost of goods sold due to the step-up in the
basis of property, plant and equipment and inventory, respectively, goodwill
amortization and increased interest expense on acquisition debt. The pro forma
financial information is not necessarily indicative of the operating results
that would have occurred if the acquisition had taken place on the
aforementioned date, or of future results of operations of the consolidated
entities.
The purchase price of approximately $38.4 million (including closing costs of
approximately $3.4 million) has been allocated to the assets acquired and the
liabilities assumed as follows:
<TABLE>
<S> <C>
Cash $ 889
Accounts receivable 18,684
Inventories 21,474
Other current assets 1,275
Property, plant and equipment 39,808
Notes receivable 369
Goodwill 13,701
Intangibles 474
Deferred income taxes 1,028
Assets held for sale 702
Other non-current assets 659
Accounts payable 5,065
Accrued liabilities 15,883
Debt 18,694
Pension obligation 14,332
Minority interests 6,689
</TABLE>
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NOTE 3. Inventories
Inventories at December 31, 1997 and March 31, 1997 are comprised of the
following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
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(In thousands)
<S> <C> <C>
Raw materials $ 5,828 $ 3,194
Work-in-process 3,928 1,035
Finished goods 15,741 1,210
------- -------
$25,497 $ 5,439
======= =======
</TABLE>
The increase in finished goods inventory is a result of the acquisition of
Hornschuch, which has its own retail distribution. As a result of its
relationship with Rubbermaid, Decora is able to maintain relatively low levels
of finished goods inventory.
NOTE 4. Non-Recurring Charges
The consolidated statement of income for the nine months ended December 31, 1997
reflects certain non- recurring charges totaling $1,461,000. These charges are
partially a result of charges that the Company took in connection with the
acquisition of Hornschuch on October 1, 1997 (see Note 2). Of these charges,
$531,000 was recorded relative to severance costs for U.S. work force reductions
implemented in anticipation of operating synergies with Hornschuch and $141,000
was recorded relative to print tooling redundancies between the two operations.
An additional $789,000 was recorded to reserve against notes receivable which
the Company obtained in fiscal years 1996 and 1995 in conjunction with the sale
of previously discontinued operations.
NOTE 5. Earnings per share and reverse stock split
The Company adopted Statement of Financial Standard No. 128, as required, in the
quarter ended December 31, 1997 with all prior periods being restated. The
adoption did not have a significant impact on net income per share reported for
the three and nine months ended December 31, 1997 and 1996, respectively.
In December 1997, the Company's shareholders approved a one for five reverse
stock split which was effective December 29, 1997. The weighted average number
of common shares outstanding for all periods presented have been restated to
reflect the reverse stock split.
The number of shares of common stock and common stock equivalents used in the
computation of earnings per common share-assuming dilution for each period is
the weighted average number of common shares outstanding during the periods and,
if dilutive, common stock options, warrants and convertible securities which are
considered common stock equivalents. The following is a reconciliation of the
numerators and denominators for earnings per common share and earnings per
common share-assuming dilution for the three and nine months ended December 31,
1997 and 1996, respectively (in thousands, except per share data):
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<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1997 1996
--------------------------------- ---------------------------------
Per-share Per-share
Income Shares Amount Income Shares Amount
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income and income available
to common shareholders $ 241 7,331 $ 0.03 $ 406 7,094 $ 0.06
EFFECT OF DILUTIVE SECURITIES
Contingently issuable shares 519 400
Options 155 170
------ -----
DILUTED EPS
Income available to common share-
holders and assumed conversions $ 241 8,005 $ 0.03 $ 406 7,643 $ 0.05
</TABLE>
The total number of shares of common stock and common stock equivalents that
were not included in the computation of earnings per common share-assuming
dilution because they were anti-dilutive totaled approximately 2,954,000 and
1,245,000 for the three months ended December 31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1997 1996
---------------------------------- -----------------------------------
Per-share Per-share
Income Shares Amount Income Shares Amount
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income and income available
to common shareholders $ 335 7,204 $ 0.05 $2,003 7,027 $ 0.29
EFFECT OF DILUTIVE SECURITIES
Contingently issuable shares 519 400
Options 170 138
------ -----
DILUTED EPS
Income available to common share-
holders and assumed conversions $ 335 7,893 $ 0.04 $2,003 7,565 $ 0.27
</TABLE>
The total number of shares of common stock and common stock equivalents that
were not included in the computation of earnings per common share-assuming
dilution because they were anti-dilutive totaled approximately 2,954,000 and
1,245,000 for the nine months ended December 31, 1997 and 1996, respectively.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This quarterly report on Form 10-Q (the "10-Q") 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 under "Management 's Discussion and Analysis of
Financial Condition and Results of Operations" and located elsewhere herein
regarding industry prospects, anticipated synergies from the acquisition of
Hornschuch and the Company's financial position 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. Important factors that could cause
actual results to differ materially from the Company's expectations are
disclosed in this 10-Q and the Company's Form 10-K for its year ended March 31,
1997.
The condensed consolidated statements of income include the results of the
Company and of Hornschuch since October 1, 1997, the date of the acquisition.
RESULTS OF OPERATIONS AND FORWARD LOOKING INFORMATION
THREE MONTHS ENDED DECEMBER 31, 1997 VERSUS THREE MONTHS ENDED DECEMBER 31, 1996
The quarter ended December 31, 1997 reflects the first consolidated financial
statements of the Company which include the results of Hornschuch. Net sales
were $36,909,000 for the three months ended December 31, 1997 compared with
$9,533,000 in the three months ended December 31, 1996. The increase of
$27,376,000 was a result of the inclusion of Hornschuch net sales of $28,602,000
reflected in the three months ended December 31, 1997, offset by a $1,540,000
decrease in sales to the principal U.S. customer of Decora, Rubbermaid,
Incorporated ("Rubbermaid"). The sales decrease at Decora, as discussed in prior
quarters, was primarily a result of inventory reductions initiated by Rubbermaid
in an effort to implement a just-in-time replenishment of inventory levels as
well as inventory reductions by certain retailers. Export sales from the
Company's U.S. operations were $1,571,000 for the three months ended December
31, 1997 reflecting an increase of $302,000 as compared with the prior year
period. Sales of U.S. based non-core and industrial products were $136,000 for
the three months ended December 31, 1997 as compared with $126,000 in the prior
year period.
Gross profit was $9,715,000 or 26.3% to sales for the three months ended
December 31, 1997 as compared with $2,379,000, or 25.0% to sales for the prior
year period. This increase of $7,336,000 was primarily a result of the inclusion
of Hornschuch's gross profit of $7,662,000, or 26.8% to sales, reflected in the
three month period ended December 31, 1997, offset by a decrease of $326,000 in
gross profit at Decora's U.S. operations which was principally due to the
decreased sales discussed above.
Selling, general and administrative expenses were $7,153,000 or 19.4% to sales
for the three months ended December 31, 1997 as compared with $1,382,000, or
14.5% to sales, in the prior year period. The increase of $5,771,000 was a
result of the addition of Hornschuch's selling, general and administrative
expenses of $6,212,000 reflected in the three month period ended December 31,
1997, offset by a decrease of $441,000 in selling, general and administrative
expenses at Decora's U.S. operations as compared with the prior year period.
This decrease was primarily a result of certain cost saving measures implemented
in fiscal year 1997 and the workforce reductions in fiscal year 1998 (see Note 4
of unaudited consolidated financial statements).
Interest expense was $1,601,000 for the three months ended December 31, 1997 as
compared with $581,000 in the prior year period. The increase of $1,020,000 is
principally due to the addition of Hornschuch's interest expense of $373,000
from pre-existing operating loans and additional interest expense associated
with debt utilized for the acquisition of Hornschuch of approximately $830,000
which are reflected in the three month period ended December 31, 1997. Excluding
the impact of acquisition debt,
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interest expense at the U.S. operations of Decora was approximately $398,000
a decrease of $183,000 as compared with $581,000 in the prior year period. This
decrease was a result of lower borrowings and lower overall interest rates on
outstanding debt.
The Company recognized income before taxes and minority interest of $961,000 in
the three months ended December 31, 1997 an increase of $545,000 as compared
with the prior year period. This increase is principally the result of the
inclusion of Hornschuch's earnings for the three months ended December 31, 1997.
The increase in income before taxes and minority interest was also effected by
decreases in Decora's selling, general and administrative and interest expenses
in the three months ended December 31, 1997, offset by the interest expense
associated with the acquisition of Hornschuch. Net income for the three months
ended December 31, 1997 was $241,000, a decrease of $165,000 versus the prior
year period. Net income was effected by, in addition to the above noted
changes, a $509,000 increase in the provision for income taxes and the
deduction of the minority interest in the earnings of subsidiary in the
amount of $201,000.
The Company anticipates that its cash payments for taxes will remain at
historical levels in relation to pre-tax income levels due to the use of net
operating loss carry forwards to offset taxable income both in the U.S. and
Germany. The tax provision for the third quarter ended December 31, 1997
reflects an increase in the "effective" tax rate following the release of the
remaining net operating loss valuation allowance in fiscal 1997 (see Note 8 of
the Company's Form 10-K for the fiscal year ended March 31, 1997). The effective
tax rate of 54% for the quarter reflects the higher effective tax rate in
Germany as well as the impact of the treatment of certain acquisition costs.
Management anticipates that future blended effective tax rates will decline from
current levels.
The minority interest in earnings of subsidiary in the amount of $201,000
reflects the share of income in Germany allocated to the outstanding minority
shareholders. This amount represents the pro-rata share of the after tax income
of Hornschuch pursuant to German statutory accounting and is not impacted by
U.S. GAAP purchase accounting adjustments or interest expense associated with
the acquisition debt.
NINE MONTHS ENDED DECEMBER 31, 1997 VERSUS NINE MONTHS ENDED DECEMBER 31, 1996
The nine month period ended December 31, 1997 reflects the first consolidated
financial statements which include the results of Hornschuch. Net sales were
$56,364,000 for the nine months ended December 31, 1997 as compared with net
sales of $32,575,000 for the nine months ended December 31, 1996. The increase
of $23,789,000 was a result of the inclusion of Hornschuch net sales of
$28,602,000 reflected in the nine months ended December 31, 1997, offset by a
$5,485,000 decrease in sales to the principal U.S. customer of Decora,
Rubbermaid. The decrease in sales in the U.S. resulted primarily from the
inventory reductions discussed above. Export sales from the U.S. operations were
$3,647,000 for the nine months ended December 31, 1997 reflecting an increase of
$523,000 as compared with $3,124,000 in the prior year period. Sales of
U.S.-based non-core and industrial products were $541,000 as compared with
$394,000 in the prior year period.
Gross profit was $14,716,000 or 26.1% to sales for the nine months ended
December 31, 1997 as compared with $8,045,000 or 24.7% to sales for the nine
months ended December 31, 1996. The increase of $6,671,000 was a result of the
addition of Hornschuch's gross profit of $7,662,000 or 26.8% to sales reflected
in the nine month period ended December 31, 1997, offset by a decrease of
$991,000 in gross profit at the U.S. operations. The decrease in gross profit in
the U.S. was principally due to the decreased sales discussed above. Management
anticipates that future gross profit margins will be favorably impacted by
synergies between the U.S. and German operations which are now being
implemented.
Selling, general and administrative expenses were $9,720,000 or 17.3% to sales
for the nine months ended December 31, 1997 as compared with $4,111,000 or 12.6%
to sales in the nine months ended December 31, 1996. The increase of $5,609,000
was a result of the addition of Hornschuch's selling, general and administrative
expenses of $6,212,000 reflected in the nine month period ended December 31,
1997, offset by a decrease of $603,000 at the U.S. operations. The decrease
in selling, general and administrative expenses in the U.S. was primarily
a result of cost saving measures
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<PAGE> 13
implemented in fiscal year 1997 and the workforce reductions in the current
fiscal year (see Note 4 to unaudited consolidated financial statements).
Non-recurring charges of $1,461,000 were recorded in the nine months
ended December 31, 1997 (see Note 4 to unaudited consolidated financial
statements).
Interest expense was $2,439,000 for the nine months ended December 31, 1997 as
compared with $1,861,000 in the prior year period. The increase of $578,000 is
principally due to interest expense on Hornschuch's operating loans of $373,000
and the additional interest expense of approximately $830,000 associated with
the acquisition debt, offset by a decrease in interest expense at the U.S.
operations of approximately $625,000 which resulted from lower borrowings and
lower overall interest rates on outstanding debt.
The Company recognized income before taxes and minority interest of $1,096,000
in the nine months ended Deccember 31, 1997 as compared with $2,073,000 in the
prior year period. This decrease is principally a result of the non-recurring
charge of $1,461,000 as well as the increased interest expense associated with
the acquisition. These changes were partially offset by decreases in U.S.-based
selling, general and administrative and interest expenses and the addition of
Hornschuch's earnings since the acquisition resulting in a net change of
$977,000. Management anticipates that operational synergies between the U.S. and
German operations, which have yet to be reflected, will contribute to future
income.
Net income of $335,000 for the nine months ended December 31, 1997 was
$1,668,000 lower than the same period in the prior year as a result of the above
noted changes, a $490,000 increase in the provision for income taxes and the
deduction of $201,000 for the minority interest in earnings of subsidiary (see
income tax and minority provision discussions above).
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased from $6,253,000 at March 31, 1997 to
$15,671,000 at December 31, 1997, a net change of $9,418,000. The increase is
due to the addition of the working capital of Hornschuch of $10,663,000 at
December 31, 1997, partially offset by the reclassification of the balance on a
convertible debt of $1,250,000 (the "Convertible Note") from long-term to
short-term debt.
Capital expenditures for the nine months ended December 31, 1997 were $1,828,000
which includes expenditures of $848,000 at Hornschuch since the acquisition.
Decora's U.S. operation's expenditures are consistent with historical averages.
Plans for the remainder of the fiscal year are likely to result in expenditures
for the full year of approximately $1,200,000 for the U.S. operations, while
Hornschuch's expenditures for the period following the acquisition are expected
to total approximately $1,500,000.
Management believes that short-term liquidity needs will be satisfied through
its existing lines of credit, through cash flows generated by operations and
through the establishment of additional lines of credit, if required.
Additionally, the Company is evaluating alternative financing sources which may
be required to repay the Convertible Note which is convertible into common stock
and is due in May 1998. Other routine requirements of the Company are likely to
be met in the future through cash flows generated by operations and existing
credit facilities.
-13-
<PAGE> 14
DECORA INDUSTRIES, INC.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. Although
the Company is subject to certain legal proceedings, the ultimate outcome of
each proceeding will not, in the opinion of management, have a material adverse
effect on the Company's financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
In connection with the acquisition of Hornschuch, the Company issued 187,500
shares of the Company's common stock in a private placement of securities in
exchange for $750,000. Also, the Company granted Series A warrants to a
pension fund (the"Pension Fund") which are currently exercisable for the
purchase of 1,818,447 shares of the Company's common stock. The Series A
warrants were granted in connection with financing provided by the Pension
Fund for the acquisition of Hornschuch.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 18, 1997, at a special meeting of shareholders, the Company's
shareholders' ratified a one-for-five reverse stock split of its common stock
which was effective December 29, 1997. 29,350,172 shares were voted for the
proposal, 447,839 shares were voted against the proposal and 105,406 shares
abstained. The Company's shareholders also ratified a resolution to decrease the
number of shares of authorized common stock from 45,000,000 to 20,000,000.
29,995,618 shares were voted for the proposal, 421,964 shares were voted
against the proposal and 115,742 shares abstained.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
1. Stock Purchase Agreement by and between Baden-Wurtttenbergische Bank AG
and Newco dated as of December 3,1997, as amended
2. Stock Purchase Agreement by and between der Kunz Holding GmbH & Co. KG
and Newco dated As of August 18, 1997, as amended
3. Certificate of Designation of Series A Preferred Stock of Holdings
dated September 26, 1997
4. Note and Warrant Purchase Agreement dated as of September 26, 1997
among Decora,
-14-
<PAGE> 15
Incorporated (dba Decora Manufacturing) ("Borrower"), Decora
Industries, Inc. ("Holdings"), Dorrance Street Capital Advisors, LLC
("Agent") and Textron Master Trust ("Purchaser")
5. Common Warrant Certificate with respect to 2,136,534 shares of
Holdings, Common Stock, dated September 29, 1997 issued by Holdings to
Purchaser
6. Preferred Warrant Certificate with respect to 69,557 shares of Holdings
Series A Stock, dated September 29, 1997 issued by Holdings to
Purchaser
7. Contingent Common Warrant Certificate with respect to an indeterminate
number of shares of Holdings Common Stock, dated September 29, 1997
issued by Holdings to Purchaser
8. 13% Senior Subordinated Note doe 2005, dated September 29, 1997 issued
by Borrower in the principal amount of $18,000,000 to Purchaser
9. Inter-creditor Subordination Agreement, dated September 26, 1997, among
Fleet Bank, Purchaser, Borrower and Holdings
10. Assignment, Pledge and Security Agreement dated September 26, 1997 of a
$15,207,000 Note to Fleet Bank from Borrower
11. First Amendment to March 27, 1997 Note dated September 26, 1997, by and
between Fleet Bank and Borrower regarding a $1,000,000 note
12. Second Amendment to Loan and Security Agreement dated September 26,
1997 by and between Fleet Bank and Borrower regarding a $3,3354,167
note
13. Credit and Reimbursement Agreement Modification Agreement No. 2 dated
September 26, 1997, by and between Borrower and Fleet Bank in
connection with a letter of credit issued by Fleet Bank in favor of
Mellon Bank, FSB, as Trustee, concerning the issuance of $2,460,000
industrial revenue development bond
14. Sixth Amendment to Secured Revolving Line of Credit Agreement dated
September 26, 1997 by and between Fleet Bank and Borrower regarding a
note of up to $6,000,000
15. Note and Loan and Security Agreement Amendment No. 4 dated September
26, 1997 by and between Borrower and Fleet Bank regarding a $5,169,000
note
16. Promissory Note in the amount of $15,207,000 dated September 30, 1997
by Holdings to Borrower
17. Loan Agreement dated September 29, 1997 among Newco, Holdings and
Dresdner Bank AG
- ----------
All exhibits are incorporated by reference to the Company's Form 8-K
dated October 1, 1997.
(b) Reports on Form 8-K
1. Form 8-K dated October 1, 1997 reporting the acquisition of the 73.2%
of the stock of Konrad Hornschuch AG
2. Form 8-K/A dated October 1, 1997
-15-
<PAGE> 16
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
EVP ADMINISTRATION & FINANCE
DATED: February 17, 1998
-16-
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