<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------
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 June 30, 1998
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) Identification No.)
ONE MILL STREET
FORT EDWARD, NY 12828
(address of principal executive office) (Zip code)
Registrant's telephone number
(including area code) (518) 747-6255
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 90 days.
Yes [X] No [ ]
At August 11, 1998 there were 7,331,354 shares of Common Stock of the registrant
outstanding. This document consists of 18 pages.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
as of June 30, 1998 and March 31, 1998 3-4
Condensed Consolidated Statements of
Income for the Quarters ended
June 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows for the Quarters ended
June 30, 1998 and 1997 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 17
SIGNATURES 18
</TABLE>
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<PAGE> 3
]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,390 $ 1,682
Restricted cash 188 125
Accounts receivable, less allowance 24,209 26,049
Inventories 33,500 26,964
Deferred income taxes 1,913 1,913
Prepaid expenses and other current assets 2,003 1,481
-------- --------
Total current assets 90,203 58,214
Property and equipment, net 48,460 44,152
Notes receivable 519 626
Goodwill and other intangibles, net 77,799 22,478
Deferred income taxes 3,576 3,787
Other assets 5,451 1,959
-------- --------
$226,008 $131,216
======== ========
</TABLE>
(continued)
See accompanying Notes to Condensed Consolidated Financial Statements
-3-
<PAGE> 4
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,371 $ 9,577
Accrued liabilities 20,708 17,104
Current portion of long-term debt 19,137 10,472
Other current liabilities 4,352 4,928
--------- ---------
Total current liabilities 54,568 42,081
Long-term debt 133,498 50,644
Pension obligation 13,620 13,424
--------- ---------
Total liabilities 201,686 106,149
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Minority interest in subsidiary 7,311 6,978
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized -- --
Common stock, $.01 par value;
20,000,000 shares authorized;
7,331,000 shares issued and outstanding
at June 30, 1998 and March 31, 1998 73 73
Additional paid-in capital 33,775 33,775
Accumulated deficit (15,709) (14,984)
Cumulative translation adjustment (1,128) (775)
--------- ---------
Total shareholders' equity 17,011 18,089
--------- ---------
Total liabilities and shareholders' equity $ 226,008 $ 131,216
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE> 5
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales $ 45,842 $ 9,147
Cost of goods sold (see Note 2) 31,051 6,556
-------- --------
Gross profit 14,791 2,591
Selling, general and administrative expenses 8,972 1,340
-------- --------
Operating income 5,819 1,251
Interest expense 3,016 416
-------- --------
Income before income taxes, minority interest
in earnings of subsidiary and extraordinary item 2,803 835
Income tax provision 1,183 251
-------- --------
Income before minority interest in earnings
of subsidiary and extraordinary item 1,620 584
Minority interest in earnings of subsidiary 326 --
-------- --------
Income before extraordinary item 1,294 584
Extraordinary item, net of income taxes (see Note 2) (2,019) --
-------- --------
Net income (loss) $ (725) $ 584
-------- --------
Income before extraordinary item per share of common stock:
Basic $ 0.18 $ 0.08
Diluted 0.12 0.07
Extraordinary item per share of common stock:
Basic (0.28) --
Diluted (0.19) --
Net income (loss) per share of common stock:
Basic (0.10) 0.08
Diluted (0.07) 0.07
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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<PAGE> 6
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (725) $ 584
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Extraordinary item, net of income taxes 2,019 --
Depreciation and amortization 2,036 580
Minority interest in earnings of subsidiary 326 --
Deferred income tax provision -- 185
Net changes in current assets and liabilities 3,730 (1,278)
--------- ---------
Net cash provided by operating activities 7,386 71
Cash flows from investing activities:
Rubbermaid Acquisition (62,145) --
Acquisition of Hornschuch shares (207) --
Reduction in notes receivable 189 72
Purchase of property and equipment (1,618) (341)
--------- ---------
Net cash used in investing activities (63,781) (269)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 110,086 757
Repayment of long-term debt (28,418) (577)
Change in short-term borrowing 8,394 --
Proceeds from issuance of common stock -- 62
Net cash paid for debt penalties and fees (6,255) --
--------- ---------
Net cash provided by financing activities 83,807 242
--------- ---------
Effect of exchange rate fluctuations on cash
and cash equivalents (641) --
Net increase in cash and cash equivalents 26,771 44
Cash at beginning of period 1,807 243
--------- ---------
Cash at end of period $ 28,578 $ 287
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
-6-
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ("DII" and together with its
subsidiaries, the "Company") Audited Consolidated Financial Statements included
in its Form 10-K for the fiscal year ended March 31, 1998, filed with the
Securities and Exchange Commission (File No. 0-16072) (the "Form 10-K"). In the
opinion of the Company, the accompanying Unaudited Condensed Consolidated
Financial Statements contain all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for the
interim periods.
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting comprehensive income. Comprehensive income is the change in the
equity of a company, not including those changes that result from shareholder
transactions. The Company's components of other comprehensive income relate to
foreign currency translation adjustments. Total comprehensive income (loss) for
the three months ended June 30, 1998 and 1997 was $(937) and $584, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The new standard requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from the changes in the values of the derivatives would be accounted
for depending on whether it qualifies for hedge accounting. The Company will be
required to adopt this standard by the fiscal year beginning April 1, 2000, but
may adopt it sooner. Management does not believe that the adoption of this
statement will have a material impact on the financial statements.
Certain reclassifications of prior year amounts have been made to conform to the
current year presentation.
NOTE 2 - Acquisitions, Extraordinary Item and Acquisition Related One-time
Charge to Cost of Goods Sold
Acquisitions
On April 29, 1998, the Company acquired certain assets which had constituted
Rubbermaid's Decorative Coverings Group (the "DCG") for a purchase price of
approximately $62.5 million (the "Rubbermaid Acquisition"). The assets acquired
included inventory, certain manufacturing equipment, tradenames and all other
rights to three product lines; (i) the Con-Tact self-adhesive line which is
manufactured by Decora, (ii) the Shelf Liner light-adhesive line which was
manufactured by Rubbermaid, and (iii) The Grip Liner non-adhesive covering line
which is manufactured by a third party pursuant to the terms of an exclusive
manufacturing agreement.
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<PAGE> 8
The acquisition cost for the DCG of approximately $64.6 million (purchase price
of $62.5 million, adjusted for acquisition related closing costs of
approximately $3.6 million, less amounts allocated to transition services of
$1.5 million) was allocated to the assets acquired as follows:
<TABLE>
<S> <C>
Inventory $7,500,000
Property and equipment 1,000,000
Intangible assets:
Con-Tact tradename 20,300,000
Customer relationships 27,400,000
Goodwill 8,400,000
</TABLE>
In order to finance the Rubbermaid Acquisition and to improve its capital
structure, the Company issued $112,750,000 of 11.0% senior secured notes (the
"Notes"). The Notes were issued with an original issue discount of $2,664,000
resulting in gross cash proceeds of $110,086,000 with interest payable
semi-annually and no principal payments required prior to maturity on May 1,
2005. In addition, Konrad Hornschuch AG ("Hornschuch"), a 76% owned subsidiary,
borrowed under its secured credit facilities approximately $10.0 million. Of the
total amount raised of approximately $120,086,000, approximately $58,300,000 was
used for the Rubbermaid Acquisition, approximately $32,100,000 was used to
refinance existing debt (including an $18.0 million 13% subordinated loan (the
"Subordinated Loan")), approximately $9,300,000 will be used to finance a tender
offer for the remaining 24% equity interest in Hornschuch, approximately
$7,500,000 was used to pay acquisition and financing related transaction fees
and expenses and the remaining net proceeds will be used for general corporate
purposes including the payment of the remaining transaction related fees and
expenses, working capital requirements and the relocation of manufacturing
assets purchased as part of the Rubbermaid Acquisition. At the same time Decora
Incorporated ("Decora"), a wholly owned subsidiary of the Company, entered into
a three year, $15.0 million secured revolving line of credit (the "Credit
Facility"). As of June 30, 1998, the Credit Facility had not been utilized and
availability is based on a factor of the amount of accounts receivable and
inventory held by Decora.
Direct financing transaction costs incurred of approximately $4.4 million were
deferred and are being amortized, using the effective interest rate method, over
the term of the respective financings.
The accompanying Condensed Consolidated Statements of Income include the results
of the Company (including Hornschuch since the acquisition of 73.2% of the
outstanding shares on October 1, 1997 (the "Hornschuch Acquisition")) and
reflect the effects of the Rubbermaid Acquisition since April 29, 1998, the date
of the acquisition. Pro forma unaudited consolidated operating results for the
three months ended June 30, 1997, assuming the Hornschuch Acquisition had been
made as of April 1, 1997, are summarized below (in thousands, except per share
amounts). Since the Rubbermaid Acquisition was an acquisition of product lines
and comparative information is not available, the pro forma unaudited
consolidated operating results for the three months ended June 30, 1997 reflect
only the effect of the Hornschuch Acquisition. The statement of income for
Hornschuch for
-8-
<PAGE> 9
the three months ended June 30, 1997 has been translated at DM1.7131 per dollar.
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1997
-------------------
(In thousands)
<S> <C>
Sales $ 40,791
Net loss (56)
Basic net loss per common share (0.01)
Diluted net loss per common share (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 due to the step-up in the basis of property and
equipment, goodwill amortization and increased interest on the Hornschuch
Acquisition debt. The pro forma 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.
Extraordinary Item
As noted above, in conjunction with the Rubbermaid Acquisition, the Company
raised sufficient funds through the issuance of the 11.0% Notes to refinance
$32.1 million of its existing debt, including the 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 three months ended June 30, 1998.
Acquisition Related One-time Charge to Cost of Goods Sold
The results for the three months ended June 30, 1998 were also impacted by a
one-time 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. Pursuant to purchase accounting, the manufacturers profit related
to such inventory must be reflected in the inventory basis upon the sale of such
inventory.
-9-
<PAGE> 10
NOTE 3 - Inventories
Inventories at June 30, 1998 and March 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
----------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials $ 6,553 $ 7,335
Work-in-Process 5,079 4,634
Finished Goods 21,868 14,995
----------------- ---------------
$ 33,500 $ 26,964
================= ===============
</TABLE>
NOTE 4 - Net Income Per Share
The Company adopted SFAS 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 months ended
June 30, 1998 and 1997.
The number of shares of common stock and common stock equivalents used in the
computation of net income 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 denominators for determining basic and diluted net income per common
share for the three months ended June 30, 1998 and 1997. The numerators were the
same for both calculations (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998 June 30, 1997
------------- -------------
WEIGHTED AVERAGE SHARES:
<S> <C> <C>
Shares outstanding at beginning of period 7,331 7,136
Shares issued -- --
------ ------
Shares used in the calculation of Basic EPS 7,331 7,136
Effect of dilutive securities:
Contingently issuable shares 327 541
Options/ Warrants 2,800 367
------ ------
Adjusted weighted average shares 10,458 8,044
====== ======
</TABLE>
The total number of shares of common stock and common stock equivalents that
were not included in the computation of diluted income per common share because
they were anti-
-10-
<PAGE> 11
dilutive was approximately 424,000 and 361,000 for the three months ended June
30, 1998 and 1997, respectively.
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 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 company and industry prospects are forward-looking statements.
Although management 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 management's expectations are disclosed
in this 10-Q and in the annual report of Decora Industries Inc. ("DII", and
together with its subsidiaries, the "Company") on Form 10-K for the year ended
March 31, 1998.
Prior to October 1997, the Company was operating primarily as a contract
manufacturer with approximately 90% of its sales to one customer, Rubbermaid
Incorporated ("Rubbermaid"). Since October 1, 1997, the Company has been
transformed from a contract manufacturer into a vertically integrated,
world-wide leader in the self-adhesive consumer decorative products category
through the October 1, 1997 acquisition of approximately 76% of the shares of
Konrad Hornschuch AG by the Company's wholly-owned subsidiary, Decora Industries
Deutschland GmbH (the "Hornschuch Acquisition") and the April 29, 1998
acquisition of certain assets from Rubbermaid, including the Con-Tact brand
name, which constituted Rubbermaid's Decorative Covering Group (the "DCG") by
the Company (the "Rubbermaid Acquisition"). Since the Condensed Consolidated
Statements of Income of the Company for the three months ended June 30, 1998
reflect the results of Hornschuch (unless otherwise noted in this section
"Hornschuch" refers collectively to Konrad Hornschuch AG and Decora Industries
Deutschland GmbH) and the effect of approximately two months of results
following the Rubbermaid Acquisition; and since the three months ended June 30,
1997 do not reflect the results for either Hornschuch or the Rubbermaid
Acquisition; the results for the three months ended June 30, 1998 may not be
directly comparable with the three months ended June 30, 1997.
In the following discussion, dollar amounts are stated in thousands:
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 VS. THREE MONTHS ENDED JUNE 30, 1997.
The Company's Condensed Consolidated Financial Statements for the three months
ended June 30, 1998 are the first to reflect the April 29, 1998 Rubbermaid
Acquisition. Net sales for the three months ended June 30, 1998 were $45,842
(reflecting the impact of the Hornschuch Acquisition during the entire period
and the Rubbermaid Acquisition for part of the three month period) as compared
with net sales of $9,147 for the three months
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<PAGE> 12
ended June 30, 1997. The increase of $36,695 resulted principally from the
inclusion of Hornschuch net sales of $29,024 in the current year quarter, and an
increase in sales of $7,711 in the U.S. operations. The increase in net sales in
the United States partially reflects the impact of the Rubbermaid Acquisition
during the months of May and June of 1998. Export and industrial net sales from
U.S. operations were $1,488 for the three months ended June 30, 1998, reflecting
an increase of $370, as compared with $1,118 in the three months ended June 30,
1997.
Gross profit was $14,791, or 32.3% of net sales, for the three months ended June
30, 1998 as compared with $2,591, or 28.3% of net sales, for the three months
ended June 30, 1997. The increase of $12,200 was a result of reflecting
Hornschuch's gross profit of $9,090 in the three months ended June 30, 1998, and
an increase of $3,110 in gross profit in the U.S. operations. The increase in
gross margin in the U.S. operations is principally due to the effect of the
Rubbermaid Acquisition included in the results, primarily for May and June of
1998, partially offset by a one-time charge of $797 for the step-up in basis on
DCG inventory acquired in the Rubbermaid Acquisition. Excluding the impact of
this one-time charge, total Company gross profit would have been $15,588 or
34.0% of net sales.
Selling, general and administrative expenses were $8,972, or 19.6% of net sales,
for the three months ended June 30, 1998 as compared with $1,340, or 14.7% of
net sales, in the three months ended June 30, 1997. The increase of $7,632 was a
result of the addition of Hornschuch's selling, general and administrative
expenses of $6,937 in the three months ended June 30, 1998 and an increase of
$696 at the U.S. operations. The increase in selling, general and administrative
expenses in the United States was primarily due to the incremental sales and
marketing costs incurred in the three months ended June 30, 1998 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 was $3,016 for the three months ended June 30, 1998 as compared
with $416 in the prior year quarter. The increase of $2,600 is principally due
to interest expense relative to the $112,750 of senior secured notes issued
April 29, 1998 (the "Notes") of $2,142, interest expense on Hornschuch's
operating loans of $163 and additional interest expense of approximately $362
associated with the Hornschuch Acquisition debt not refinanced.
The Company recognized income before income taxes, minority interest in earnings
of subsidiary and extraordinary item of $2,803 in the three months ended June
30, 1998, as compared with $835 in the three months ended June 30, 1997. This
increase is principally a result of the earnings of Hornschuch.
The Company recognized an extraordinary charge relative to the repayment of debt
in April 1998 in conjunction with the Rubbermaid Acquisition. A related
prepayment penalty and the write-off of unamortized deferred loan costs totaling
approximately $2,019 (net of income taxes) were reflected as an extraordinary
item in the three months ended June 30, 1998.
-12-
<PAGE> 13
Net loss of $725 for the three months ended June 30, 1998 was $1,319 lower than
the three months ended June 30, 1997 as a result of the above-noted changes, a
$932 increase in the provision for income taxes and a $326 deduction for the
minority interest in earnings of Hornschuch.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are cash from operations and
borrowings under its credit facilities. The Company's primary capital
requirements include debt service, capital expenditures, working capital needs
and financing of acquisitions.
The Company's net working capital increased from $16,133 at March 31, 1998 to
$35,635 at June 30, 1998, an increase of $19,502. The increase is due primarily
to the proceeds from the issuance of long-term debt.
Consolidated cash balances as of June 30, 1998 were $28,578 which are limited by
certain security agreements, minority interests and debt covenants as to use.
During recent fiscal periods, DII's subsidiaries generated cash from operations
which was utilized primarily to fund working capital requirements and repay
debt, and DII was funded with management fees, proceeds of notes receivable and
proceeds from the private placement of equity securities.
Net cash flow from operating activities for the three months ended June 30, 1998
was $7,386 versus cash flow from operating activities of $71 for the three
months ended June 30, 1997. A decrease in net income was offset primarily by
increased depreciation and amortization, the extraordinary charge and the
increase in net working capital noted above.
Capital expenditures for the three months ended June 30, 1998 were $1,618
(including expenditures of $1,290 at Hornschuch) versus $341 for the three
months ended June 30, 1997. Approximately $1,100 of the expenditures at
Hornschuch relate to a progress payment on a new printing machine. Expenditures
at DII's U.S. operations are consistent with historical averages. The Company
anticipates increasing spending on capital projects to approximately $10,000
this fiscal year. Additionally, as a part of the Rubbermaid Acquisition,
management anticipates spending approximately $2,500 to move the Shelf Liner
equipment from Ohio and install it at the Fort Edward, New York facility of
Decora, Incorporated ("Decora") and approximately $2,000 to install systems and
pay related expenses necessary to establish Decora's new sales, distribution and
customer service functions.
The Company's consolidated operations and cash flow are significantly exposed to
changes in exchange rates between the U.S. dollar and the Deutsche Mark, as well
as, to a limited extent, other foreign currencies. To date, the Company has
engaged in limited hedging transactions to protect against fluctuations in
exchange rates relative to the payment of interest on the senior loans utilized
to fund the Hornschuch Acquisition. Although the Company plans to utilize
limited hedging strategies in the future as the need arises, its profitability
will continue to be affected by fluctuations in foreign exchange rates.
-13-
<PAGE> 14
Concurrent with the April 1998 Rubbermaid Acquisition, DII issued $112,750 of
senior secured notes (the "Notes"). The Notes were issued with an original issue
discount of $2,664 resulting in gross cash proceeds of $110,086. The interest
rate on the Notes is 11% which is paid semi-annually and no principal payments
are required prior to maturity on May 1, 2005. In addition, (i) Hornschuch
borrowed approximately $10.0 million under its secured credit facilities; (ii)
Hornschuch loaned Decora such $10.0 million pursuant to a secured intercompany
note, the proceeds of which were used by Decora to partially finance the
Rubbermaid Acquisition; and (iii) Decora entered into a three year, $15.0
million secured revolving line of credit facility which, as of June 30, 1998,
has not been utilized. Availability under the credit line is based on a factor
of the amount of accounts receivable and inventory held by Decora. In addition
to financing the Rubbermaid Acquisition, these borrowings refinanced
approximately $32.1 million of debt and related fees of DII and Decora, will
finance a tender offer for the remaining 24% equity interest in Hornschuch and
will be used for general corporate purposes including working capital
requirements and the relocation of manufacturing assets noted above.
OUTLOOK
The completion of the Hornschuch Acquisition and the Rubbermaid Acquisition
represents two significant achievements for the Company and not only
transitioned the Company into a world-leading manufacturer and marketer, but
also creates significant opportunities for strengthening the Company's market
position and increasing sales world-wide. During the current fiscal year, the
Company intends to focus its efforts on areas which are key to achieving its
operational and financial objectives, including the following:
- Enhance the North American Con-Tact brand acquired from
Rubbermaid and expand market share.
- Diversify the use of Con-Tact by consumers and expand
distribution into other segments.
- Complete the development of its North American sales and
distribution infrastructure.
- Expand international sales.
- Implement manufacturing and product synergies between North
American and German operations.
As a result of the financing associated with the Rubbermaid Acquisition and
Hornschuch Acquisition, the Company has substantial debt in relation to its
shareholders' equity, as well as substantial debt service requirements that are
significant compared to its cash flow from operations. At June 30, 1998, the
Company had consolidated outstanding indebtedness of $152,635 representing
approximately 90% of total capitalization. Management believes that it has
enhanced its competitive position and cash flow as a result of the acquisitions
and that the investments it is making in its sales and marketing efforts will
enhance future cash flow. The Company's ability to service its debt will depend
upon the Company's future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, many
of which are beyond the Company's control. If the Company is unable to service
its indebtedness, it may be required to alter its business plans, restructure or
refinance its indebtedness or seek additional equity capital.
-14-
<PAGE> 15
The Company did not acquire the distribution or sales and marketing operations
from Rubbermaid as part of the Rubbermaid Acquisition. In the three months ended
June 30, 1998, the Company made significant progress in establishing operations
which can fulfill such distribution and sales and marketing requirements
including the filling of key sales and marketing positions, the establishment of
the North American headquarters in Cleveland Ohio, the selection of a new
management information system and the transfer of most major customer
relationships. Additionally, Rubbermaid continues to manufacture the Shelf Liner
product line until such operations are relocated to Decora's facility in Fort
Edward, New York (such relocation is currently planned for November/ December
1998). For a nine-month transition period which ends in January 1999, Rubbermaid
will continue to provide manufacturing, warehousing, shipping, order entry,
customer service, billing and collection functions for Decora on a contractual
basis, until such activities have been transferred to Decora. While Decora plans
to begin the transition of accounts on October 15, 1998, and to complete the
transition prior to January 1999, the inability to totally or partially complete
the transition as planned could result in unplanned investment requirements,
increased operating costs, loss of sales, loss of customers or reduction in
operating cash flow available to service required debt payments.
The Company's foreign operations are conducted primarily through Hornschuch. The
Company's European operations, representing approximately 63% of the Company's
net sales for the three months ended June 30, 1998, are subject to special risks
inherent in doing business outside the United States, including governmental
instability, war and other international conflicts, civil and labor
disturbances, requirements of local ownership, partial or total expropriation,
nationalization, currency devaluation, foreign exchange controls and foreign
laws and policies, each of which may limit the movement of assets or funds or
result in the deprivation of contract rights or the taking of property without
fair compensation.
Certain indirect subsidiaries of Hornschuch own two commercial real estate
properties in Germany which are unrelated to its operating business and which
collateralize bank loans totaling approximately $16,199. Currently, the
properties are producing rental income sufficient to cover interest payments.
Management is attempting to sell the two properties and is in contract
negotiations on one of them; however, there is no assurance that the properties
can be sold in the near term, or at all, at a price which will be sufficient to
repay the loans in full. If not, Hornschuch could be required to pay amounts due
under the loans, which could have a material adverse effect on Hornschuch's
business and financial condition. Management believes, however, that it can
complete the sales as planned and that it can finance any shortfall in the sales
price through its current banking relationships.
The Company has conducted a review of its electronic data processing systems to
assess what changes might be needed for those systems to recognize the year 2000
and not to treat any date after December 31, 1999 as a date during the twentieth
century. In conjunction with the Rubbermaid Acquisition, during fiscal 1999,
Decora is purchasing and installing new electronic data processing systems which
will replace its existing systems and will be fully year 2000 compliant.
Management believes that all such changes can be implemented in an orderly and
timely manner. Costs to modify existing systems are not anticipated to be
material while the cost for installation of the new systems described above are
anticipated to total approximately $1,000. The Company plans to try to
coordinate its response to these issues with those third parties with whom the
Company engages in electronic transactions,
-15-
<PAGE> 16
both domestically and internationally, including suppliers, customers, creditors
and financial service organizations, although the Company has not yet fully
assessed and cannot effectively ensure against all potential Year 2000 problems
that might originate with third parties. 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 and the Company's financial condition and
results of operations could be materially adversely affected.
-16-
<PAGE> 17
DECORA INDUSTRIES, INC.
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 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not Applicable.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the three months ended June
30, 1998:
1. Form 8-K dated March 31, 1998 reporting the Company's agreement to
acquire the DCG from Rubbermaid.
2. Form 8-K/A dated October 1, 1997 (filed April 22, 1998) restating item
7 to correct certain financial information regarding Hornschuch.
3. Form 8-K dated April 29, 1998 reporting the completion of the Company's
acquisition of the DCG.
-17-
<PAGE> 18
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 INDUSTRIES, INC.
(REGISTRANT)
BY /s/ TIMOTHY N. BURDITT
---------------------------
Timothy N. Burditt
EVP Administration & Finance
DATED: August 14, 1998
-18-
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