<PAGE> 1
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 September 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 November 9, 1998 there were 7,340,385 shares of Common Stock of the
registrant outstanding. This document consists of 22 pages.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
as of September 30, 1998 and March 31, 1998 3-4
Condensed Consolidated Statements of
Income for the Three and Six Months ended
September 30, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows for the Six Months ended
September 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 12
PART II OTHER INFORMATION 19
SIGNATURES 22
</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>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,675 $ 1,682
Restricted cash 246 125
Accounts receivable, less allowance 25,964 26,049
Inventories 37,399 26,964
Deferred income taxes 1,913 1,913
Prepaid expenses and other current assets 1,898 1,481
-------- --------
Total current assets 95,095 58,214
Property and equipment, net 51,338 44,152
Goodwill and other intangibles, net 81,144 22,478
Deferred income taxes 3,965 3,787
Other assets 7,341 2,585
-------- --------
$238,883 $131,216
======== ========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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<PAGE> 4
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,812 $ 9,577
Accrued liabilities 27,583 17,104
Current portion of long-term debt 18,199 10,472
Other current liabilities 6,726 4,928
--------- ---------
Total current liabilities 61,320 42,081
Long-term debt 134,842 50,644
Pension obligation 14,623 13,424
--------- ---------
Total liabilities 210,785 106,149
--------- ---------
Minority interest in subsidiary 7,473 6,978
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value;
5,000,000 shares authorized -- --
Common stock, $.01 par value;
20,000,000 shares authorized;
7,340,000 and 7,331,000 shares issued
and outstanding at September 30, 1998
and March 31, 1998, respectively 73 73
Additional paid-in capital 33,627 33,775
Accumulated deficit (14,388) (14,984)
Cumulative translation adjustment 1,313 (775)
--------- ---------
Total shareholders' equity 20,625 18,089
--------- ---------
Total liabilities and shareholders' equity $ 238,883 $ 131,216
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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<PAGE> 5
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $ 49,018 $ 10,308 $ 95,496 $ 19,455
Cost of goods sold (see Note 2) 29,681 7,898 61,368 14,454
-------- -------- -------- --------
Gross profit 19,337 2,410 34,128 5,001
Selling, general and administrative
expenses 13,395 1,226 22,367 2,567
Non-recurring charges -- 1,461 -- 1,461
-------- -------- -------- --------
Operating income (loss) 5,942 (277) 11,761 973
Interest expense, net 3,656 421 6,672 838
-------- -------- -------- --------
Income (loss) before income taxes,
minority interest in earnings of
subsidiary and extraordinary item 2,286 (698) 5,089 135
Income tax provision (benefit) 932 (209) 2,115 41
-------- -------- -------- --------
Income (loss) before minority interest
in earnings of subsidiary and
extraordinary item 1,354 (489) 2,974 94
Minority interest in earnings of
subsidiary 33 -- 359 --
-------- -------- -------- --------
Income (loss) before extraordinary item 1,321 (489) 2,615 94
Extraordinary item, net of income
taxes (see Note 2) -- -- (2,019) --
-------- -------- -------- --------
Net income (loss) $ 1,321 $ (489) $ 596 $ 94
======== ======== ======== ========
Per share of common stock:
Income (loss) before extraordinary item
Basic $ 0.18 $ (0.07) $ 0.36 $ 0.01
Diluted 0.16 (0.07) 0.31 0.01
Extraordinary item
Basic -- -- (0.28) --
Diluted -- -- (0.24) --
Net income (loss)
Basic 0.18 (0.07) 0.08 0.01
Diluted 0.16 (0.07) 0.07 0.01
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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<PAGE> 6
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 596 $ 94
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item, net of income taxes 2,019 --
Depreciation and amortization 4,609 1,246
Amortization of debt discount and fees 481 33
Provision for notes receivable -- 789
Minority interest in earnings of subsidiary 359 --
Deferred income tax provision -- (116)
Net changes in current assets and liabilities 5,083 895
Other, net (792) --
--------- ---------
Net cash provided by operating activities 12,355 2,941
--------- ---------
Cash flows from investing activities:
Rubbermaid Acquisition (63,312) --
Acquisition of Hornschuch shares (667) --
Reduction in notes receivable 66 --
Purchase of property and equipment (3,032) (466)
--------- ---------
Net cash used in investing activities (66,945) (466)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 110,086 --
Repayment of long-term debt (28,913) (2,253)
Change in short-term borrowing 6,280 --
Proceeds from issuance of common stock -- 62
Payment of warrant exchange obligation (200) --
Net cash paid for debt penalties and fees (7,087) --
--------- ---------
Net cash provided by (used in) financing activities 80,166 (2,191)
--------- ---------
Effect of exchange rate fluctuations on cash
and cash equivalents 538 --
--------- ---------
Net increase in cash and cash equivalents 26,114 284
Cash and cash equivalents at beginning of period 1,807 243
--------- ---------
Cash and cash equivalents at end of period $ 27,921 $ 527
========= =========
</TABLE>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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<PAGE> 7
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 ("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 September 30, 1998 and 1997 was $3,762,000 and
($489,000), respectively; and for the six months ended September 30, 1998 and
1997 was $2,684,000 and $94,000, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This 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.
The acquisition cost for the DCG of approximately $64.6 million (purchase price
of $62.5 million, adjusted for acquisition related closing costs of
approximately $3.6 million, less amounts related to transition services of $1.5
million) was allocated to the assets acquired as follows:
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<PAGE> 8
<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
with interest payable semi-annually and no principal payments required prior to
maturity on May 1, 2005. In addition, Konrad Hornschuch AG ("Hornschuch"), a 77%
owned subsidiary, borrowed under its secured credit facilities approximately
$10.0 million. Of the total amount raised, approximately $58,300,000 was used
for the Rubbermaid Acquisition, approximately $32,100,000 was used to refinance
existing debt and related fees (including an $18.0 million 13% subordinated loan
(the "Subordinated Loan")), approximately $8,700,000 will be used to finance a
tender offer for the remaining 23% 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 are being 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"). Its availability is based on a factor of the amount of accounts
receivable and inventory held by Decora. As of September 30, 1998, the Credit
Facility had not been utilized.
Direct financing transaction costs incurred of approximately $4.9 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 and six months ended September 30, 1997, assuming the Hornschuch
Acquisition had been made as of April 1, 1997, are summarized below (in
thousands, except per share amounts). The Rubbermaid Acquisition was an
acquisition of product lines and comparative information is not available;
therefore, the pro forma unaudited consolidated operating results for the three
and six months ended September 30, 1997 reflect only the effect of the
Hornschuch Acquisition.
-8-
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1997
------------------ -----------------
(In thousands, except per share data)
<S> <C> <C>
Net sales $ 38,454 $ 79,245
Net loss (478) (534)
Basic net loss per common share (0.07) (0.07)
Diluted net loss per common share (0.07) (0.07)
</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 and related fees, 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 six months
ended September 30, 1998.
Acquisition Related One-time Charge to Cost of Goods Sold
The results for the six months ended September 30, 1998 were also impacted by a
one-time non-cash charge of approximately $797,000 for the step-up in basis of
certain DCG inventory acquired in the Rubbermaid Acquisition. This charge
related primarily to inventory sold by Decora to Rubbermaid prior to the
Rubbermaid Acquisition. Pursuant to purchase accounting, the manufacturer's
profit related to such inventory must be reflected in the inventory basis upon
the sale of such inventory.
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<PAGE> 10
NOTE 3 - Inventories
Inventories at September 30, 1998 and March 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials $ 6,974 $ 7,335
Work-in-Process 7,738 4,634
Finished Goods 22,687 14,995
------- -------
$37,399 $26,964
======= =======
</TABLE>
NOTE 4 - Net Income Per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
("Earnings Per Share"), 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 (loss) per common share reported for the three and six
months ended September 30, 1998 and 1997.
The number of shares of common stock and common stock equivalents used in the
computation of net income (loss) 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
(loss) per common share for the three and six months ended September 30, 1998
and 1997. The denominators for the three months ended September 30, 1998 are the
same for both calculations as including the contingently issuable shares and
options/warrants would have been anti-dilutive. The numerators were the same for
both calculations for all periods (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES:
Shares outstanding at beginning
of period 7,331 7,144 7,331 7,140
Shares issued 2 -- 1 --
----- ----- ----- -----
Shares used in the calculation
of Basic EPS 7,333 7,144 7,332 7,140
Effect of dilutive securities:
Contingently issuable shares 339 -- 339 485
Options/ Warrants 537 -- 664 44
----- ----- ----- -----
Adjusted weighted average shares 8,209 7,144 8,335 7,669
===== ===== ===== =====
</TABLE>
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<PAGE> 11
The total number of shares of common stock and common stock equivalents that
were not included in the computation of diluted income (loss) per common share
because they were anti-dilutive was approximately 679,000 and 1,329,000 for the
three months ended September 30, 1998 and 1997, respectively, and approximately
484,000 and 1,076,000 for the six months ended September 30, 1998 and 1997,
respectively.
For the three months ended June 30, 1998, the weighted average shares - fully
diluted were incorrectly stated in the Company's Form 10-Q for that period. Due
to a clerical error, the Company reflected 10,458,000 weighted average shares -
assuming dilution. The correct number of weighted average shares should have
been 8,465,000. The diluted income before extraordinary item per share of common
stock and diluted loss per share of common stock should have been reported as
$0.15 and $(0.09), respectively, instead of $0.12 and ($0.07).
NOTE 5 - Reclassification of Prior Period Amounts
In the three and six months ended September 30, 1998, outbound freight charges
are classified as cost of goods sold. In the three months ended June 30, 1998,
North American outbound freight charges of approximately $656,000 were reflected
as reductions of net sales.
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<PAGE> 12
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 (i) the October 1, 1997 acquisition of approximately 73.2% of the shares
of Konrad Hornschuch AG by the Company's wholly-owned subsidiary, Decora
Industries Deutschland GmbH (the "Hornschuch Acquisition"), and (ii) the April
29, 1998 acquisition of certain assets from Rubbermaid, including the Con-Tact
brand name, which constituted Rubbermaid's Decorative Coverings Group (the
"DCG") (the "Rubbermaid Acquisition"). As a result of additional market
purchases, the Company now owns approximately 77% of the shares of Konrad
Hornschuch AG. Since the Condensed Consolidated Statements of Income of the
Company for the three and six months ended September 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 and five months, respectively, of
results following the Rubbermaid Acquisition, and since the three and six months
ended September 30, 1997 do not reflect the results for either Hornschuch or the
Rubbermaid Acquisition, the results for the three and six months ended September
30, 1998 are not directly comparable with the three and six months ended
September 30, 1997.
In the following discussion, dollar amounts are stated in thousands:
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 VS. THREE MONTHS ENDED SEPTEMBER 30, 1997.
The Company's Condensed Consolidated Financial Statements for the three months
ended September 30, 1998 include the operations arising from the October 1, 1997
Hornschuch Acquisition and the April 29, 1998 Rubbermaid Acquisition. Net sales
for the three months ended September 30, 1998 were $49,018 as compared with net
sales of $10,308 for the three months ended September 30, 1997. The increase of
$38,710 resulted principally from the inclusion of Hornschuch net sales of
$27,628 in the current year quarter and the Rubbermaid Acquisition contributed
to an increase in sales of $11,476 in the U.S. operations.
-12-
<PAGE> 13
Gross profit was $19,337, or 39.4% of net sales, for the three months ended
September 30, 1998 as compared with $2,410, or 23.4% of net sales, for the three
months ended September 30, 1997. The increase of $16,927 and the increase in
gross profit margin reflect the impact of the Hornschuch Acquisition and the
Rubbermaid Acquisition and the fact that all subsidiaries now sell directly to
retailers.
Selling, general and administrative expenses were $13,395, or 27.3% of net
sales, for the three months ended September 30, 1998 as compared with $1,226, or
11.9% of net sales, in the three months ended September 30, 1997. The increase
of $12,169 was a result of the addition of Hornschuch's selling, general and
administrative expenses and an increase at the U.S. operations reflecting 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 $3,656 for the three months ended September 30, 1998 as
compared with $421 in the prior year quarter. The increase of $3,235 is
principally due to approximately $3,400 of interest expense on the $112,750 of
senior secured notes issued April 29, 1998 to help finance the Rubbermaid
Acquisition (the "Notes").
The Company recognized income before income taxes, minority interest in earnings
of subsidiary and extraordinary item of $2,286 in the three months ended
September 30, 1998, as compared with a loss of $698 in the three months ended
September 30, 1997. This increase is principally a result of the increase in
earnings resulting from the Rubbermaid Acquisition and the earnings of
Hornschuch. The results in the prior year were also impacted by $1,461 of
non-recurring charges.
Net income of $1,321 for the three months ended September 30, 1998 was $1,810
higher than the three months ended September 30, 1997 as a result of the
above-noted changes, a $1,141 increase in the provision for income taxes and a
$33 deduction for the minority interest in earnings of Hornschuch.
SIX MONTHS ENDED SEPTEMBER 30, 1998 VS. SIX MONTHS ENDED SEPTEMBER 30, 1997.
The Company's Condensed Consolidated Financial Statements for the six months
ended September 30, 1998 include the operations arising from the Hornschuch
Acquisition and the Rubbermaid Acquisition. Net sales for the six months ended
September 30, 1998 were $95,496 (reflecting the impact of the Hornschuch
Acquisition for the entire period and the Rubbermaid Acquisition since April 29,
1998) as compared with net sales of $19,455 for the six months ended September
30, 1997 (which reflect neither acquisition). The increase of $76,041 resulted
principally from the inclusion of Hornschuch net sales of $56,651 in the current
year and the Rubbermaid Acquisition contributed to an increase in sales of
$19,824 in the U.S. operations.
Gross profit was $34,128, or 35.7% of net sales, for the six months ended
September 30, 1998 as compared with $5,001, or 25.7% of net sales, for the six
months ended September 30, 1997. The increase of $29,127 and the increase in
gross profit margin reflect the impact of the Hornschuch Acquisition and the
Rubbermaid Acquisition and the fact that all subsidiaries now sell directly to
retailers. The gross margin for the six months ended September 30, 1998 reflects
only five months of the DCG operations which were acquired on April 29, 1998.
Additionally, gross margin for the six months ended September 30, 1998 was
partially offset by a one-time non-cash
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<PAGE> 14
charge of $797 for the step-up in basis of DCG inventory acquired in the
Rubbermaid Acquisition. Excluding the impact of this one-time charge, total
Company gross profit would have been $34,925 or 36.6% of net sales.
Selling, general and administrative expenses were $22,367, or 23.4% of net
sales, for the six months ended September 30, 1998 as compared with $2,567, or
13.2% of net sales in the six months ended September 30, 1997. The increase of
$19,800 was a result of the addition of Hornschuch's selling, general and
administrative expenses and an increase at the U.S. operations primarily due to
the incremental sales and marketing costs incurred relative to the change from
being primarily a contract manufacturer to being a vertically integrated
manufacturer and marketer of Con-Tact products following the Rubbermaid
Acquisition.
Interest expense was $6,672 for the six months ended September 30, 1998 as
compared with $838 in the prior year. The increase of $5,834 is principally due
to interest expense of approximately $5,500 on the Notes.
The Company recognized income before income taxes, minority interest in earnings
of subsidiary and extraordinary item of $5,089 in the six months ended September
30, 1998, as compared with income of $135 in the six months ended September 30,
1997. This increase is principally a result of the increase in earnings
resulting from the Rubbermaid Acquisition and the Hornschuch Acquisition.
Net income of $596 for the six months ended September 30, 1998 was $502 higher
than the six months ended September 30, 1997 as a result of the above-noted
changes, a $2,074 increase in the provision for income taxes and a $359
deduction for the minority interest in earnings of Hornschuch.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are 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
$33,775 at September 30, 1998, an increase of $17,642. The increase is due
primarily to the proceeds from the issuance of long-term debt and an increase in
inventories resulting primarily from the Rubbermaid Acquisition, partially
offset by an increase in accrued liabilities (includes increases of
approximately $4,000 in accrued interest expense and $3,500 for relocation of
manufacturing assets and remaining payments for the Rubbermaid Acquisition) and
the current-portion of long-term debt.
Consolidated cash balances as of September 30, 1998 were $27,921 (which are
limited to varying degrees by certain security agreements, minority interests
and debt covenants as to use) as compared with $1,807 as of March 31, 1998. The
$26,114 increase in cash resulted primarily from net proceeds from issuance of
$112,750 of senior secured notes (the "Notes") which were issued on April 29,
1998 in conjunction with the Rubbermaid Acquisition. Of the amount on hand as of
September 30, 1998, up to approximately $8,700 is intended to be used to
purchase the outstanding minority interest of Konrad Hornschuch AG (during the
six months ended September 30, 1998, the Company utilized $667 of the previous
estimate of $9,300 to purchase
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<PAGE> 15
shares of Konrad Hornschuch and increase its ownership to approximately 77%) and
$6,270 was used on November 2, 1998 to pay interest on the Notes. 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 six months ended September 30,
1998 was $12,355 versus cash flow from operating activities of $2,941 for the
six months ended September 30, 1997. Increases in net income, the extraordinary
charge, depreciation and amortization and net working capital were partially
offset by a decrease in the provision for notes receivable.
Capital expenditures for the six months ended September 30, 1998 were $3,032
(including expenditures of $1,852 at Hornschuch) versus $466 for the six months
ended September 30, 1997. Approximately $1,100 of the expenditures at Hornschuch
relate to a progress payment on a new printing machine. The Company currently
anticipates spending on capital projects in both operating subsidiaries of
approximately $8,750 this fiscal year. Additionally, as a part of the Rubbermaid
Acquisition, management anticipates spending approximately $2,500 for the move
of the Shelf Liner equipment from Ohio to Fort Edward, New York, and
approximately $1,500 to install acquired systems and pay related expenses
necessary to establish Decora, Incorporated's ("Decora") new sales, distribution
and customer service systems.
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.
Concurrent with the April, 1998 Rubbermaid Acquisition, DII issued the Notes
with an original issue discount of $2,664. 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 September 30, 1998, had 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 23% equity interest in Hornschuch (since the date of the Hornschuch
Acquisition, the Company has increased its ownership of Hornschuch to 77%
through market purchases of shares) and will be used for general corporate
purposes including working capital requirements and the relocation of
manufacturing assets noted above.
On July 9, 1998, the Company entered into a new agreement with Cigna
Investments, Inc. ("Cigna") relating to the payment and deferral of a $1.9
million obligation resulting from the Exchange Agreement between the Company and
Cigna dated March 31, 1996. Such obligation was payable in cash or shares on
April 15, 1998. Pursuant to the July 9th agreement, the
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<PAGE> 16
Company and Cigna have agreed to defer such payment until June 30, 1999. The
Company paid $200 of such obligation during the second quarter and the remaining
obligation which is payable in cash or shares, was increased to between $2.0
million and $2.1 million reflecting the increased value of a fixed number of the
Company's shares at the date of the agreement.
OUTLOOK
By completing the Hornschuch Acquisition and the Rubbermaid Acquisition, the
Company not only became a world-leading manufacturer and marketer but also
derived significant opportunities for strengthening its market position and
increasing its sales world-wide. During the first six months of fiscal 1999, the
Company has focused on the integration of the two acquisitions with its existing
operations. Such activities have included remerchandising, customer development,
new product introduction, new consumer communication methods and optimization of
manufacturing capacity. Management believes that such activities will contribute
to the operating performance and value of the Company in the future.
The Company also continues to focus on its broader objectives of pursuing
product and market opportunities of both Decora and Hornschuch on a global basis
and cross selling of existing products between the North American and European
Markets. In conjunction with these efforts, the Company has started a market
segmentation program aiming to diversify its product portfolio and to enter new
market segments world-wide capitalizing on the strength of its Con-Tact and
dc-fix consumer brands.
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 September 30, 1998,
the Company had consolidated outstanding long term indebtedness of $134,842 and
other short term indebtedness of $18,199 which together totalled $153,041, and
constituted approximately 88% of total capitalization. Management believes that
the Company 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; however, the Company's ability
to service its debt will depend upon the Company's future operating performance,
which may 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.
The Company acquired the Rubbermaid Decorative Coverings Group without its sales
and marketing operations. In the six months ended September 30, 1998, the
Company made significant progress in establishing operations for its new
distribution, sales and marketing requirements as follows: Key sales and
marketing positions have been filled, the new North American headquarters in
Cleveland, Ohio is now well established and installation of a new management
information system has been completed, allowing the on-going training and
transfer of Rubbermaid customers to Decora. Additionally, the Company selected a
third party logistics firm to carry out North American distribution operations,
and, in October 1998, the Company began shipping products directly to retail
accounts. The Company is also currently in the process of relocating the Shelf
Liner production operations to the Company's Fort Edward, New York manufacturing
facility. While Decora management believes that it will complete the
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<PAGE> 17
planned transition of all activities prior to the end of January 1999, the
inability to complete the transition on a timely basis 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 60% of the Company's
net sales for the six months ended September 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.
An additional risk with respect to the Company's European operations relates to
the conversion of certain European countries to a common currency beginning as
of January 1, 1999 (the "Euro Conversion"). The Company has formed an internal
task force to evaluate the risks and implement any required actions with respect
to the Euro Conversion. Based on the analysis of this task force, management
does not believe that the costs to the Company to convert to a common currency
will be material. Additionally, management does not believe that there will be
any material impact from a competitive point of view with respect to the impact
of the Euro Conversion on the sales of products.
During the first and second quarters of fiscal 1999, the Company's German
subsidiary realized sales from Russia of $4,500 and $ 2,960, respectively. As a
result of Russian economic conditions, sales to Russia have declined
significantly and the Company has reduced its production rates accordingly.
While the Company anticipates continued sales of products to Russia, such sales
are anticipated to be at a reduced rate over the near term.
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 $17,717. 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 the Company'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 not yet experienced a full year of results including twelve
months of recently acquired operations in both the U.S. and Germany. In the
past, the Company has typically experienced seasonally lower sales in the third
fiscal quarter. Additionally, Hornschuch's consumer product sales are impacted
by holiday season slow downs, although it has industrial sales which are more
uniform throughout the year. As a result, the Company may experience
historically similar sensitivity.
Year 2000. Many existing computer systems, communication systems, machines and
other items, whether large or small, which utilize microprocessors and/or
software use only two digits rather
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<PAGE> 18
than four digits to process date-related transactions. As a result, many of
these items will not be able to correctly process a transaction with the year
2000 date, as the "00" could cause the program or system to fail or create
erroneous results before, on or after January 1, 2000 (the "Year 2000 Issue").
The Company has employees in both its North American and European operations who
have the task of identifying potential Year 2000 Issues and overseeing the
implementation of solutions with respect to these issues where possible.
With regard to the Company's primary computer systems, the Company's European
operating subsidiary licenses and utilizes a comprehensive management
information system which was installed in 1996/1997. Such management information
system which includes general ledger, accounts receivable, accounts payable and
manufacturing control is currently Year 2000 compliant.
The Company's North American operations recently completed Phase I of a program
to replace its primary management information and communication systems with
full Year 2000 compliance. This included hardware and software required to
operate its telephone systems and its accounting systems (including general
ledger, accounts receivable, accounts payable). Phase II of this program, which
is scheduled to be completed in February 1999, will also convert manufacturing
control systems to Year 2000 compliant systems. The combined hardware and
software costs of Phases I & II are estimated to be approximately $600,000.
In addition to its primary management information system, the Company utilizes
personal computers, which function either on a stand-alone basis or as
workstations on an integrated network. These computers utilize a variety of
operating systems and software packages ranging from Windows NT to DOS
platforms. The Company believes that the majority of these systems can and will
be made Year 2000 compliant prior to January 1, 2000 at little or no cost to the
Company through software updates provided by the respective software vendors.
Any full system replacements, which may be required, are not anticipated to have
a material impact on the cash flow of the Company and can be funded from
operating cash flow. The Company is in the process of reviewing other equipment
and systems in order to determine and remedy any potential Year 2000 Issues. The
Company does not separately track the incremental costs incurred for the
investigation, analysis and remedy of Year 2000 Issues. Such costs consist
principally of related payroll costs of certain members of its systems and
operations groups.
The Company sells its products primarily to retailers, distributors and original
equipment manufacturers with a significant number of such transactions occurring
electronically. The Company also purchases raw materials from many vendors;
however, the majority of such purchasing transactions are not handled
electronically. If the Company, or any third party with whom the Company does
business, were to have a Year 2000 problem, the Company's business could be
seriously disrupted which could negatively affect the financial condition and
results of operations of the Company. This is particularly true in the case of
retail customers where high volume transactions would have to be converted to a
manual system until any Year 2000 Issue was resolved. The Company is in the
process of reviewing the Year 2000 compliance status with its vendors and
customers and to-date has not become aware of a situation which would have a
material adverse impact on the Company's operations and/or financial condition,
although no assurances can be given that such a problem does not exist, or will
not exist in the future. As the Company continues to evaluate the Year 2000
compliance status of its suppliers and vendors, it will also develop contingency
plans to deal with any potential problems that may arise in this analysis.
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<PAGE> 19
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 AND USE OF PROCEEDS
In March, June, July and August 1998, the Company granted options for the
purchase of common stock to certain employees of the Company as incentive
compensation. Such options were granted in reliance on a private placement
exemption from registration, based on the placement without any general
solicitation to a limited number of recipients who had access to information
about the Company. Of the total 315,000 options granted, 30,000 options were
granted at each of the following exercise prices per share (210,000 options in
total): $5.00, $5.13, $6.19, $6.63, $6,69, $7.38 and $7.75. Each such exercise
price was equal to the fair market value of the Company's common stock on the
date of grant. Of these 210,000 options, 14,000 will vest six months after the
date of grant and the remaining 196,000 will vest at the earlier of nine years
after grant or upon achievement of certain individual performance goals during
fiscal years 1999 through 2001. The remaining 105,000 options will be
exercisable at a price equal to the closing bid price of the Company's common
stock on the date of vesting. Vesting of these options will occur at the earlier
of nine years after grant or upon achievement of certain corporate financial
goals during fiscal years 1999 through 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on September 28,
1998.
(b) The following individuals were nominated and elected to serve as
directors:
Nathan Hevrony, Roger Grafftey-Smith, Gabriel Thomas, Stephen H.
Verchick, and Ronald Artzer
(c) The shareholders voted as follows on the following matters:
1. Election of directors. The voting result for each nominee is as
follows:
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<PAGE> 20
<TABLE>
<CAPTION>
Name Votes for Votes Withheld
---- --------- --------------
<S> <C> <C>
Nathan Hevrony 5,605,587 589,743
Roger Grafftey-Smith 5,605,587 589,743
Gabriel Thomas 5,605,585 589,745
Stephen H. Verchick 5,605,585 589,745
Ronald Artzer 5,605,585 589,745
</TABLE>
2. The reappointment of the Company's independent public
accountants was approved by a count of 6,176,044 votes for,
7,477 votes against, and 11,809 votes abstaining.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included with this report:
(3) Articles of Incorporation and By-Laws
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of Decora Industries, Inc.
("DII") filed on January 28, 1992. (1)
3.2 Amendment No. 1 to DII's Certificate of Incorporation filed on
November 2, 1993. (2)
3.3 Amendment No. 2 to DII's Certificate of Incorporation filed on
December 29, 1997. (2)
3.4 Amendment No. 3 to DII's Certificate of Incorporation filed on
December 29, 1997. (2)
3.5 By-Laws of DII. (1)
(4) Instruments Defining the Rights of Security Holders
4.1 Certificate of Incorporation and By-Laws (see Exhibits
3.1-3.5).
4.2 Form of Certificate of Common Stock of DII. (3)
4.3 Form of Indenture dated as of April 29, 1998 among DII as
Issuer, Decora, Incorporated ("Decora"), Subsidiary
Guarantors, and United States Trust Company of New York as
Trustee (the "Indenture"). (3)
</TABLE>
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<PAGE> 21
<TABLE>
<S> <C>
4.4 Form of 11% Senior Secured Notes due 2005 ("Old Notes") issued
under the Indenture (included as Exhibit A to the Indenture).
(3)
4.5 Form of Series B 11% Senior Secured Notes due 2005 issued
under the Indenture in exchange for the Old Notes (included as
Exhibit B to the Indenture). (3)
4.6 Form of Guarantee of Decora dated as of April 29, 1998
(included as Exhibit G to the Indenture). (3)
(10) Material Contracts
10.1 Form of Option Agreement dated as of August 1, 1998, by and
between Rolf J. Gemmersdorfer and DII. (4)
10.2 Form of Payment and Deferral Agreement dated as of July 9,
1998 by and among Decora, DII and each of the Holders listed
in Schedule A attached thereto. (4)
(27) Financial Data Schedule
27.1 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------------------------
(1) Previously filed as Exhibit to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992.
(2) Previously filed as Exhibit to the Company's Form S-4 Registration
Statement No. 333-58989 filed on July 13, 1998 (the "Registration
Statement").
(3) Previously filed as Exhibit to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1998.
(4) Previously filed as Exhibit to Amendment No. 1 to the Registration
Statement filed on September 4, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended September 30, 1998.
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<PAGE> 22
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: November 13, 1998
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0
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