<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 June 30, 1999
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 10, 1999 there were 7,823,887 shares of Common Stock of the registrant
outstanding. This document consists of 18 pages.
<PAGE> 2
TABLE OF CONTENTS
PAGE
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1999 and March 31, 1999 3-4
Condensed Consolidated Statements of
Income for the three months ended
June 30, 1999 and 1998 5
Condensed Consolidated Statements of
Cash Flows for the three months ended
June 30, 1999 and 1998 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 16
PART II OTHER INFORMATION 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
------------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 4,408 $ 6,158
Restricted cash .................................. 959 504
Accounts receivable, less allowance .............. 30,591 26,826
Inventories ...................................... 40,914 42,676
Prepaid expenses and other current assets ........ 1,746 1,811
-------- --------
Total current assets ...................... 78,618 77,975
Property and equipment, net ........................ 52,810 54,341
Goodwill and other intangibles, net ................ 79,085 78,081
Deferred income taxes .............................. 3,215 3,769
Deferred financing costs, net ...................... 4,282 4,171
Other assets ....................................... 1,039 2,402
-------- --------
Total assets ............................. $219,049 $220,739
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 9,908 $ 11,547
Accrued liabilities ................................ 12,036 12,438
Accrued interest ................................... 2,268 5,293
Current portion of long-term debt .................. 7,347 9,467
Deferred income taxes .............................. 419 242
Other current liabilities .......................... 3,383 4,331
--------- ---------
Total current liabilities ..................... 35,361 43,318
Long-term debt ....................................... 147,997 140,562
Pension obligation ................................... 13,768 14,634
--------- ---------
Total liabilities ............................. 197,126 198,514
--------- ---------
Minority interest in subsidiary ...................... 2,953 3,360
Shareholders' equity:
Preferred stock, $.01 par value;
5,000 shares authorized, none issued ............. -- --
Common stock, $.01 par value;
20,000 shares authorized;
7,424 and 7,342 shares issued and outstanding
at June 30, 1999 and March 31, 1999, respectively 74 73
Additional paid-in capital ......................... 34,103 33,634
Accumulated deficit ................................ (12,555) (13,307)
Cumulative translation adjustment .................. (2,058) (918)
Additional minimum pension liability ............... (594) (617)
--------- ---------
Total shareholders' equity .................... 18,970 18,865
--------- ---------
Total liabilities and shareholders' equity .... $ 219,049 $ 220,739
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Net sales ........................................... $ 44,392 $ 46,478
Cost of goods sold .................................. 28,872 31,687
-------- --------
Gross profit ........................................ 15,520 14,791
Selling, general and administrative expenses ........ 10,115 8,972
-------- --------
Operating income .................................... 5,405 5,819
Interest expense, net ............................... 3,834 3,016
-------- --------
Income before income taxes, minority interest
and extraordinary item ............................ 1,571 2,803
Income tax provision ................................ 699 1,183
-------- --------
Income before minority interest and
extraordinary item .................................. 872 1,620
Minority interest in earnings of subsidiary ......... 120 326
-------- --------
Income before extraordinary item .................... 752 1,294
Extraordinary item, net of income taxes ............. -- (2,019)
-------- --------
Net income (loss) ................................... $ 752 $ (725)
======== ========
Per share of common stock:
Income before extraordinary item
Basic ............................................. $ 0.10 $ 0.18
Diluted ........................................... 0.09 0.15
Extraordinary item
Basic ............................................. -- (0.28)
Diluted ........................................... -- (0.24)
Net income (loss)
Basic ............................................. 0.10 (0.10)
Diluted ........................................... 0.09 (0.09)
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................. $ 752 $ (725)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Extraordinary item, net of income taxes ......... -- 2,019
Depreciation and amortization ................... 2,016 1,859
Amortization of debt discounts and fees ......... 272 177
Minority interest in earnings of subsidiary ..... 120 326
Deferred tax provision .......................... 816 --
Net changes in current assets and liabilities ... (8,965) 3,730
Other, net ...................................... (494) --
--------- ---------
Net cash provided by (used in) operating activities .. (5,483) 7,386
--------- ---------
Cash flows from investing activities:
Rubbermaid acquisition ........................... (320) (62,145)
Other acquisitions ............................... (607) (207)
Reduction in notes receivable .................... -- 189
Purchase of property and equipment ............... (1,482) (1,618)
--------- ---------
Net cash used in investing activities ................ (2,409) (63,781)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt ....................... 9,755 110,086
Repayment of long-term debt ...................... (2,937) (28,418)
Change in short-term borrowing ................... (200) 8,394
Proceeds from exercise of options ................ 120 --
Payment of debt penalties and fees ............... -- (6,255)
--------- ---------
Net cash provided by financing
activities ......................................... 6,738 83,807
--------- ---------
Effect of exchange rate fluctuations on cash
and cash equivalents ............................... (141) (641)
--------- ---------
Net increase (decrease) in cash and cash equivalents . (1,295) 26,771
Cash and cash equivalents at beginning of period ..... 6,662 1,807
--------- ---------
Cash and cash equivalents at end of period ........... $ 5,367 $ 28,578
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Integration of Financial Statements Reported on Form 10-K
The accompanying Condensed Consolidated Financial Statements should be read in
conjunction with Decora Industries, Inc.'s ( "DII" and together with its
subsidiaries, the "Company") Consolidated Financial Statements included in its
Form 10-K for the fiscal year ended March 31, 1999, filed with the Securities
and Exchange Commission (File No. 0-16072) (the "Form 10-K"). In the opinion of
the Company, the accompanying Condensed Consolidated Financial Statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the results for the interim periods.
In June 1998, the Financial Accounting Standards Board issued SFAS 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 has adopted this standard as of the
beginning of this fiscal year. Adoption of this statement had no material impact
on the financial statements.
Certain reclassifications of prior year amounts have been made to conform to the
current year presentation.
NOTE 2 - Inventories
Inventories at June 30, 1999 and March 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials .......................... $ 7,998 $ 8,018
Work-in-Process ........................ 10,131 8,832
Finished Goods ......................... 22,785 25,826
------- -------
$40,914 $42,676
======= =======
</TABLE>
NOTE 3 - Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
------- --------
<S> <C> <C>
Net income (loss) ................................ $ 752 $ (725)
Cumulative translation adjustment ................ (1,140) (353)
Additional minimum pension liability ............. 23 --
------- -------
$ (365) $(1,078)
======= =======
</TABLE>
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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 (loss) per common share reported for the three
months ended June 30, 1999 and 1998.
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
per common share for the three months ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Weighted average shares:
Shares outstanding at beginning
of period ...................................... 7,342 7,331
Shares issued ...................................... 65 --
----- -----
Shares used in the calculation
of Basic EPS ................................... 7,407 7,331
Effect of dilutive securities:
Contingently issuable shares ................... 361 327
Options/Warrants .............................. 537 807
----- -----
Adjusted weighted average shares ................... 8,305 8,465
===== =====
</TABLE>
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 857,000 and 412,000 for the
three months ended June 30, 1999 and 1998, respectively.
NOTE 5 - Segment Financial Data
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, as required, in fiscal 1999, which changes the way the
Company reports information about its operating segments. The Company's
operating subsidiaries design, develop, and manufacture and sell products,
classified in two principal operating segments. The company's operating segments
were generally determined on the basis of strategic business units within the
operating subsidiaries which require different marketing strategies.
Consumer products include global sales of self-adhesive, decorative and surface
protection products sold in a wide variety of retail stores worldwide.
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Industrial products primarily include converted films for use in the manufacture
of cabinets, furniture, automobiles, luggage and shoes which are sold to users
and OEM's in diversified markets, principally in Europe.
Information for fiscal 1999 has been restated from the prior year's presentation
in order to conform to the current year presentation.
OPERATING SEGMENTS
<TABLE>
<CAPTION>
NET SALES (000'S)
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Consumer ........................................... $31,061 $32,784
Industrial ......................................... 13,331 13,694
------- -------
Consolidated ....................................... $44,392 $46,478
------- -------
</TABLE>
<TABLE>
<CAPTION>
OPERATING PROFITS (000'S)
THREE MONTHS ENDED JUNE 30,
1999 1998
---- ----
<S> <C> <C>
Consumer ........................................... $ 5,062 $ 5,484
Industrial ......................................... 1,004 1,016
------- -------
Total segment ...................................... 6,066 6,500
General corporate expenses ......................... 661 681
------- -------
5,405 5,819
Interest expense, net .............................. 3,834 3,016
------- -------
Consolidated income before income taxes,
minority interest and extraordinary item ......... $ 1,571 $ 2,803
------- -------
</TABLE>
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<PAGE> 10
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, 1999.
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 into a vertically integrated, world-wide leader in the self-adhesive
consumer decorative products category through a series of acquisitions; the
October 1, 1997 acquisition of approximately 73.2% of the shares of Konrad
Hornschuch AG (since increased to approximately 90% as of June 30, 1999) 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 (the "Rubbermaid Acquisition"), including the Con-Tact(R) brand
name, which constituted Rubbermaid's Decorative Coverings Group (the "DCG").
Since the Condensed Consolidated Statements of Income of the Company for the
three months ended June 30, 1999 reflect the effects of three months of results
from the Rubbermaid Acquisition, whereas the three months ended June 30, 1998
reflect the effects of approximately two months of results from the Rubbermaid
Acquisition; the results for the three months ended June 30, 1999 are not
directly comparable with those of the three months ended June 30, 1998.
The following amounts are reflected in thousands:
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998.
Net sales for the three months ended June 30, 1999 were $44,392 as compared with
net sales of $46,478 for the three months ended June 30, 1998. The change of
$2,086 resulted from a decrease in Hornschuch net sales of approximately $3,345
in the current year quarter, partially offset by an increase in net sales of
$1,259 in the North American operations. The decrease in net sales at Hornschuch
is principally due to two factors: 1) In the first quarter of fiscal year 1999,
sales to Russia, primarily to a single customer, were at an unusually high
level. Following the collapse of the Russian economy in August 1998,
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<PAGE> 11
sales in that area declined sharply. As a result, sales to all customers in
Russia for the first quarter of fiscal 2000 were approximately $3,200 less than
the prior year's quarter. 2) An unfavorable foreign currency translation
adjustment (German marks to U.S. dollar) in the current year quarter reduced net
sales by approximately $800. The increase in net sales in the North American
operations is primarily due to the impact of the Rubbermaid Acquisition for a
full quarter as compared with two months of results in the prior year quarter.
Gross profit was $15,520, or 35.0% of net sales, for the three months ended June
30, 1999 as compared with $14,791, or 31.8% of net sales, for the three months
ended June 30, 1998. The increase of $729 was primarily a result of an increase
of $1,118 in gross profit in the North American operations, partially offset by
a decrease in gross profit of $389 at Hornschuch. The increase in gross margin
in the North American operations is principally due to the current year quarter
reflecting the effects of the inclusion of a full quarter of the Rubbermaid
Acquisition, as compared to approximately two months in the prior year quarter.
Although gross profit at Hornschuch declined slightly in the current year
quarter, gross margin as a percentage to sales improved due to favorable product
mix.
Selling, general and administrative expenses were $10,115 or 22.8% of net sales,
for the three months ended June 30, 1999 as compared with $8,972 or 19.3% of net
sales, in the three months ended June 30, 1998. The increase of $1,143 was
principally a result of incremental costs incurred in the North American
subsidiary which was operating throughout the three months ended June 30, 1999
with a fully developed sales, marketing, supply chain and accounting
infrastructure in place, as compared with the prior year quarter when these
functions were in transition from Rubbermaid.
Interest expense, net was $3,834 for the three months ended June 30, 1999 as
compared with $3,016 in the prior year quarter. The increase of $818 is
principally due to the current year quarter reflecting three months of interest
expense relative to the $112,750 of senior secured notes issued April 29, 1998
(the "Notes") as compared with two months of interest expense in the prior year
quarter.
Income before income taxes, minority interest and extraordinary item was $1,571
in the three months ended June 30, 1999, as compared with $2,803 in the three
months ended June 30, 1998. The decrease in the current year quarter is
principally a result of higher selling, general and administrative expenses and
net interest expense, partially offset by the higher gross margins, all as
discussed above.
The Company recognized an extraordinary charge of $2,019 (net of income taxes)
in the three months ended June 30, 1998 associated with the debt refinancing and
the Rubbermaid Acquisition in April 1998.
Net income was $752 for the three months ended June 30, 1999 which was $1,477
higher than that of the three months ended June 30, 1998 as a result of the
above-noted changes, a $484 decrease in the provision for income taxes and a
$206 decrease in the deduction for the minority interest in earnings of
Hornschuch.
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<PAGE> 12
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 $34,657 at March 31, 1999 to
$43,257 at June 30, 1999, an increase of $8,600. The increase is due primarily
to utilization of existing lines of credit to fund working capital requirements.
Consolidated cash balances as of June 30, 1999 were $5,367, which are limited by
certain security agreements, minority interests and debt covenants as to use.
Net cash flow used in operating activities for the three months ended June 30,
1999 was $5,483 versus cash flow provided by operating activities of $7,386 for
the three months ended June 30, 1998. An increase in net income was offset
primarily by the extraordinary charge reflected in the prior year quarter and
the increase in net working capital noted above.
Net cash flow used in investing activities for the three months ended June 30,
1999 was $2,409 as compared with $63,781 in the prior year quarter. The change
resulted primarily from the effect of the Rubbermaid Acquisition.
Net cash provided by financing activities in the three months ended June 30,
1999 was $6,738 as compared with $83,807 in the three months ended June 30,
1998. The change was primarily a result of the issuance of the Notes in the
prior year quarter, partially offset by the use of a portion of the proceeds to
repay existing long-term debt.
Capital expenditures for the three months ended June 30, 1999 were $1,482
(including expenditures of $981 at Hornschuch) versus $1,618 for the three
months ended June 30, 1998. Expenditures at Decora's North American operations
and Hornschuch are consistent with historical averages. During the current
fiscal year, the Company plans to make capital expenditures at similar levels to
prior years and intends to finance such expenditures with operating cash flow
and existing lines of credit.
The Company currently owns, through Decora Industries Deutschland GmbH
approximately 90% of the outstanding shares of a foreign entity (Hornschuch). As
a result, the Company's consolidated operations and cash flow have become
significantly exposed to changes in exchange rates between the U.S. dollar and
the German Mark/Euro, 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. 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 Rubbermaid Acquisition, DII issued the Notes which were
issued with an original issue discount of $2,664 resulting in gross cash
proceeds of $110,086. Interest on the notes is paid semi-annually and no
principal payments are required prior to maturity on
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<PAGE> 13
May 1, 2005. In addition, (i) Hornschuch borrowed approximately $10.0 million
under its secured credit facilities; (ii) Hornschuch participated in the
acquisition by loaning Decora such $10.0 million pursuant to a secured
intercompany note, the proceeds of which were used by Decora to partially
finance the acquisition of the DCG; and (iii) Decora entered into a three year,
$15.0 million secured revolving line of credit facility. Availability under the
credit line is based on a factor of the amount of accounts receivable and
inventory held by Decora. At August 10, 1999, borrowings under the credit line
totaled $9,711.
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 $12,877. Currently, the
properties are producing rental income sufficient to cover interest payments.
Management is attempting to sell the properties; 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.
OUTLOOK
During the current fiscal year, the Company's primary objective is to continue
to enhance the value of its consumer brands by capitalizing on each brand's
strength and popularity in its respective region; Con-Tact(R) in North America
and d-c-fix(R) in Europe. The Company has a strong distribution position in the
housewares market in North America and primarily in the home furnishing market
in Europe. The Company plans to capitalize on the Con-Tact(R) brand recognition
and awareness in North America by expanding its product offerings beyond its
housewares and shelving position into the other categories for which the
European products are used. Similarly, by capitalizing on the same strengths of
d-c-fix(R), the North American products, targeted for different applications,
will expand the product offering in Europe. This cross selling of all products
into the expanded categories was successfully tested on a limited basis during
fiscal 1999. This year the Company will fully implement this strategy. The
priority of manufacturing will be to continue to strive to improve quality and
reduce costs in both production facilities in order to remain a high-quality,
lowest cost producer.
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, 1999, the
Company had consolidated outstanding indebtedness of $155,344 representing
approximately 89% of total capitalization. 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
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<PAGE> 14
indebtedness or seek additional equity capital. There can be no assurance that
the Company would be able to accomplish these objectives on terms acceptable to
it, if at all.
The Company's foreign operations are conducted primarily through Hornschuch. The
Company's European operations, representing approximately 59% of the Company's
net sales for the three months ended June 30, 1999, 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.
YEAR 2000 RISKS
Many existing computer systems, communication systems, machines and other items,
whether large or small, which utilize microprocessors and/or software use only
two digits rather than four digits to process date-related transactions. As a
result, many of these items will not be able to correctly process a transaction
with the year 2000 date, as the "00" could cause the program or system to fail
or create erroneous results before, on or after January 1, 2000 (the "Year 2000
Issue"). The Company has employees 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, includes general ledger,
accounts receivable, accounts payable and manufacturing control and is currently
Year 2000 compliant.
The Company's North American operations recently completed Phases I & II of a
program to replace its primary management information and communication systems
with full Year 2000 compliance. This included hardware and software required to
operate its telephone systems, its accounting systems (including general ledger,
accounts receivable, accounts payable) and manufacturing control systems at a
cost of approximately $600.
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 has completed its survey to detect non-compliant systems
and believes that the majority of these systems can and will be made Year 2000
compliant prior to January 1, 2000 at little or no cost to the Company through
software updates provided by the respective software vendors. Any full system
replacements which may be required are not anticipated to have a material impact
on the cash flow of the Company and can be funded from operating cash flow. The
Company has completed the process of reviewing other equipment and systems in
order to determine and remedy any potential Year 2000 Issues. All manufacturing
systems have been reviewed for Year 2000 compliance. All in-house programmable
Logic Controllers (PLCs) and micro processor based Digital Drive Regulators were
checked for Year 2000 compliance as of March 1, 1999. All equipment
manufacturers were contacted regarding our PLCs, Digital
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<PAGE> 15
Drives and PLC programs, and it was determined that there were no 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 has completed
the process of reviewing the Year 2000 compliance status with its vendors and
customers and to-date is not 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.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The intended use of the derivative and its
designation as either (1) a hedge of exposure to changes in the fair value of a
recognized asset or liability or a firm commitment (a fair value hedge), (2) a
hedge of exposure to variable cash flows of a forecasted transaction (a cash
flow hedge), or (3) a hedge of the foreign currency exposure of a net investment
in a foreign operation (a foreign currency hedge), will determine when the gains
or losses on the derivatives are to be reported as a component of other
comprehensive income. The Company has adopted this standard as of the beginning
of this fiscal year. Adoption of this standard had no impact on the financial
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information about market risks for the three months ended June 30, 1999 does not
differ materially from that discussed under Item 7A of the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
-15-
<PAGE> 16
DECORA INDUSTRIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants 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
The Company believes that the transactions described below in which securities
were sold were exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof as transactions not involving any
public offerings. In each transaction, the number of investors was limited, the
investors were provided with information about the Company and/or access to such
information, and restrictions were placed on the resale of such securities
<TABLE>
<CAPTION>
Date Title Amount Consideration Purchaser
- ---- ----- ------ ------------- ---------
<S> <C> <C> <C> <C>
4/9/99 Common Stock 58,333 Sale of Assets Corporation
4/9/99 Conditional Options
to purchase common stock NA(1) Sale of Assets Corporation
5/1/99 Options to purchase
common stock 55,000 Services Consultants
5/3/99 Exercise of Common Institutional
Stock Options 24,000 Cash of $120,000 Investor
</TABLE>
- --------------------
(1) The number of options to be issued, if any, will be calculated
following March 31, 2000 on the basis of one option for every $4.00 of
the amount equal to 2% of sales generated from the assets purchased for
the twelve month period commencing April 1, 1999. The exercise price
for any such options, if granted, will equal the market price of the
Company's stock as of the day prior to the date of grant.
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
Not Applicable.
-16-
<PAGE> 17
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) Exhibits
10.53 First Amendment to Payment and Deferral Agreement with CIGNA dated
June 30, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
June 30, 1999
-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/ ROBERT L. MACDONALD
-----------------------------
Robert L. Macdonald
Chief Financial Officer
DATED: August 16, 1999
-18-
<PAGE> 1
EXHIBIT 10.53
FIRST AMENDMENT TO PAYMENT AND DEFERRAL AGREEMENT
This First Amendment to Payment and Deferral Agreement (this
"Amendment") is made as of this 30th day of June, 1999 (the "Amendment Effective
Date"), by and among Decora, Incorporated, a Delaware corporation (the
"Company"), Decora Industries, Inc., a Delaware corporation ("Decora"), and each
of the "Holders" identified and listed on Schedule A attached hereto and made a
part hereof, and amends that certain Payment and Deferral Agreement, dated as of
July 9, 1999, by and among the Company, Decora and the Holders (the
"Agreement"). Except to the extent otherwise specifically amended by this
Amendment, the Agreement remains in full force and effect in accordance with its
terms, and after giving effect to the terms of this Amendment, shall constitute
the "Amended Agreement". Capitalized terms used in this Amendment and not
otherwise specifically designed or changed herein shall have the meanings
assigned to such terms in the Agreement.
WITNESSETH
WHEREAS, pursuant to Section 4 of the Agreement, Decora is obligated to
pay the Settlement Amount to the Holders on the Amendment Effective Date.
Payment of the Settlement Amount is to be made to the Holders in accordance with
the terms of Section 5 of the Agreement.
WHEREAS, as of the Amendment Effective Date, the Settlement Amount is
$2,302,610.
WHEREAS, the Holders have agreed to defer payment of the Settlement
Amount, subject to the terms and conditions set forth herein.
WHEREAS, the parties now desire to set forth the terms and conditions
of their agreement with respect to payment of the Settlement Amount.
NOW THEREFORE, in consideration of the agreement of the parties set
forth herein, and for other good and valuable consideration, the receipt of
which each of the parties hereby acknowledges, the parties hereby agree as
follows:
AGREEMENT
1. The Payment Date, as defined in Section 4 of the Agreement, is hereby
extended to July 8, 1999.
2. The Settlement Amount, as defined in Section 3 of the Agreement, is
hereby adjusted to $2,324,677 as of July 1, 1999, to reflect the additional
accrual of interest on the
-1-
<PAGE> 2
Shortfall Balance at the Applicable Rate calculated in the manner set forth in
Section 3 of the Agreement.
3. This Amendment may be executed in one or more counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument. Each counterpart may consist of a number of copies hereof, each
signed by less than all, but together signed by all, of the parties hereto.
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Amendment as of the Amendment Effective Date.
DECORA, INCORPORATED,
a Delaware corporation
By /s/ Timothy N. Burditt
------------------------
Name: Timothy N. Burditt
Title: Vice President
DECORA INDUSTRIES, INC.
By /s/ Timothy N. Burditt
------------------------
Name: Timothy N. Burditt
Title: Vice President
(Signatures continued on next page)
-2-
<PAGE> 3
CIGNA MEZZANINE PARTNERS II, L.P.
By: CIGNA Investments, Inc., Agent
By: /s/ Donald F. Rieger, Jr.
--------------------------------
Name: Donald F. Rieger, Jr.
Title: Managing Director
CIGNA PROPERTY AND CASUALTY
INSURANCE COMPANY
By: CIGNA Investments, Inc.
By: /s/ Donald F. Rieger, Jr.
--------------------------------
Name: Donald F. Rieger, Jr.
Title: Managing Director
CENTURY INDEMNITY COMPANY
By: CIGNA Investments, Inc.
By: /s/ Donald F. Rieger, Jr.
--------------------------------
Name: Donald F. Rieger, Jr.
Title: Managing Director
CONNECTICUT GENERAL LIFE
INSURANCE COMPANY
By: CIGNA Investments, Inc.
By: /s/ Donald F. Rieger, Jr.
--------------------------------
Name: Donald F. Rieger, Jr.
Title: Managing Director
-3-
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,367
<SECURITIES> 0
<RECEIVABLES> 33,065
<ALLOWANCES> (2,474)
<INVENTORY> 40,914
<CURRENT-ASSETS> 78,618
<PP&E> 71,613
<DEPRECIATION> (18,803)
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<CURRENT-LIABILITIES> 35,361
<BONDS> 155,344
0
0
<COMMON> 74
<OTHER-SE> 18,896
<TOTAL-LIABILITY-AND-EQUITY> 219,049
<SALES> 44,392
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<CGS> 28,872
<TOTAL-COSTS> 10,115
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<INCOME-PRETAX> 1,571
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