<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 December 31, 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 February 8, 1999 there were 7,340,385 shares of Common Stock of the
registrant outstanding. This document consists of 20 pages.
<PAGE> 2
TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
as of December 31, 1998 and March 31, 1998 3-4
Condensed Consolidated Statements of
Income for the Three and Nine Months ended
December 31, 1998 and 1997 5
Condensed Consolidated Statements of
Cash Flows for the Nine Months
ended December 31, 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 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,884 $ 1,682
Restricted cash 63 125
Accounts receivable, less allowance 25,132 26,049
Inventories 41,479 26,964
Deferred income taxes 1,913 1,913
Prepaid expenses and other current assets 1,181 1,481
-------- --------
Total current assets 88,652 58,214
Property and equipment, net 54,629 44,152
Goodwill and other intangibles, net 79,505 22,478
Deferred income taxes 3,623 3,787
Other assets 6,317 2,585
-------- --------
$232,726 $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>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,182 $ 9,577
Accrued liabilities 17,363 17,104
Current portion of long-term debt 19,649 10,472
Other current liabilities 5,985 4,928
--------- ---------
Total current liabilities 53,179 42,081
Long-term debt 134,677 50,644
Pension obligation 16,105 13,424
--------- ---------
Total liabilities 203,961 106,149
--------- ---------
Minority interest in subsidiary 7,534 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 December 31, 1998
and March 31, 1998, respectively 73 73
Additional paid-in capital 33,627 33,775
Accumulated deficit (13,903) (14,984)
Cumulative translation adjustment 1,434 (775)
--------- ---------
Total shareholders' equity 21,231 18,089
--------- ---------
Total liabilities and shareholders' equity $ 232,726 $ 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 DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
1998 1997 1998 1997
---- ---- ----- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $41,174 $36,909 $136,670 $56,364
Cost of goods sold (see Note 2) 26,641 27,194 88,009 41,648
------- ------- -------- -------
Gross profit 14,533 9,715 48,661 14,716
Selling, general and administrative
expenses 9,056 7,153 31,423 9,720
Non-recurring charges -- -- -- 1,461
------- ------- -------- -------
Operating income 5,477 2,562 17,238 3,535
Interest expense, net 3,774 1,601 10,446 2,439
------- ------- ------- -------
Income before income taxes,
minority interest in earnings of
subsidiary and extraordinary item 1,703 961 6,792 1,096
Income tax provision 811 519 2,926 560
------- ------- -------- -------
Income before minority interest
in earnings of subsidiary and
extraordinary item 892 442 3,866 536
Minority interest in earnings of
subsidiary 407 201 766 201
------- ------- -------- -------
Income before extraordinary item 485 241 3,100 335
Extraordinary item, net of income
taxes (see Note 2) -- -- (2,019) --
------- ------- -------- -------
Net income $ 485 $ 241 $ 1,081 $ 335
------- ------- -------- -------
Per share of common stock:
Income before extraordinary item
Basic $ 0.06 $ 0.03 $ 0.42 $ 0.05
Diluted 0.05 0.03 0.36 0.05
Extraordinary item
Basic -- -- (0.28) --
Diluted -- -- (0.24) --
Net income
Basic 0.06 0.03 0.14 0.04
Diluted 0.05 0.03 0.12 0.04
</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>
NINE MONTHS ENDED DECEMBER 31,
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,081 $ 335
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item, net of income taxes 2,019 --
Depreciation and amortization 7,329 3,544
Amortization of debt discount and fees 720 84
Provision for notes receivable -- 789
Minority interest in earnings of subsidiary 766 201
Deferred income tax provision -- 306
Net changes in current assets and liabilities (1,779) 4,408
Other, net (1,027) 371
--------- ---------
Net cash provided by operating activities 9,109 10,038
--------- ---------
Cash flows from investing activities:
Rubbermaid Acquisition (65,491) --
Acquisition of Hornschuch shares (1,289) (37,511)
Reduction in notes receivable 305 --
Purchase of property and equipment (7,732) (1,828)
--------- ---------
Net cash used in investing activities (74,207) (39,339)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 110,086 39,205
Repayment of long-term debt (29,166) (3,732)
Change in short-term borrowing 7,787 (4,612)
Proceeds from issuance of common stock -- 812
Payment of warrant exchange obligation (200) --
Net cash paid for debt penalties and fees (7,087) --
--------- ---------
Net cash provided by financing activities 81,420 31,673
--------- ---------
Effect of exchange rate fluctuations on cash
and cash equivalents 818 (212)
--------- ---------
Net increase in cash and cash equivalents 17,140 2,160
Cash and cash equivalents at beginning of period 1,807 243
--------- ---------
Cash and cash equivalents at end of period $ 18,947 $ 2,403
--------- ---------
</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 for the
three months ended December 31, 1998 and 1997 was $588,000 and $18,000,
respectively; and for the nine months ended December 31, 1998 and 1997 was
$3,290,000 and $112,000, respectively.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting 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, Determination of Acquisition Cost, 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
(subject to a purchase price contingency of $2.5 million based upon calendar
1998 DCG sales levels) of approximately $62.5 million (the "Rubbermaid
Acquisition"). Based upon final 1998 sales of the DCG, the purchase price was
adjusted downward by $2 million to $60.5 million.
The assets acquired included inventory, manufacturing equipment, tradenames
including the Con-Tact trademark and all other rights to three product lines:
(i) the Con-Tact self-adhesive coverings line that was manufactured exclusively
for Rubbermaid by Decora, (ii) Shelf Liner, a proprietary product line, which
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<PAGE> 8
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.
Determination of Acquisition Cost
The acquisition cost for the DCG of approximately $62.6 million (final purchase
price of $60.5 million, adjusted for acquisition related closing costs of
approximately $3.6 million, less amounts related to transition services of $1.5
million paid to Rubbermaid) was allocated to the assets acquired as follows:
Inventory $7,500,000
Property and equipment 1,000,000
Intangible assets:
Con-Tact tradename 20,300,000
Customer relationships 27,400,000
Goodwill 6,400,000
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 79%
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 at the closing, approximately $32,100,000 was
used to refinance existing debt and related fees (including an $18.0 million 13%
subordinated loan which had been used to finance the Hornschuch Acquisition (the
"Subordinated Loan")), approximately $8,000,000 will be used to finance a tender
offer (which commenced on February 3, 1999) for the remaining 21% 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 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 December 31, 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
nine months ended December 31, 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
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<PAGE> 9
operating results for the nine months ended December 31, 1997 reflect only the
effect of the Hornschuch Acquisition.
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1997
-----------------
(In thousands, except
per share data)
<S> <C>
Net sales $ 115,327
Net loss (856)
Basic net loss per common share (0.12)
Diluted net loss per common share (0.11)
</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 nine months
ended December 31, 1998.
Acquisition Related One-time Charge to Cost of Goods Sold
The results for the nine months ended December 31, 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 December 31, 1998 and March 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Raw Materials $ 5,268 $ 7,335
Work-in-Process 6,132 4,634
Finished Goods 30,079 14,995
------- -------
$41,479 $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 per common share reported for the three and nine months ended
December 31, 1998 and 1997.
The number of shares of common stock and common stock equivalents used in the
computation of net income per common share, assuming dilution for each period,
is the weighted average number of common shares outstanding during the periods
and, if dilutive, common stock options, warrants and convertible securities
which are considered common stock equivalents. The following is a reconciliation
of the denominators for determining basic and diluted net income per common
share for the three and nine months ended December 31, 1998 and 1997. The
numerators were the same for both calculations for all periods (in thousands,
except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------ ------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES:
Shares outstanding at beginning
of period 7,340 7,144 7,331 7,140
Shares issued -- 187 4 64
----- ----- ----- -----
Shares used in the calculation
of Basic EPS 7,340 7,331 7,335 7,204
Effect of dilutive securities:
Contingently issuable shares 339 519 339 519
Options/Warrants 1,091 155 1,058 170
----- ----- ----- -----
Adjusted weighted average shares 8,770 8,005 8,732 7,893
----- ----- ----- -----
</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 per common share because
they were anti-dilutive was approximately 752,000 and 2,954,000 for the three
months ended December 31, 1998 and 1997, respectively, and approximately 752,000
and 2,954,000 for the nine months ended December 31, 1998 and 1997,
respectively.
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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 operated primarily as a contract manufacturer
with approximately 90% of its sales to one customer, Rubbermaid Incorporated
("Rubbermaid") which marketed and distributed the Company's consumer products.
As a result, since the Company did not sell products directly to retailers, it
had limited sales, marketing and product distribution expenditures.
Since October 1, 1997, the Company has been transformed from a contract
manufacturer into a vertically integrated, world-wide leader in the consumer
decorative and surface covering products market with complete sales, marketing
and distribution operations. This was accomplished through (i) the October 1,
1997 acquisition of approximately 73.2% of the shares of Konrad Hornschuch AG
(the "Hornschuch Acquisition") (since the acquisition the Company has increased
its ownership to 79%, and on February 3, 1999 initiated a tender offer for the
remaining 21% of Hornschuch's outstanding shares), and (ii) the April 29, 1998
acquisition of the Con-Tact(R) brand name and other assets from Rubbermaid (the
"Rubbermaid Acquisition").
Since the Condensed Consolidated Statements of Income of the Company for the
three and nine months ended December 31, 1997 do not reflect the results from
the Hornschuch Acquisition prior to October 1, 1997 or any results from the
April 29, 1998 Rubbermaid Acquisition, the results for the three and nine months
ended December 31, 1998 are not directly comparable with the three and nine
months ended December 31, 1997. Only in the most recent two fiscal quarters
ended September 30, 1998 and December 31, 1998 have the Company's financial
statements reflected the results of both acquisitions for the entire quarter.
In the following discussion, dollar amounts are stated in thousands:
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 VS. THREE MONTHS ENDED DECEMBER 31, 1997.
The Company's third fiscal quarter is seasonally not as strong as other quarters
in both Europe and North America as a result of typically lower shipments of the
Company's consumer products during the holiday season and also due to the
Company's scheduled factory shutdowns both in the U.S. and Europe. Net sales for
the three months ended December 31, 1998 were $41,174 as compared with net sales
of $36,909 for the three months ended December 31, 1997. The increase of $4,265
resulted principally from the impact of the Rubbermaid Acquisition, partially
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<PAGE> 13
offset by slow shipments during the end of the service agreement with Rubbermaid
and by a decrease in Hornschuch net sales of $974, which were partially impacted
by weak sales to Russia.
Gross profit was $14,533, or 35.3% of net sales, for the three months ended
December 31, 1998 as compared with $9,715, or 26.3% of net sales, for the three
months ended December 31, 1997. The increase in gross profit of $4,818 and the
increase in gross profit margin reflect the impact of the Hornschuch Acquisition
as well as the inclusion of the Rubbermaid Acquisition and the fact that all
subsidiaries now sell directly to retailers. However, gross profit margins in
the current year's quarter when compared with the first two quarters of the
fiscal year were lower as a result of lower production volumes and scheduled
holiday plant shutdowns.
Selling, general and administrative expenses were $9,056, or 22.0% of net sales,
for the three months ended December 31, 1998 as compared with $7,153, or 19.3%
of net sales, in the three months ended December 31, 1997. The increase of
$1,903 was a result of the inclusion of sales, marketing and operations in the
U.S. 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, net was $3,774 for the three months ended December 31, 1998 as
compared with $1,601 in the prior year quarter. The increase of $2,173 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"), partially offset by interest income earned on cash
deposits, interest capitalized in the current year period for property, plant
and equipment additions and lower average borrowings on other debt.
The Company recognized income before income taxes and minority interest in
earnings of subsidiary of $1,703 in the three months ended December 31, 1998, as
compared with $961 in the three months ended December 31, 1997. This increase is
principally a result of the increase in earnings resulting from the Rubbermaid
Acquisition and the earnings of Hornschuch.
Net income of $485 for the three months ended December 31, 1998 was $244 higher
than the three months ended December 31, 1997 as a result of the above-noted
changes, a $292 increase in the provision for income taxes and a higher
deduction for the minority interest in earnings of Hornschuch in the current
year.
NINE MONTHS ENDED DECEMBER 31, 1998 VS. NINE MONTHS ENDED DECEMBER 31, 1997.
Net sales for the nine months ended December 31, 1998 were $136,670 (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
$56,364 for the nine months ended December 31, 1997 (which reflect the
Hornschuch Acquisition for three months). The increase of $80,306 resulted
principally from the inclusion of Hornschuch net sales of $83,090 in the current
year as compared with $28,602 in the prior year, and the Rubbermaid Acquisition
which contributed to an increase in sales of $24,978 in the U.S. operations.
Gross profit was $48,661, or 35.6% of net sales, for the nine months ended
December 31, 1998 as compared with $14,716, or 26.1% of net sales, for the nine
months ended December 31, 1997. The increase in gross profit of $33,945 and the
increase in gross profit margin reflect the impact of the Hornschuch Acquisition
as well as the inclusion of the Rubbermaid Acquisition and the
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<PAGE> 14
fact that all subsidiaries now sell directly to retailers. The gross margin for
the nine months ended December 31, 1998 reflects only eight months of the
Decorative Coverings Group ("DCG") operations which were acquired from
Rubbermaid on April 29, 1998.
Selling, general and administrative expenses were $31,423, or 23.0% of net
sales, for the nine months ended December 31, 1998 as compared with $9,720, or
17.2% of net sales in the nine months ended December 31, 1997. The increase of
$21,703 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 $10,446 for the nine months ended December 31, 1998 as
compared with $2,439 in the prior year. The increase of $8,007 is principally
due to interest expense of approximately $8,900 on the Notes, partially offset
by interest income earned on cash deposits and lower interest expense on other
debt due to lower average borrowings in the current year.
The Company recognized income before income taxes, minority interest in earnings
of subsidiary and extraordinary item of $6,792 in the nine months ended December
31, 1998, as compared with $1,096 in the nine months ended December 31, 1997.
This increase is principally a result of the increase in earnings resulting from
the Rubbermaid Acquisition and the Hornschuch Acquisition.
Net income of $1,081 for the nine months ended December 31, 1998 was $746 higher
than the nine months ended December 31, 1997 as a result of the above-noted
changes, a $2,366 increase in the provision for income taxes and a $565 increase
in the 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
$35,473 at December 31, 1998, an increase of $19,340. The increase is due
primarily to an increase in cash due 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 the current portion
of long-term debt.
Consolidated cash balances as of December 31, 1998 were $18,947 (which are
limited as to use to varying degrees by certain security agreements, minority
interests and debt covenants) as compared with $1,807 as of March 31, 1998. The
$17,140 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
December 31, 1998, up to approximately $8,000 is intended to be used to purchase
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<PAGE> 15
the outstanding minority interest of Konrad Hornschuch AG, for which the
Company commenced a tender offer on February 3, 1999 (during the nine months
ended December 31, 1998, the Company utilized $1,289 of the original amount
allocated of $9,300 to purchase shares of Konrad Hornschuch and increase its
ownership to approximately 79%). 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 nine months ended December 31,
1998 was $9,109 versus cash flow from operating activities of $10,038 for the
nine months ended December 31, 1997. Increases in net income, the extraordinary
charge, depreciation and amortization and minority interest in earnings of
subsidiary were offset by a decrease in the provision for notes receivable and
net working capital.
Capital expenditures for the nine months ended December 31, 1998 were $7,732
(including expenditures of $5,289 at Hornschuch) versus $1,828 for the nine
months ended December 31, 1997. Approximately $2,000 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 $9,500 this fiscal year.
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 for the purpose of financial
reporting. 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 DII's
U.S. subsidiary, Decora, Incorporated ("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
December 31, 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 21% equity interest in
Hornschuch and will be used for general corporate purposes including working
capital requirements and the relocation of manufacturing assets noted above.
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 $15,400. 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,
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<PAGE> 16
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.
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 nine months of fiscal 1999,
the Company has focused on the integration of the two acquisitions with its
existing operations and establishment of a global market strategy for its
consumer product lines.
With regard to operations, in North America the Company has completed its
comprehensive nine-month transition plan which involved taking over the sales,
marketing, distribution and manufacturing operations related to the product
lines acquired from Rubbermaid. The Company established and staffed its new
North American headquarters in Cleveland, Ohio and completed the installation of
a new, integrated management information system within all of its North American
facilities. Additionally, the Company selected a third party logistics firm to
warehouse and deliver its consumer products throughout North America, and, as of
February 1, 1999, the Company is shipping products directly to all of its retail
accounts. The Company also relocated the acquired Shelf Liner production
operations from Ohio to the Company's Fort Edward, New York manufacturing
facility. In addition to completion of the Rubbermaid transition, the Company's
North American and European operations have worked together to initiate projects
related to potential synergies between the two operations. Primary areas of
focus have included research and development, purchasing, engineering and
production. Management believes that such activities will contribute to the
operating performance and value of the Company in the future.
With regard to sales and marketing, activities, the Company has focused on
developing a global market strategy for its product lines and beginning the
implementation of this strategy in its existing markets. Baseline market and
consumer behavior studies were completed and utilized to develop new sales and
marketing strategies for both existing and new potential markets and market
segments. As a result of these activities, management believes there is a
significant opportunity to increase the size of its consumer business and it has
initiated activities to take advantage of this opportunity including
remerchandising, repositioning, design upgrades, brand enhancement, new product
introduction and new consumer communication methods. Management anticipates that
the impact of these efforts will begin to be realized in fiscal 2000 as new
products and programs begin to be rolled out to the market place.
The Company also continues to focus on its broader objective of increasing its
leadership role in the worldwide decorative coverings market by maximizing its
existing operations and pursuing additional consolidation opportunities in the
market. As a result, the Company continues to evaluate potential acquisition
and/or joint venture opportunities which may fit into its overall global
strategy.
-16-
<PAGE> 17
At December 31, 1998, the Company had consolidated outstanding long term
indebtedness of $134,677 and other short term indebtedness of $19,649 which
together totalled $154,326, 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. 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. 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's foreign operations are conducted primarily through Hornschuch. The
Company's European operations, representing approximately 61% of the Company's
net sales for the nine months ended December 31, 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 which began
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.
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 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.
-17-
<PAGE> 18
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 $600,000.
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 is completing 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 is in the process of reviewing other equipment and systems in order to
determine and remedy any potential Year 2000 Issues. Certain manufacturing
equipment has date-sensitive controllers which are not Year 2000 compliant and
will have to be upgraded, replaced or decommissioned. The Company anticipates
resolving these issues by September 1999 at a cost which is anticipated to be
within ordinary maintenance expenditure levels. 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.
-18-
<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
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included with this report:
(27) Financial Data Schedule
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended December 31, 1998.
-19-
<PAGE> 20
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: February 11, 1999
-20-
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