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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 1999.
[] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______ .
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 incorporation (I.R.S. Employer
or organization) Identification No.)
1 MILL STREET
FORT EDWARD, NEW YORK 12828
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (518) 747-6255
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of Each Class on which registered
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NONE NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $ .01 PAR VALUE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___
As of June 18, 1999, the Registrant had 7,423,886 shares of Common Stock
outstanding. The aggregate market value of the Common Stock held by
non-affiliates as of June 18, 1999, was approximately $42,517,000 based on the
closing price of the registrant's common stock on The Nasdaq National Market on
that date.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE BUSINESS
Decora Industries, Inc. ("DII") is a leading, worldwide manufacturer and
marketer of self-adhesive, branded, consumer decorative products. DII, a holding
company, is a Delaware corporation operating through its wholly owned
subsidiaries, Decora, Incorporated ("Decora") and Decora Industries Deutschland
GmbH ("DI Deutschland"). DI Deutschland owns approximately 90% of the voting
stock of Konrad Hornschuch AG ("Hornschuch"). The main emphasis of DII and its
subsidiaries (the "Company") is the world-wide development of its branded,
self-adhesive consumer decorative products and of specialty industrial and
commercial products, utilizing proprietary adhesive systems and coating
technologies.
Con-Tact(R), Cobra(R) and Wearlon(R) are registered trademarks of Decora.
d-c-fix(R), ceramo-fix(R), skai(R) and sol-pal(R) are registered trademarks of
Hornschuch. Rubbermaid(R) is a registered trademark of Rubbermaid, Incorporated
("Rubbermaid").
HISTORY OF THE COMPANY
The Company's primary lines of business, self-adhesive consumer decorative
products, are best known under the brands Con-Tact and d-c-fix. Con-Tact
self-adhesive consumer products were first introduced in the United States in
the 1950's by Decora's upstate New York operation which was formerly known as
the Decora Division of United Merchants and Manufacturers, Inc. ("UM&M"). This
operation developed and introduced the line and has always been its
manufacturer; however, from 1981 through April 1998 Con-Tact products were
distributed by Rubbermaid Incorporated ("Rubbermaid") pursuant to an exclusive
distribution and manufacturing agreement between Rubbermaid and UM&M. UM&M had
sold the Con-Tact brand name to Rubbermaid in 1983. The Company acquired the
Decora Division assets from UM&M in 1990 and maintained the established
relationship with Rubbermaid until April 1998, when Decora acquired the Con-Tact
brand name back from Rubbermaid along with all the assets, product lines and
market position of Rubbermaid's entire Decorative Coverings Group ("DCG"). At
the time of the 1990 acquisition, the Company was a holding company for numerous
disparate industrial and telecommunication services businesses. In the early
1990's, a decision was made to rationalize these disparate businesses to focus
on the Company's core decorative products business. Consequently, the Company
underwent a significant divestiture program (which was completed in 1995) and in
1992 changed its name to "Decora Industries, Inc." to better reflect its core
business. After completing this divestiture program, the Company was primarily a
contract manufacturer of Con-Tact brand products for Rubbermaid and it focused
on improving manufacturing efficiencies, broadening its product lines and
enhancing its relationship with Rubbermaid.
On October 1, 1997, the Company changed the course of its business significantly
by acquiring a majority interest in one of the largest manufacturers and
marketers of consumer decorative products in Europe, along with one of the most
well known self-adhesive consumer brands, thus beginning the transformation into
a vertically
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integrated, branded consumer products company. On that date, the Company
acquired 73.2% of the voting stock of Hornschuch through its newly formed
subsidiary, DI Deutschland (the "Hornschuch Acquisition"), which has since
increased its ownership to approximately 90%. Hornschuch, which was one of the
world's largest independent manufacturers and marketers of consumer
self-adhesive products, is best known for its d-c-fix brand, which is one of the
most popular brands of such products outside of the United States. Hornschuch
also manufactures decorative and functional films for use by original equipment
manufacturers ("OEM's") in the automotive, building, furniture, handbag, shoe
and interior decoration markets.
Soon after the Hornschuch Acquisition, the Company entered into an acquisition
agreement with Rubbermaid for the assets of the DCG (the "Rubbermaid
Acquisition"). The Rubbermaid Acquisition was completed on April 29, 1998 and
included all the assets and brand names associated with three product lines: (i)
the Con-Tact self-adhesive product line, which is manufactured by Decora, (ii)
the Shelf Liner light-adhesive line, which was previously 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 Rubbermaid Acquisition completed the transformation of the Company from a
contract manufacturer of products for others to its current position as one of
the world's largest vertically integrated manufacturers and marketers of branded
consumer self-adhesive products.
NARRATIVE DESCRIPTION OF THE BUSINESS
GENERAL
The Company is a manufacturer and marketer of branded, consumer, self-adhesive
decorative and surface coverings and of specialty industrial and commercial
products. The Company markets its consumer products primarily under the Con-Tact
and d-c-fix brands. These two consumer brands are considered to be two of the
most recognized brands of such products in the world, especially in the United
States and Europe. In the United States, the primary market for the Con-Tact
brand, products are distributed to leading retailers such as K-mart, Target, The
Home Depot and Wal-Mart where the products occupy prominent shelf space.
Similarly, in Germany, Italy and the Czech Republic, d-c-fix products are sold
directly to retail chains such as Brico, Metro and Stinnes. In the remainder of
Western Europe, Eastern Europe, South America, Africa, the Middle East and the
Far East, products under both brands are sold and distributed through a network
of approximately 50 wholesalers, independent distributors and agents.
Decora and Hornschuch utilize similar manufacturing processes to produce a wide
variety of consumer and industrial products. Each finished product is assembled
from a range of basic components such as film and adhesive using a wide variety
of surface treatments and designs. Final performance attributes of these
products are determined by the specific product application and the Company's
product marketing strategy for end-use categories including (i) decorative
coverings for household surfaces including shelving and drawers, (ii)
transparent and semi-transparent decorative coverings for windows and other
glass surfaces, (iii) arts and crafts
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project materials and (iv) decorative and surface protection coverings for
do-it-yourself ("DIY") home resurfacing and improvement projects.
The commercial and industrial products also use a broad range of film, release
and coating technologies. These products are sold to OEM's for use in (i)
furniture, automotive, handbag and shoe products, (ii) pressure-sensitive
hazardous marking tape products and (iii) coatings for industrial applications,
such as those utilizing the Company's proprietary release technology sold under
the brand name Wearlon.
INDUSTRY OVERVIEW
The Company operates primarily within the consumer household products industry.
Its branded consumer products are manufactured through the conversion of various
films into complete functional, packaged goods. These products are sold by
retailers to consumers for a wide range of applications including shelf lining,
glass covering, furniture and door repair and resurfacing, arts and crafts and
general surface protection. Consumers purchase these products based upon their
ease of application, design, durability and price. The products are sold in a
wide variety of retail stores, ranging from mass-merchants like Wal-Mart to
individual, independently owned food, drug and hardware stores.
The Company's manufacturing processes enable it to sell converted films beyond
its consumer lines into various industrial sectors. Various printed, coated and
textured films are sold to users and OEM's in diversified markets for use in the
manufacture of cabinets, furniture, automobiles, luggage and shoes. Customers
require high quality products with exact design specifications and consistency
as most products are intended to simulate the appearance and texture of natural
materials such as wood, stone and leather.
PRODUCTS AND MARKETS
The Company is a world leader in consumer, self-adhesive, surface covering
products and owns what management believes to be two of the most popular
consumer brand names in its markets, Con-Tact and d-c-fix. The Company also
manufactures films and other products for industrial and OEM applications. In
fiscal 1999, sales of consumer and industrial products represented 69% and 31%
of total revenues, respectively. In terms of geographic distribution, in fiscal
1999, sales to customers in the United States, Germany and the rest of the world
were 37%, 29% and 34% of total revenues, respectively. For additional product
line and geographic segment information, see Note 15 to the Consolidated
Financial Statements included in this report.
North American Operations
Decora operates as a branded consumer products company with its Con-Tact brand
product offering. Con-Tact is a repositionable, self-adhesive decorative
covering material which is used for DIY applications and is marketed to four
strategic product categories including shelving, surface protection, arts and
crafts and glass covering. Con-Tact is the leader in the U.S. consumer
self-adhesive decorative market and is sold primarily in the housewares
departments of mass merchandisers in the United States. Con-Tact is manufactured
by Decora utilizing a proprietary and patented repositionable adhesive
technology and is sold in roll form with a wide range
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of finishes, including functional coatings, printed patterns, solid colors and
clear and textured films. In its shelving category, the Company also sells
Con-Tact brand Shelf Liner and Grip Liner product lines that are also decorative
and functional covering materials. Shelf Liner is a light-adhesive covering
material which is used primarily as a removable shelf liner. Grip Liner is a
cushioned, non-adhesive surface covering with non-slip qualities also used
primarily for shelving applications. Decora intends to expand into and penetrate
additional consumer product segments with both existing and new products.
Management's objective is also to expand the sales which it derives from its
industrial products, which are currently not material to North America's overall
business. Decora has developed an industrial coatings business which markets a
range of proprietary coatings under the Wearlon brand name. These non-stick, yet
abrasion-resistant, coatings are water-based and cure at room temperature,
providing the industrial market with an environmentally friendly coating system
for a range of specialized applications. Decora also markets various other
industrial products, including commercial laminating, coating and printing
services and a line of high quality hazardous marking tapes sold under Decora's
Cobra brand name.
European Operations
Hornschuch's net sales for the twelve months ended March 31, 1999 were comprised
51% from consumer products and 49% from industrial products. Hornschuch's
consumer products, in addition to d-c-fix self-adhesive products, include
tablecloths and place mats.
Hornschuch's consumer products historically have been sold through the
hardware/DIY market, in contrast to those of Decora which typically have been
marketed as a housewares application. As a result, Hornschuch's products differ
somewhat from Decora's Con-Tact brand products in range of design, grade of
materials and utility. Through Hornschuch, management expects to introduce
Decora's housewares market-oriented products into Europe. Similarly, management
expects to introduce products that currently target the DIY market segment in
Europe into the United States to address product line gaps in Decora's DIY
market offerings.
In addition to its consumer decorative products, Hornschuch's industrial
business includes films processed specifically for sale primarily into the
fashion, automotive and laminate markets, which accounted for approximately 17%,
13% and 15%, respectively, of Hornschuch's net sales for fiscal 1999. The
fashion films line includes synthetic leathers and other materials which are
sold for use in the manufacture of shoes, upholsteries and handbags under the
brand name Skai. Hornschuch's automotive line primarily consists of artificial
leather for use in automobile interiors, and its laminates line consists of
films which are laminated to wood, metal and injection molded products during
the manufacturing of furniture and cabinetry.
MARKETING AND DISTRIBUTION
Prior to the Hornschuch Acquisition and the Rubbermaid Acquisition, the Company,
as primarily a contract manufacturer, did not incur traditional sales and
marketing expenses. In the past, Rubbermaid had sold and distributed Decora's
Con-Tact products and Decora conducted its international sales primarily through
a limited number of distributors. As a result of the two acquisitions, the
Company now performs full sales and marketing
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activities to support its integrated manufacturing operations and sells directly
to retailers. During a nine month transition period following the Rubbermaid
Acquisition, Decora established its own marketing and sales team and its own
distribution system and since January 1999 has been operating without any
further services from Rubbermaid. Decora's consumer products are warehoused and
delivered to customers by a third party logistics services provider.
Hornschuch has complete marketing and distribution operations which handle sales
in Germany. In addition, approximately 50 independent distributors and sales
representatives in 160 countries worldwide purchase product directly from
Hornschuch and resell to customers. In the Czech Republic and Italy,
subsidiaries of Hornschuch also make direct sales. Industrial products are
marketed to OEM's through a small group of technically-oriented sales persons.
CUSTOMERS
Decora sells its consumer Con-Tact products primarily to large retailers such as
K-mart, Target, The Home Depot and Wal-Mart as well as to wholesalers who sell
to smaller retailers and food, drug and hardware stores. Sales of decorative
coverings products are concentrated. During fiscal 1999, sales to Decora's top
five customers represented 60% of Decora's net sales. The loss of any one or
more of these customers could have a material adverse effect on Decora's
business and financial condition. During fiscal 1998, prior to the Rubbermaid
Acquisition, 31% of the Company's net sales were to Rubbermaid. Decora also
sells consumer products internationally and has industrial product customers in
the U.S. which purchase its tape and coating products.
Hornschuch's consumer decorative coverings products known as d-c-fix are sold
worldwide to large and small retailers in Germany and to independent
distributors outside of Germany. The top five customers for Hornschuch's
decorative products in fiscal 1999 and for the post acquisition six month period
ended March 31, 1998 represented 10% and 15% of its net sales, respectively. The
loss of any one or more of these customers could have a material adverse effect
on Hornschuch's business and financial condition. For fiscal 1999 and for the
six months ended March 31, 1998, approximately 32% and 31%, respectively, of
Hornschuch's net sales of decorative products were made in Germany and the
remainder primarily in other parts of Europe, the Far East and the Middle East.
During fiscal 1999 and for the six months ended March 31, 1998, a single
distributor in Russia constituted 8% and 18% of Hornschuch's total decorative
products net sales, respectively. Hornschuch's remaining divisions sell to the
OEM market and each has diversified customers, except for the automotive
division which sells primarily to four or five automotive manufacturers.
COMPETITION
Consumer Decorative Coverings
The Con-Tact product line has long held the leading market position in the
United States. The competition is divided among several smaller companies which
have slightly increased their market share in the last several years in certain
product categories. The Shelf Liner product line has dominated the light
adhesive market with a leading market share for a significant period, while the
Grip Liner product line is a significant player in a larger field of
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approximately four competitors, only one of which the Company believes has a
market share in this category which is equal to Decora's. Although each product
has a solid competitive position, availability of retail shelf space in the
competitive retail market can be impacted both by products of direct competitors
and by products serving different functions than Decora's products.
Hornschuch's decorative coverings products have been in the market since 1957.
In Germany, Hornschuch holds an approximately 50% market share, while outside of
Germany and in other countries around the world, Hornschuch competes with
approximately ten smaller competitors.
The Company's decorative products compete effectively on the basis of brand name
recognition, selection, price, service and quality of products, as well as
retail shelf space and location.
Other Products
The Company sells industrial products in a variety of market segments including
automotive, clothing, textile and furniture manufacturing. The Company does not
hold a significant market share in any of these markets and competes with many
larger and smaller competitors on the basis of quality, performance, customer
service and price.
MANUFACTURING
North American Operations
The majority of the products sold by Decora are produced at its facility in Fort
Edward, New York. Decora also utilizes outside suppliers when required for
certain specific printing, coating and finishing purposes for which it does not
currently have sufficient industrial capabilities. Decora purchases its Grip
Liner products from a third party supplier pursuant to an exclusive supply
agreement which expires in December 2001. Management anticipates making capital
expenditures in amounts similar to current annual levels in order to maintain
operating efficiencies and add additional capacity as warranted by product
demand and mix. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
The primary raw materials used in Decora's products are paper, poly vinyl
chloride ("PVC"), adhesives, inks, silicone and other chemicals. Decora uses two
primary suppliers for its PVC, and relations with such suppliers are good.
Decora believes that it has alternative sources of supply for all of its
significant and primary raw materials.
European Operations
The majority of the products sold by Hornschuch are produced at its facility in
Weissbach, Germany. Historically, Hornschuch has entered into arrangements with
various suppliers for certain specific printing purposes and is now in the
process of completing the installation of new printing capacity. In the future,
Hornschuch expects to use fewer outside suppliers as such manufacturing capacity
is made available to it. Management of Hornschuch
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expects to increase its capital expenditures over the next three years to
increase efficiencies and to add additional capacity when required (see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
As with Decora, the primary raw materials used in Hornschuch's products are
paper, PVC, adhesives, inks, silicone and other chemicals. Hornschuch uses at
least two primary suppliers for each of its raw materials, and relations with
such suppliers are good. Management believes that Hornschuch has alternative
sources for its significant and primary raw materials.
SEASONALITY
Decora has generally experienced higher sales and earnings in its first two
fiscal quarters as a result of increased seasonal demand for Con-Tact products
in the late spring and summer. The effect of this seasonality on the Company's
consolidated operations has been somewhat moderated by the Hornschuch
Acquisition. Overall, Hornschuch's historical sales have demonstrated little
seasonality; however, sales patterns have varied from year to year.
RESEARCH AND DEVELOPMENT
North American Operations
Decora has reduced its research and development function and currently maintains
a small internal research group. The majority of recent efforts have been placed
on the refinement and enhancement of existing products; however, that group also
continues to pursue new consumer and industrial products and applications
periodically. As a result of these research and development efforts, the Company
has refined a high-end liquid coating product for certain industrial
applications sold under the name Wearlon. Wearlon is a water-based co-polymer
which management believes is a breakthrough in coatings requiring non-stick and
slip-lubricity properties. Decora owns a patent on a portion of this technology
and certain prominent manufacturers are using Wearlon industrial maintenance
coating systems within their production lines for mold release and non-stick
applications.
European Operations
The majority of Hornschuch's recent efforts has been placed on the refinement
and enhancement of products already developed; however, a limited amount of
research and development is devoted to the pursuit of new industrial products
and applications. Recent research and development has de-emphasized automotive
and fashion products and focused primarily on the development of laminated film
products for desktops, tabletops and bookcases and new films for use in
decorative product manufacturing.
Through collaboration on research and development efforts between Decora and
Hornschuch, management believes that savings will result from the elimination of
efforts as each of the firms currently markets products that the other was
planning to develop. Management further believes that collaboration on research
and development will also result in a quicker response to new product
development through the sharing of technical
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expertise, although no assurance can be given that this will prove to be the
case. In particular, management expects to benefit from the combined significant
expertise in adhesive technology developed by Decora and significant expertise
in film technology developed by Hornschuch.
PROPRIETARY RIGHTS
North American Operations
Decora owns the rights to the pressure sensitive adhesive technology used in the
manufacturing of its self-adhesive Con-Tact products and owns the rights to the
Con-Tact trade name throughout most of the world. Con-Tact is a registered
trademark in over 50 countries worldwide; however, sales of Con-Tact products
outside of North America have been minimal. In connection with the Rubbermaid
Acquisition, Decora also acquired 20 unregistered trade names. In addition,
Decora owns the Cobra, Wearlon and Decora trade names. Decora is not aware of
any circumstances that would materially impair its trademarks. Decora has also
applied in the United States for trade name and patent protection for certain of
its other new products and has applied for foreign protection for certain of its
technologies and trademarks.
European Operations
Hornschuch does not currently own any patents; rather, Hornschuch's management
believes that Hornschuch's products are protected under the laws of Germany and
elsewhere with respect to proprietary information. Hornschuch owns 22 German
trademark registrations, four U.S. trademark registrations and 149 trademark
registrations in all countries combined, where Hornschuch is active.
Hornschuch's trademarks include d-c-fix, ceramo-fix, furnit, howesol, laif,
noblessa, select, skai and sol-pal.
Management considers seven of Hornschuch's trademarks, including the original
d-c-fix, skai, laif, furnit, select, howesol and sol-pal, to be important to
Hornschuch's business. Hornschuch is not aware of any circumstances that would
materially impair its trademarks.
The Company believes that its commercial position is enhanced by the patents it
owns as well as the know-how and trade secrets it has developed. Although the
Company seeks to protect its proprietary information by obtaining patents,
registering trade names and entering into trade secret and confidentiality
agreements, there is no guaranty that competitors will not misappropriate
proprietary information or develop similar products that are outside the
protection of the Company's patents, trade secrets and other proprietary rights.
GOVERNMENTAL REGULATION
The operations of Decora and Hornschuch are subject to regulation by various
federal, state and local authorities regarding the manufacturing of their
products. The Company's manufacturing facilities and products are subject to
periodic inspection by federal, state and local authorities. The Company
believes that it is currently in substantial compliance with all material
governmental laws and regulations and maintains all material permits and
licenses relating to its operations. Nevertheless, there can be no assurance
that the Company is in full
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compliance with all such laws and regulations or that it will be able to comply
with any future laws and regulations in a cost-effective manner. Failure by the
Company to comply with applicable laws and regulations could subject it to civil
remedies, including fines, injunctions, recalls or seizures, as well as
potential criminal sanctions, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
ENVIRONMENTAL MATTERS
Decora and Hornschuch's operations and properties are subject to numerous U.S.
and German federal, state and local environmental laws and regulations relating
to the emission, discharge, storage, treatment, handling, generation,
transportation, release, disposal, investigation and remediation of certain
materials, substances and wastes used in or resulting from its operations. As
with other companies engaged in similar businesses, the nature of the Company's
operations exposes it to the risk of liabilities or claims with respect to
environmental matters, including those relating to the disposal and release of
hazardous substances.
Based on Decora's experience to date, Decora believes that the future cost of
compliance with existing environmental laws and regulations and liability for
known environmental conditions will not have a material adverse effect on the
Company's business, financial condition or results of operations. Decora has not
made any material expenditures during the last three fiscal years in order to
comply with environmental laws or regulations
Hornschuch's manufacturing facility is located on property which has been used
for manufacturing purposes for the last 100 years. The current facilities
include water treatment and wastewater treatment facilities and an energy
production facility. Management of Hornschuch reports that certain environmental
issues may exist with respect to both Hornschuch-owned and third party waste
disposal sites, wastewater discharges and dust and hot air emissions. Hornschuch
management believes that any costs associated any remediation activities will
not be material and will not materially impact operations.
The Company cannot predict what environmental or health and safety legislation
or regulations will be enacted in the future or how existing or future laws or
regulations will be enforced, administered or interpreted, nor can it predict
the amount of future expenditures which may be required in order to comply with
such environmental or health and safety laws or regulations or to respond to new
environmental claims.
EMPLOYEES
At March 31, 1999, DII employed four people in its corporate office, Decora
employed approximately 211 people and Hornschuch employed approximately 715
people.
As of the same date, 130 of Decora's employees were represented by Local #13
United Paper Workers International Union (AFL-CIO) under a contract which was
renegotiated and renewed in March 1999 and expires in March 2002.
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As of the same date, 675 of Hornschuch's employees were represented by a labor
union. Almost all of the union members belong to the Textile and Clothing trade
union, which merged into the Metal trade union effective April 1, 1998. The most
recent collective agreement for Hornschuch's employees (including both blue
collar workers and white collar employees below management level) was signed in
June 1999 and expires in August 2000.
Neither Decora nor Hornschuch has experienced any work stoppage in recent years,
and management believes that relations with the Company's labor force are good.
ITEM 2. PROPERTIES
Decora owns its 220,000 square foot facility located on approximately 12 acres
in Fort Edward, New York. The Company's corporate headquarters are located
within this facility. Decora also leases a 10,000 square foot
manufacturing/office facility in Longwood, Florida and a 10,000 square foot
office facility in North Ridgeville, Ohio. Hornschuch owns its approximately 1.0
million square foot manufacturing and office facility located on approximately
48 acres in Weissbach, Germany.
Through a subsidiary corporation, Hornschuch also owns two commercial real
estate properties which are unrelated to its operating business and which are
being held for sale. Although these properties are currently generating rental
income sufficient to cover related expenses, no assurance can be given that this
will continue to be true in the future (see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook").
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings. Although
the Company is subject to certain legal proceedings, the ultimate outcome of
each proceeding will not, in the opinion of management, have a material adverse
effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
a. Market Information
Since August 17, 1998, the Company's Common Stock has been traded on The
Nasdaq National Market under the symbol "DECO". Prior to such date, the
Company's common stock was traded on The Nasdaq SmallCap Market under
the same symbol.
b. Stock Price Information
The following table sets forth the high and low sales prices of the
Company's Common Stock for the periods indicated, as reported by The
Nasdaq Stock Market. Such prices reflect a one-for-five reverse stock
split of the Company's Common Stock which became effective on December
29, 1997.
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Sales Prices
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High Low
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Fiscal 1998:
First Quarter 4 11/16 3 7/16
Second Quarter 5 3 1/8
Third Quarter 6 23/32 3 1/2
Fourth Quarter 5 7/8 4
High Low
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Fiscal 1999:
First Quarter 7 7/8 5 1/2
Second Quarter 7 15/16 4
Third Quarter 8 3/16 3 11/16
Fourth Quarter 8 6
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The Company has also authorized a class of preferred stock, although no
shares of preferred stock have been issued.
c. Approximate Number of Holders of Common Stock.
There were 707 holders of record of Common Stock as of June 18, 1999.
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d. Dividends
The Company has never paid a cash dividend and intends to retain
earnings, if any, for use in its business. In addition, the Company's
agreements with its lenders restrict the ability of the Company to pay
cash dividends.
e. Recent Sales of Unregistered Securities
The Company believes that the transactions described below in which
securities were sold or granted were exempt from registration under the
Securities Act of 1933 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 resale of the securities.
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Date Title Amount Consideration Purchaser
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7/5/98 Options to purchase 30,000(1) Services Director
common stock
8/1/98 Options to purchase 120,000(2) Services Employee
common stock
9/10/98 Common stock 9,032 Issued as part of Corporation
litigation
settlement
10/1/98 Warrants to purchase 20,000(3) Extension of Corporation
common stock warrant
agreement
1/26/99 Common stock 1,170 Services Employee
4/9/99 Options to purchase 20,000(4) Services Corporation
common stock
</TABLE>
- ----------------
(1) These options originally were issued on July 6, 1995 at an exercise
price of $1.25 per share ($6.25 after giving effect to the one-for-five
reverse stock split which was effective December 29, 1997). On July 5,
1998, the expiration date of the options was extended from July 6, 1998
to July 5, 2001. The exercise price remains the same.
(2) These options are exercisable at a price of $8.00 per share. Of these
options, 12,000 vested immediately upon grant, 48,000 shall vest over a
period of four years (12,000 per year) and the remaining 60,000 will
vest upon achievement of certain financial performance objectives over
the course of four years.
(3) These warrants originally were issued June 29, 1993 at an exercise price
of $1.40 per share ($7.00 after giving effect to the one-for-five
reverse stock split which was effective December 29, 1997). In December
1995, the exercise price was reduced to $1.04 per share ($5.20 after
giving effect to the one-for-five reverse stock split) and the
expiration date was extended from December 31, 1997 to December 31,
1998. On October 1, 1998, the expiration date was further extended to
December 31, 2000.
(4) These options are exercisable at a price of $7.66 per share and expire
on April 9, 2004.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL INFORMATION.
The following selected financial data of the Company are derived from the
consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP as to all years.
The following table should be read in conjunction with the Company's historical
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-K. Unless otherwise indicated, none of the information in the table
includes discontinued operations of the Company. See Note 2 of the financial
statements. See also Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
DECORA INDUSTRIES, INC.
SELECTED FINANCIAL DATA
For the five years ended March 31, 1999(1)
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
Statement of Operations Data: 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 176,577 $ 98,407 $ 41,082 $ 38,828 $ 40,414
Operating income 21,560 11,049 4,726 4,108 3,895
Income from continuing operations 3,696 2,730 3,566 2,919 2,408
Loss from discontinued operations -- -- -- -- (1,297)
Extraordinary item, net of income taxes (2,019) -- -- -- --
--------- --------- --------- --------- ---------
Net income $ 1,677 $ 2,730 $ 3,566 $ 2,919 $ 1,111
========= ========= ========= ========= =========
Basic income (loss) per share(2):
Continuing operations $ 0.50 $ 0.38 $ 0.51 $ 0.45 $ 0.40
Discontinued operations -- -- -- -- (0.22)
Extraordinary item, net of income taxes (0.27) -- -- -- --
--------- --------- --------- --------- ---------
Net income(2) $ 0.23 $ 0.38 $ 0.51 $ 0.45 $ 0.18
========= ========= ========= ========= =========
Diluted income (loss) per share(2):
Continuing operations $ 0.44 $ 0.35 $ 0.46 $ 0.44 $ 0.40
Discontinued operations -- -- -- -- (0.22)
Extraordinary item, net of income taxes (0.24) -- -- -- --
--------- --------- --------- --------- ---------
Net income(2) $ 0.20 $ 0.35 $ 0.46 $ 0.44 $ 0.18
========= ========= ========= ========= =========
Balance Sheet Data:
Total Assets $ 220,739 $ 131,216 $ 37,189 $ 36,157 $ 31,021
Working capital $ 34,657 $ 16,133 $ 6,631 $ 1,460 $ 238
Long-term obligations $ 164,663 $ 74,540 $ 18,817 $ 20,299 $ 18,163
Stockholders equity $ 18,865 $ 18,089 $ 14,503 $ 10,139 $ 4,396
Cash dividends per common share(3) -- -- -- -- --
</TABLE>
- ------------------
(1) The selected historical operating data for the fiscal year ended March
31, 1999 reflect the results following the Rubbermaid Acquisition that
was completed on April 29, 1998. Additionally, the historical operating
data in fiscal 1999 and in fiscal 1998
13
<PAGE> 16
reflect the results of Hornschuch since the Hornschuch Acquisition on
October 1, 1997. The Rubbermaid Acquisition and the Hornschuch
Acquisition materially impact the comparability of the information
reflected in the selected financial data table for fiscal 1999 and 1998
to that of prior years (see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
(2) Per share amounts reflect a one-for-five reverse stock split which
became effective on December 29, 1997.
(3) The Company has not paid dividends during the five years ended March 31,
1999 and does not anticipate paying cash dividends in the foreseeable
future.
14
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
During fiscal 1999, the Company completed its transformation from a contract
manufacturer operating under an exclusive agreement with Rubbermaid as it
existed prior to October 1997, to the vertically integrated, international
consumer products company it is today. Fiscal 1999 was the first year to include
a full twelve months of results from Hornschuch and, in North America,
significant effort and investment was required to build a sales, marketing and
product delivery infrastructure following the acquisition of the Con-Tact brand
and related product lines in April 1998. During the year, management focused on
transitioning these new operations and customer relationships from Rubbermaid
and setting the course for new product expansion and segmentation with emphasis
on marketing tailored product offerings to specific market segments and
establishing an integrated global marketing strategy.
On April 29, 1998, the Company acquired the assets of the Decorative Products
Group ("DCG") from Rubbermaid for an aggregate cost, including transaction
costs, of approximately $66 million (the "Rubbermaid Acquisition"). The assets
acquired included: (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
currently manufactured by a third party pursuant to the terms of an exclusive
manufacturing agreement. The Rubbermaid Acquisition has enabled Decora, which
previously had been primarily only a manufacturer of Con-Tact, to integrate the
marketing, sales and distribution of the Con-Tact product offering, as well as
the other two product lines, with its manufacturing capabilities. In conjunction
with the financing of the Rubbermaid Acquisition, the Company refinanced a
substantial portion of its outstanding debt and made significant investments
which were required to integrate the acquired assets into the Company's business
during a nine month transition period following the acquisition (see "Liquidity
and Capital Resources" below). During this nine month period, Decora established
a totally new sales, marketing, customer service and distribution management
team and operation in its new North American headquarters in North Ridgeville,
Ohio, installed new financial and enterprise resource planning software and
hardware systems, established a third party warehousing and distribution service
to handle consumer product shipments in North America and relocated acquired
manufacturing operations to its Fort Edward, New York manufacturing facility.
While executing this transformation, the Company strove to maintain and
strengthen customer relationships and interest in the Con-Tact product line.
In Europe, the Company's main emphasis was to solidify its management structure,
a process which was initiated in late summer and completed by year end.
Hornschuch's operations were negatively impacted by a soft economy in Germany
and by economic crises in Russia and the Far East. Despite these challenges,
Hornschuch was able to achieve some offsetting gains in other product segments
and to pursue the revitalization of its consumer product offering, laying the
groundwork for the potential broadening of its market reach in fiscal 2000 while
integrating its consumer product plans with the Company's global marketing and
product strategy.
15
<PAGE> 18
As a result of the Rubbermaid Acquisition completed during fiscal 1999 and the
Hornschuch Acquisition completed in fiscal 1998, the Company has established
itself as the worldwide market leader in the self-adhesive consumer product
market with significant competitive strengths including strong brand
recognition, strong product placement with retailers, vertically integrated
manufacturing operations, proprietary technologies, broad product lines and
cross-selling opportunities. The Company's strategy is to utilize these
competitive strengths in order to maintain its leadership position and to
increase shareholder value.
The results of operations of the Company reflect the results associated with the
Rubbermaid Acquisition since April 29, 1998 and the results of Hornschuch and DI
Deutschland (unless otherwise noted, in this section, financial information
regarding DI Deutschland represents the consolidated results and financial
position of Hornschuch and DI Deutschland) since the acquisition on October 1,
1997, thus affecting the comparability of results between the two years as well
as to those of prior years.
RESULTS OF OPERATIONS
Year Ended March 31, 1999 vs. Year Ended March 31, 1998
As noted above, the comparability of results between fiscal 1999 and fiscal 1998
is significantly affected by the inclusion of Hornschuch for only six months in
fiscal 1998 and the inclusion of results following the Rubbermaid Acquisition in
April 1998. As a result, cost of goods sold, gross margin and selling, general
and administrative expense levels in fiscal 1999 may not be meaningfully
compared with the prior year as the Company transitioned from being a contract
manufacturer for Rubbermaid to an integrated branded consumer products company.
Management's focus for North American operations during the year included the
establishment of new management and infrastructure for the product lines
acquired from Rubbermaid. Decora's results were impacted by these factors and
also by the nine month transition period during which Rubbermaid continued to
distribute the acquired product lines and the Company operated primarily under
product promotion and merchandising programs which were established by
Rubbermaid prior to the Rubbermaid Acquisition.
Net sales for the year ended March 31, 1999 were $176,577,000 (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 $98,407,000 for
the year ended March 31, 1998 (which reflect the inclusion of DI Deutschland
results for only six months). The increase of $78,170,000 resulted principally
from the inclusion of a full year of DI Deutschland net sales of $110,745,000 in
the current year as compared with $62,150,000 in the prior year, and the
Rubbermaid Acquisition contributed to an increase in net sales of $30,345,000 in
the U.S. operations.
Gross profit was $63,409,000, or 35.9% of net sales, for the year ended March
31, 1999 as compared with $30,187,000 or 30.7% of net sales, for the year ended
March 31, 1998. The increase of $33,222,000 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 year ended March 31, 1999 reflects only eleven months
of the DCG operations which were acquired on April 29, 1998. Additionally, gross
margin for the year ended March 31, 1999 was partially offset by a one-time
non-cash charge of approximately $800,000 for the step-up in basis of DCG
inventory acquired in the Rubbermaid Acquisition. Excluding the
16
<PAGE> 19
impact of this one-time charge, total Company gross profit would have been
approximately $64,209,000 or 36.4% of net sales.
Selling, general and administrative expenses were $41,849,000, or 23.7% of net
sales, for the year ended March 31, 1999 as compared with $17,677,000 or 18.0%
of net sales in the year ended March 31, 1998. The increase of $24,172,000 was a
result of the addition of DI Deutschland's selling, general and administrative
expenses for the entire period 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 $14,085,000 for the year ended March 31, 1999 as compared
with $3,829,000 in the prior year. The increase of $10,256,000 is principally
due to interest expense of approximately $12,200,000 on the $112,750,000 senior
secured notes which were issued by the Company on April 29, 1998 in connection
with the Rubbermaid Acquisition (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 $7,475,000 in the year ended March 31,
1999, as compared with income of $7,220,000 in the year ended March 31, 1998.
This increase is principally a result of the increase in earnings resulting from
the Rubbermaid Acquisition and the Hornschuch Acquisition, partially offset by
higher interest expense on the Notes.
Net income of $1,677,000 for the year ended March 31, 1999 was $1,053,000 lower
than the year ended March 31, 1998 as a result of the extraordinary charge (net
of income taxes) of $2,019,000 incurred in connection with the Rubbermaid
Acquisition, partially offset by the above noted changes and a $663,000 decrease
in the deduction for the minority interest in earnings of Hornschuch.
Year Ended March 31, 1998 vs. Year Ended March 31, 1997
The Company's consolidated financial statements for the year ended March 31,
1998 were the first fiscal year to include post-acquisition results of DI
Deutschland, which are so included for the final six months of such fiscal year.
Net sales for the year ended March 31, 1998 were $98,407,000 as compared with
net sales of $41,082,000 for the year ended March 31, 1997. The increase of
$57,325,000 resulted principally from the inclusion of DI Deutschland net sales
of $62,150,000 offset by a $5,856,000 decrease in Decora's net sales to its then
principal U.S. customer, Rubbermaid. DI Deutschland's net sales for the fourth
quarter were 17% above third quarter sales partially as a result of unusually
strong sales from certain decorative product customers, particularly in Russia.
The decrease in net sales in the United States resulted primarily from inventory
reductions initiated by Rubbermaid, as well as inventory reductions by certain
retailers. Export net sales from U.S. operations were $5,020,000 for the year
ended March 31, 1998, reflecting an increase of $858,000 as compared with
$4,162,000 in the year ended March 31, 1997.
17
<PAGE> 20
Gross profit was $30,187,000, or 30.7% of net sales, for the year ended March
31, 1998 as compared with $10,579,000, or 25.8% of net sales, for the year ended
March 31, 1997. The increase of $19,608,000 was a result of the addition of DI
Deutschland's gross profit of $20,897,000 reflected in the year ended March 31,
1998, offset by a decrease of $1,289,000 in gross profit at the U.S. operations.
The decrease in gross profit in the United States was principally due to the
decreased net sales discussed above. Gross profit margin increased by 4.9
percentage points primarily because of the higher gross profit margin
contributed by DI Deutschland's operations in the year ended March 31, 1998. DI
Deutschland's higher gross profit margin reflects its different product mix and
its greater degree of vertical integration than the U.S. operations. DI
Deutschland's gross profit margin was also favorably impacted by changes in
product mix in the fourth quarter due to increased sales of more profitable
decorative products.
Selling, general and administrative expenses were $17,677,000, or 18.0% of net
sales, for the year ended March 31, 1998 as compared with $5,853,000, or 14.2%
of net sales, in the year ended March 31, 1997. The increase of $11,824,000 was
a result of the addition of DI Deutschland's selling, general and administrative
expenses of $12,764,000 reflected in the year ended March 31, 1998, offset by a
decrease of $889,000 at the U.S. operations. The decrease in selling, general
and administrative expenses in the United States was primarily a result of
cost-saving measures implemented in fiscal year 1997 and workforce reductions
implemented in the 1998 fiscal year. The 3.8 percentage point increase in
selling, general and administrative expenses as a percentage of net sales was
primarily attributable to the inclusion of the results of DI Deutschland in
fiscal 1998, since DI Deutschland's selling, general and administrative expenses
comprised a higher percentage of its net sales than those of the U.S. operations
due to its greater level of integrated sales and marketing operations at that
time.
Non-recurring charges of $1,461,000 were recorded in the year ended March 31,
1998. Of these charges, $531,000 was recorded relative to severance costs for
U.S. workforce reductions implemented in anticipation of operating synergies
with Hornschuch, and $141,000 was recorded relative to print tooling
redundancies between the two operations. An additional $789,000 was recorded to
reserve against certain notes receivable which the Company obtained in fiscal
years 1996 and 1995 in conjunction with the sale of previously discontinued
non-core operations.
Interest expense was $3,829,000 for the year ended March 31, 1998 as compared
with $2,319,000 in the year ended March 31, 1997. The increase of $1,510,000 is
principally due to interest expense of $563,000 on Hornschuch's operating loans
and the additional interest expense of approximately $1,826,000 associated with
the Hornschuch Acquisition debt, offset by a decrease in interest expense at the
U.S. operations of approximately $879,000 which resulted from lower borrowings
and lower overall interest rates on outstanding debt.
The Company recognized income before taxes and minority interest of $7,220,000
in the year ended March 31, 1998, as compared with $2,407,000 in the year ended
March 31, 1997. This increase is principally a result of earnings of DI
Deutschland since the acquisition and decreases in U.S.-based selling, general
and administrative and interest expenses partially offset by the non-recurring
charge of $1,461,000, as well as increased interest expense associated with the
Hornschuch Acquisition.
18
<PAGE> 21
Net income of $2,730,000 for the year ended March 31, 1998 was $836,000 lower
than the year ended March 31, 1997 as a result of the above noted changes, a
$4,437,000 increase in the provision for income taxes and a $1,212,000 deduction
for the minority interest in earnings of Hornschuch.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash flow are cash from operations and
borrowings under its credit facilities. The Company's primary capital
requirements include debt service, capital expenditures, working capital needs
and financing of acquisitions.
The Company's net working capital increased from $16,133,000 at March 31, 1998
to $34,657,000 at March 31, 1999, an increase of $18,524,000. The increase is
due primarily to an increase in cash resulting from the proceeds of the issuance
of long-term debt and an increase in inventories associated with the Rubbermaid
Acquisition. Consolidated cash balances as of March 31, 1999 were $6,662,000
(which are limited as to use by certain security agreements, minority interests
and debt covenants) as compared with $1,807,000 as of March 31, 1998. The
$4,855,000 increase in cash resulted primarily from net proceeds from the
issuance on April 29, 1998 of $112,750,000 principal amount, 11.0% senior
secured notes (the "Notes"). Of the amount on hand as of March 31, 1999, up to
approximately $3,500,000 is intended to be used to purchase the remaining 10%
outstanding majority interest of Hornschuch. During the year ended March 31,
1999, the Company utilized approximately $5,800,000 of the original amount of
$9,300,000 allocated to purchase shares of Hornschuch and increased its
ownership to approximately 90%. During recent fiscal periods, DII's subsidiaries
generated cash from operations which was utilized primarily to fund working
capital requirements, capital expenditures 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 year ended March 31, 1999 was
$6,142,000 versus cash flow from operating activities of $14,781,000 for the
year ended March 31, 1998. A decrease in net income and an increase in net
working capital were partially offset by the extraordinary charge and increased
depreciation and amortization expense.
Capital expenditures for the year ended March 31, 1999 were $8,693,000 versus
$1,778,000 for the year ended March 31, 1998. The recent period includes
expenditures of $6,352,000 at DI Deutschland of which approximately $2,600,000
relate to progress payments on a new printing machine. For the fiscal year
ending March 31, 2000, the Company plans to make capital expenditures at similar
levels and intends to finance such expenditures with operating cash flow and
existing lines of credit.
During fiscal 1999, the Company increased its ownership of the shares of
Hornschuch from 76% to approximately 90% with an additional investment of
approximately $5,800,000. As a result of Hornschuch's significant operations,
the Company's consolidated operations and cash flow became significantly exposed
to changes in exchange rates between the U.S. dollar and the Deutsche 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
19
<PAGE> 22
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 $2,664,000 resulting in gross cash
proceeds of $110,086,000. Interest on the Notes is paid semi-annually, and no
principal payments are required prior to maturity on May 1, 2005. In addition,
(i) Hornschuch borrowed approximately $10,000,000 under its secured credit
facilities; (ii) Hornschuch participated in the acquisition by loaning to Decora
such $10,000,000 pursuant to a secured intercompany note, the proceeds of which
were used by Decora to help finance the acquisition of the DCG; and (iii) Decora
entered into a three year, $15,000,000 secured revolving line of credit
facility. At June 25, 1999, borrowings under the credit line totalled
$9,462,000. 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 acquisition of the DCG and related fees, these borrowings
refinanced approximately $32,100,000 of debt, including related costs and fees,
of DII and Decora, the Hornschuch Minority Tender Offer, the relocation of
manufacturing assets noted above and were used for general corporate purposes
including working capital requirements. Scheduled debt maturities during fiscal
2000 total $9,467,000 which the Company plans to fund through operating cash
flow and through renewals of existing short term lines of credit.
Certain indirect subsidiaries of Hornschuch own two commercial real estate
properties in Germany which are unrelated to its operating business and which
collateralize debt totaling approximately $13,800,000. 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 fiscal 2000, the Company's primary focus is to enhance its consumer
branded approach globally, to capitalize on its brands through repositioning and
realignment of its product offerings in various market segments, to continue to
refine and pursue a uniform global market approach and to consolidate and
integrate its international operations. The intent is to continue to strengthen
its leading market position and to increase consumer product sales in North
America, Europe and other parts of the world through increasing consumer
interest and demand, gaining market share and pursuing acquisition strategies.
Additionally the Company intends to expand sales in complementary industrial
product areas and to renew sales efforts in recovering developing countries.
As a result of the financing associated with the Rubbermaid and Hornschuch
Acquisitions, 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. As of March 31, 1999, the Company had
consolidated outstanding indebtedness of approximately $150 million, which
represented 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
20
<PAGE> 23
beyond the Company's control and by restrictive debt covenants. 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. 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 63% of the Company's
net sales for the fiscal year ended March 31, 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, minority interests, 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 $600,000.
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 has completed 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
21
<PAGE> 24
is on target to resolve 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 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.
FORWARD LOOKING STATEMENTS
From time to time, including in this Annual Report on Form 10-K, the Company may
publish forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, changes
in the industry, new products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include, without limitation, the
following: customer concentration, foreign exchange rate exposure, exposure to
raw material price fluctuations, high degree of leverage and related debt
service, competitors with significantly greater financial resources, debt
covenants restricting the Company's ability to borrow money or to move cash
between subsidiaries, a highly competitive environment, seasonality,
fluctuations in quarterly operating results, ability to maintain adequate levels
of working capital and the Company's ability to successfully implement its
acquisition and strategic alliance strategy. Refer to Item 1, "Narrative
Description of the Business" and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for additional information
regarding certain of these risks.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") 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
22
<PAGE> 25
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 new standard must be adopted for fiscal year 2000
financial reporting and the Company does not believe that the adoption of SFAS
No. 133 will have a material impact on the financial position of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
INTEREST RATES
The Company's exposure to market risk from interest rate changes relates
primarily to variable rate bank lines of credit. As of March 31, 1999, the
Company had cash flow exposure on its bank lines of credit in Germany
(approximately DM 58.3 million or $32.0 million) due to its variable LIBOR
pricing and on its Tax-Exempt Industrial Revenue Bonds ($2,210,000) in the
United States which bear interest at a variable rate. Accordingly, as of March
31, 1999 a 54 basis point (10% increase in the LIBOR) and a 33 basis point
increase in the bond's floating rate (10% increase) would have an immaterial
effect on the Company's pre-tax earnings.
FOREIGN EXCHANGE RISK
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in foreign currencies. For the fiscal year ended March 31, 1999,
approximately 63% of the Company's net sales were in currencies other than U.S.
dollars, primarily German Marks. The Company enters into foreign exchange
contracts periodically to hedge currency fluctuation relative to future fixed
payments. Such hedging activities are not significant in total. A 10% change in
the value of all foreign currencies would have resulted in a change of
approximately $830,000 in pre-tax earnings for the fiscal year ended March 31,
1999.
INTEREST RATE SWAPS AND CAPS
Hornschuch has four interest rate cap agreements as of March 31, 1999 for DM 7.0
million, DM 5.6 million, DM 3.0 million and DM 3.0 million which are used to
hedge against fluctuations in interest rates for existing debt balances.
Hornschuch is also party to three interest swap agreements as of March 31, 1999
for DM 6.0 million, DM 5.0 million and DM 3.1 million. These agreements are used
to convert variable rate debt to fixed rate debt. For the DM 5.0 million
instrument, the related debt had been repaid early. However, Hornschuch was
obliged to maintain the swap and pay (receive) the difference between
Hornschuch's fixed rate and the original variable rate.
23
<PAGE> 26
Decora has one interest rate swap agreement as of March 31, 1999 with its
primary lender which expires in May 1999. The agreement effectively converted
$8,523,000 of its variable rate borrowings into fixed rate obligations. While
the underlying obligations have been repaid, Decora continues to make payments
under the agreement until expiration in May 1999.
At March 31, 1999, the fair value of the Company's interest rate caps and
interest rate swaps approximate carrying value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is submitted in response to Part IV
hereof. See the Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
24
<PAGE> 27
PART III
DIRECTORS AND EXECUTIVE OFFICERS
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS OF DII
AND OFFICERS OF SUBSIDIARIES
The following table sets forth each of the executive officers and directors
of DII and key officers of DII's subsidiaries as of June 21, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Nathan Hevrony.............. 47 Director, Chairman, Chief Executive Officer
Timothy N. Burditt.......... 44 Executive Vice President, Administration and Business
Development; Secretary
Robert L. Macdonald......... 52 Chief Financial Officer
Earl A. Wearsch............. 54 Executive Vice President; President and General Manager of
Decora
Rolf J. Gemmersdorfer....... 47 Executive Vice President; President and General Manager of
Hornschuch
Richard A. DeCoste.......... 60 Executive Vice President; Vice President of Operations of
Decora
Roger Grafftey-Smith........ 68 Director
Gabriel Thomas.............. 58 Director
Stephen Verchick............ 58 Director
Ronald Artzer............... 55 Director
</TABLE>
Nathan Hevrony. Mr. Hevrony has served as a director of DII since August
1988 and as Chief Executive Officer and Chairman of the Board of DII since
October 1989.
Timothy N. Burditt. Mr. Burditt was named Executive Vice President,
Administration and Business Development of DII in June 1999. From 1993 through
June 1999, Mr. Burditt was Executive Vice President, Administration & Finance of
DII. Mr. Burditt has also been Secretary of DII since August 1993.
Robert L. Macdonald. Mr. Macdonald was named Chief Financial Officer of
DII in June 1999. From 1995 through June 1999, Mr. Macdonald was Chief Financial
Officer of Societe BIC S.A., a French branded consumer products maker. Mr.
Macdonald served as Vice President Finance of BIC's North American Group from
1993 through 1995.
Earl A. Wearsch. Mr. Wearsch was named Executive Vice President of DII
and President and General Manager of Decora in January 1998. From 1983 to 1997,
Mr. Wearsch served in various senior management and sales/marketing positions
with Glidden, a manufacturer of paint and coatings.
Rolf J. Gemmersdorfer. Mr. Gemmersdorfer was named Executive Vice
President of DII in August 1998. Since 1995, Mr. Gemmersdorfer was a General
Manager for Oral-B Laboratories GmbH, a subsidiary of Gillette. From 1992
through 1994, Mr. Gemmersdorfer was general manager of the largest division of
VP-Schickedanz AG.
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<PAGE> 28
Richard A. DeCoste. Mr. DeCoste joined Decora in January 1993. In
February 1994, Mr. DeCoste became President of Decora's Consumer Decorative
Products Group. In November 1994, he became Executive Vice President of DII. In
June 1997, he became Director of Operations of Decora.
Roger Grafftey-Smith. Mr. Grafftey-Smith has served as a director of DII
since August 1988 and has been a managing partner of Grafftey-Smith &
Associates, an international financial consulting firm, since 1981. Mr.
Grafftey-Smith also serves as a director of Americanino Capital Corporation, a
publicly-traded corporation.
Gabriel Thomas. Mr. Thomas has served as a director of DII since June
1991. He has served as President and Director of Unilab Corporation, a clinical
laboratory services company, since December 1989.
Stephen H. Verchick. Mr. Verchick has served as a director of DII since
October 1993. He has been engaged in the private practice of law as President of
Stephen H. Verchick & Associates, Professional Corporation, in Beverly Hills,
California, for the past 24 years. Mr. Verchick is also President of Warner
Capital Associates, a Los Angeles-based venture capital firm.
Ronald A. Artzer. Mr. Artzer has served as a director of DII since May
1994. In 1998, Mr. Artzer co-founded Tak-a-Sample Marketing, Inc., a promotional
and marketing firm. Since August 1997, Mr. Artzer has also worked as a
self-employed management consultant. From March 1994 to August 1997, Mr. Artzer
served as President and Chief Executive Officer of SoPakCo Foods, a food
processing and packaging company. From 1991 to 1993, Mr. Artzer served as
President and Chief Executive Officer of Design Foods, a Division of Sara Lee
Corporation.
Officers of DII are elected by the Board of Directors and hold office
until their successors are chosen and qualified, until their death or until they
resign or have been removed from office. All corporate officers serve at the
discretion of the Board of Directors. There are no family relationships between
any director or executive officer of DII and any other director or executive
officer of DII.
Directors of DII hold office until the next annual meeting of
shareholders, until successors are elected and qualified or until their earlier
resignation or removal.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who beneficially own
more than ten percent of a registered class of the Company's equity securities
("reporting persons"), to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Reporting persons
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
reports and amendments thereto on Forms 3, 4 and 5 furnished to the Company by
reporting persons during, and with respect to, its fiscal year ended March 31,
1999, and on a review of written representations from reporting persons to the
Company that
26
<PAGE> 29
no other reports were required to be filed for such fiscal year, all Section
16(a) filing requirements applicable to the Company's directors, executive
officers and greater than ten percent beneficial owners during such period were
satisfied in a timely manner, except that State Street Bank & Trust Company,
Trustee for the Textron Master Trust, a shareholder which beneficially owns in
excess of 10% of DII's common stock, failed to file one required report.
ITEM 11. EXECUTIVE COMPENSATION
The tables and discussion below set forth information about the
compensation awarded to, earned by or paid to DII's Chief Executive Officer and
its four other most highly compensated executive officers during the fiscal
years ended March 31, 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
FISCAL ---------------------- SHARES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1)
- --------------------------- ---- ------ ----- ----------
<S> <C> <C> <C> <C>
Nathan Hevrony ........................ 1999 $326,423 $391,625 --
Chief Executive Officer 1998 $217,644(2) $400,000 300,000
1997 $185,000(2) -- --
Timothy N. Burditt .................... 1999 $190,865 $247,925 --
Executive Vice President, 1998 $141,592 $275,000 60,000
Administration and Finance 1997 $120,000 $ 15,000 --
Earl A. Wearsch ....................... 1999 $179,962 $ 54,000
President and General Manager 1998 $ 37,269 -- 120,000
of Decora 1997 -- -- --
Rolf J. Gemmersdorfer ................ 1999 $191,504 -- 120,000(3)
President and Member of Hornschuch 1998 -- -- --
Management Board 1997 -- -- --
Richard A. DeCoste .................... 1999 $140,000 $ 6,000 --
Director of Operations, 1998 $140,000 -- 50,000
Decora, Incorporated 1997 $125,000 $ 5,000 --
</TABLE>
- ---------------
(1) The option share totals reflect the one-for-five reverse stock split
which was effective December 29, 1997.
(2) DII also paid the premium of $17,665 for term life insurance for the
benefit of Mr. Hevrony.
(3) Of these options, 12,000 vested immediately upon grant, 48,000 will vest
over a period of four years (12,000 per year), and the remaining 60,000
will vest upon the achievement of certain performance objectives over
the course of four years.
EMPLOYMENT AGREEMENTS
DII has an employment agreement with Mr. Hevrony, its Chief Executive Officer,
until May 31, 2000. The agreement was amended in January 1999 to provide for an
annual salary of $375,000. In addition, Mr. Hevrony is entitled to receive an
additional annual incentive bonus of up to $375,000 pursuant to the Company's
Executive Incentive Plan if certain profit levels are achieved. The Executive
Incentive Plan was adopted by the Compensation Committee of the Board of
Directors in October 1998.
27
<PAGE> 30
During fiscal year 1998, Mr. Hevrony was awarded a bonus of $350,000 for his
role in the Hornschuch Acquisition; $87,500 of such amount was paid in fiscal
1998 and the remainder was paid in fiscal 1999. During fiscal 1999, Mr. Hevrony
was also awarded a bonus of $391,625 for his role in the Rubbermaid Acquisition.
Mr. Hevrony's employment agreement shall terminate upon breach of a material
term of the agreement or upon the permanent disability of Mr. Hevrony. In the
event of termination without cause (as defined in such agreement), Mr. Hevrony
is entitled to receive compensation for the remainder of the term of the
agreement (through May 31, 2000) and an additional 24-month period.
DII has an employment agreement with Mr. Burditt, its Executive Vice President,
Administration and Finance, until June 30, 2001, which agreement was amended in
January 1999 to provide minimum annual compensation in the amount of $210,000.
In addition, Mr. Burditt is entitled to receive an additional annual incentive
bonus of up to $157,500 pursuant to the Company's Executive Incentive Plan if
certain profit levels are achieved. In fiscal year 1998, Mr. Burditt was awarded
a bonus of $250,000 for his role in the Hornschuch Acquisition; $62,500 of such
amount was paid in fiscal 1998 and the remainder was paid in fiscal 1999. During
fiscal year 1999, Mr. Burditt was awarded a bonus of $247,925 for his role in
the Rubbermaid Acquisition. Upon termination without cause, Mr. Burditt is
entitled to receive any earned but unpaid bonuses on a pro-rata basis, plus
compensation for the greater of twelve months from the date of termination or
the remainder of the term.
DII has a three-year employment agreement with Mr. DeCoste, Decora's Director of
Operations, until May 30, 2000 which provides for annual compensation of
$140,000. Upon termination without cause, Mr. DeCoste is entitled to receive
compensation for the lesser of twelve months or to the end of the term. As part
of his employment agreement, Mr. DeCoste was granted an option to purchase
20,000 shares of DII common stock at $5.00 per share. All of such options are
currently vested.
As of January 8, 1998, Decora entered into a three-year employment agreement
with Mr. Wearsch, its President and General Manager, which agreement was amended
in January 1999 to provide minimum annual compensation in the amount of
$210,000. In addition, Mr. Wearsch is entitled to receive an additional annual
incentive bonus of up to $157,500 pursuant to the Company's Executive Incentive
Plan if certain profit levels are achieved. As part of the employment agreement,
Mr. Wearsch was awarded an option to purchase 60,000 shares of DII common stock
at $4.75 per share. During fiscal year 1999, Mr. Wearsch was awarded a bonus of
$54,000 for his role in the Rubbermaid Acquisition. Upon termination without
cause, Mr. Wearsch is entitled to receive compensation for twelve months from
the date of termination. Upon the occurrence of certain "change of control"
events, Mr. Wearsch shall be entitled to resign his position and receive
compensation for twelve months following the resignation.
Hornschuch has a five year employment agreement with Mr. Gemmersdorfer which
expires in July 2003. Pursuant to the agreement, Mr. Gemmersdorfer is the
Chairman of Hornschuch's Management Board. The agreement provides for annual
base compensation of DM 500,000 plus an annual bonus of up to DM 200,000 in 1999
and DM 250,000 in years 2000 through 2003. The actual amount of the bonus in any
year depends on the achievement of certain enumerated budget targets. In the
event that such budget targets are exceeded in any year, Mr. Gemmersdorfer will
be entitled to receive for such year, in addition to the bonus described above,
an additional bonus based on a formula, although the total combined bonus
payments in any year shall not exceed the base compensation payable in such
year. In case of premature termination of the employment agreement during the
first three years, Mr. Gemmersdorfer will be entitled to remuneration in the
maximum amount of two times his annual salary.
28
<PAGE> 31
OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Potential
Realizable Value at Assumed
Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
------------------------------------------------------------------- ----------------------------
% Total of
Number of Options
Shares Granted to
Underlying Employees in
Options the Fiscal Exercise Expiration
Name Granted Year Price Date 5% 10%
---- ---------- ------------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Rolf J. Gemmersdorfer 120,000(1) 30.8% $8.00 7/31/2003 $201,677 $501,172
</TABLE>
- ------------------
(1) The options vest as follows: 12,000 vested immediately on the date of
grant, 48,000 will vest over a period of four years (12,000 per year)
and the remaining 60,000 will vest upon achievement of certain
performance criteria over the course of four years.
AGGREGATED MARCH 31, 1999 YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END(1) AT FISCAL YEAR END(2)
----------- ------------- ----------- -------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Nathan Hevrony ........... 430,000 100,000 $335,000 $100,000
Timothy N. Burditt ....... 65,000 20,000 $ 45,000 $ 20,000
Earl A. Wearsch .......... 80,000 40,000 $ 90,000 $ 45,000
Richard A. DeCoste ....... 55,000 10,000 $ 40,000 $ 5,000
Rolf J. Gemmersdorfer .... 12,000 108,000 $ 0 $ 0
</TABLE>
- ---------------
(1) Option share totals reflect the one-for-five reverse stock split which
was effective December 29, 1997.
(2) Value of unexercised in-the-money options was calculated using the
closing sales price for DII's stock on March 31, 1999.
During the year ended March 31, 1999, none of the executive officers exercised
any outstanding stock options. The only unexercised options held by such
executive officers as of March 31, 1999 are shown in the table above.
COMPENSATION OF DIRECTORS
Effective April 1, 1999, directors are paid $20,000 per year. Directors may also
receive stock options pursuant to a new stock option plan known as the Decora
Industries, Inc. 1999 Stock Option Plan (the "Plan") which was adopted by the
Board of Directors on June 8, 1999. The Plan, which remains subject to
shareholder approval at the Company's 1999 annual meeting of stockholders,
reserves for grant and issuance to employees, directors and consultants
1,000,000 shares of the Company's common stock. In addition, directors may also
receive options by other grant by DII. DII reimburses directors for reasonable
expenses incurred in connection with their attendance at meetings and other
Company related functions.
29
<PAGE> 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 21, 1999, certain information with
respect to the common stock of DII which may be deemed to be beneficially owned
by each stockholder who is known by DII to own more than 5% of the outstanding
common stock, by each director of DII, each executive officer of DII named in
Item 11 and by all directors and executive officers of DII as a group. The share
totals reflect a one-for-five reverse stock split which was effective December
29, 1997.
<TABLE>
<CAPTION>
NAME AND PERCENT
ADDRESS OF COMMON OTHER OF
BENEFICIAL OWNER(1) STOCK SECURITIES(2) TOTAL CLASS
- ------------------- ----- ------------- ----- -----
<S> <C> <C> <C> <C>
State Street Bank & Trust 0 1,818,447(3) 1,818,447 19.7%
Company, Trustee
Textron Master Trust
One Enterprise Drive
Master Trust C W6C
North Quincy, MA 02171
Robert W. Johnson, IV 388,416(4) 385,000 773,416 9.9%
The Johnson Company
630 Fifth Avenue, Suite 1510
New York, NY 10111
Nathan Hevrony..................... 150,750 430,000 580,750 7.4%
Roger Grafftey-Smith............... 75,000 112,400 187,400 2.5%
Gabriel Thomas..................... 0 142,400 142,400 1.9%
Stephen H. Verchick................ 0 75,000 75,000 1.0%
Ronald A. Artzer................... 0 70,000 70,000 (5)
Timothy N. Burditt................. 2,000 65,000 67,000 (5)
Earl A. Wearsch.................... 1,000 80,000 81,000 1.1%
Rolf J. Gemmersdorfer.............. 0 12,000 12,000 (5)
Richard A. DeCoste................. 4,000 55,000 59,000 (5)
All directors and executive
officers as a group, including
the named persons (10 persons).... 232,750 1,041,800 1,274,550 15.1%
</TABLE>
- -----------
(1) Unless otherwise indicated, each person included in the table has sole
investment power and sole voting power with respect to the securities
beneficially owned. The address of each director and officer listed is 1
Mill Street, Fort Edward, New York 12828.
(2) The amounts shown reflect shares of common stock underlying stock
options, convertible notes or warrants which are exercisable within 60
days. The amounts shown do not reflect a total of 360,000 shares of
common stock underlying options granted, effective as of May 1, 1999, by
the Board of Directors under the Decora Industries, Inc. 1999 Stock
Option Plan to the following persons: Ronald Artzer (25,000); Roger
Grafftey-Smith (25,000); Gabriel Thomas (25,000); Stephen Verchick
(25,000); Nathan Hevrony (150,000); Timothy Burditt (55,000) and Earl
Wearsch (55,000). These options are not included in the beneficial
ownership table because their grant is contingent upon approval of the
Decora Industries, Inc. 1999 Stock Option Plan by the Company's
stockholders.
(3) The amount shown reflects common stock issuable upon exercise of
warrants and conversion of preferred stock underlying warrants. These
warrants were issued in connection with an $18,000,000 subordinated loan
from Textron Master Trust ("Textron") to the Company which was paid in
full on April 29, 1998. So long as any of the warrants are outstanding,
Textron shall have the right to nominate one person to the Company's
Board of Directors. Textron nominated Richard A. Watson, who served as a
member of the Board of Directors until his resignation on May 5, 1998
following the repayment of the Textron loan. To date, Textron has
exercised this right only during the period that the Textron loan was
outstanding.
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<PAGE> 33
(4) Mr. Johnson disclaims beneficial interest in 27,000 shares which are
held by trusts for which he is a trustee.
(5) Each of these persons owns less than 1% of the outstanding common stock
of DII.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 8, 1999, the Board of Directors of the Company approved, subject
to the approval of the Company's stockholders at the Company's 1999 annual
meeting of stockholders, the Decora Industries, Inc. 1999 Stock Option Plan (the
"Plan"). The Plan reserves for grant and issuance to employees, directors and
consultants 1,000,000 shares of the Company's common stock. Simultaneously with
its approval of the Plan, the Board of Directors approved the issuance under the
Plan, effective May 1, 1999, of options to directors and executive officers as
follows: Ronald Artzer (25,000); Roger Grafftey-Smith (25,000); Gabriel Thomas
(25,000); Stephen Verchick (25,000); Nathan Hevrony (150,000); Timothy Burditt
(55,000) and Earl Wearsch (55,000).
On August 1, 1998, the Board of Directors granted to Rolf J.
Gemmersdorfer (i) an option to purchase 60,000 shares of common stock at an
exercise price of $8.00 per share, with 12,000 options immediately vesting and
12,000 options to vest on August 1 of each of the next four years, and (ii) an
option to purchase up to an additional 60,000 shares of common stock at an
exercise price of $8.00 per share depending on achievement of certain
performance targets in 1999 through 2002. All such options granted have an
exercise price which was either equal to or greater than the market price of
DII's common stock on the date of grant. All such options are exercisable until
the first to occur of July 31, 2003 or the third anniversary of such vesting.
On April 29, 1998, as part of a refinancing associated with the
Rubbermaid Acquisition, the Company paid off in full an $18,000,000 subordinated
loan to Textron Master Trust. In connection with that loan, Textron was issued
warrants in October 1997 which upon exercise will enable it to purchase up to
1,818,447, or approximately 19.7%, of the outstanding common stock of the
Company.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See Index to Consolidated Financial
Statements.
2. Financial Statement Schedules. See Index to Consolidated
Financial Statements.
3. Exhibits.
The following exhibits are filed or incorporated by reference as part of this
Report.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
2.1 Stock Purchase Agreement by and between Baden-Wurttenbergische Bank AG
and Newco dated as of September 3, 1997, as amended.(12)
2.2 Stock Purchase Agreement by and between der Kunz Holding GmbH & Co. KG
and Newco dated as of August 18, 1997, as amended.(12)
2.3 Asset Purchase Agreement dated as of March 30, 1998, by and between
Rubbermaid Incorporated and Rubbermaid Specialty Products, Inc., on the
one hand, and Decora Industries, Inc. and Decora, Incorporated, on the
other hand.(13)
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<PAGE> 34
(3) Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of DII filed on January 28, 1992. (3)
3.2 Amendment No. 1 to DII's Certificate of Incorporation filed on November
2, 1993. (16)
3.3 Certificate of Designation of Series A Preferred Stock of Decora
Industries, Inc. dated September 26, 1997. (12)
3.4 Amendment No. 2 to DII's Certificate of Incorporation filed on December
29, 1997. (16)
3.5 Amendment No. 3 to DII's Certificate of Incorporation filed on December
29, 1997. (16)
3.6 By-laws of DII. (3)
(4) Instruments Defining the Rights of Security Holders
4.1 Certificate of Incorporation and By-laws (see Exhibits 3.1-3.6).
4.2 Form of Specimen Certificate. (15)
4.3 Form of Indenture dated as of April 29, 1998 among Decora Industries,
Inc. as Issuer, Decora, Incorporated, Subsidiary Guarantors, and United
States Trust Company of New York as Trustee. (15)
4.4 Form of 11% Senior Secured Notes due 2005 issued under Indenture dated
as of April 29, 1998 (included as Exhibit A to Indenture). (15)
4.5 Form of Series B 11% Senior Secured Notes due 2005 issuable under
Indenture dated as of April 29, 1998 (included as Exhibit B to
Indenture). (15)
4.6 Form of Guarantee of Decora, Incorporated dated as of April 29 1998
(included as Exhibit G to Indenture). (15)
4.7 Form of Registration Rights Agreement dated as of April 29, 1998 among
Lazard Freres & Co. LLC, Decora Industries, Inc. and Decora,
Incorporated. (15)
(10) Material Contracts
10.1 Management Agreement dated as of April 18, 1990 by and between Utilitech
and Decora, Incorporated.(1)
10.2 Option Agreement dated as of January 7, 1992, by and between Utilitech,
Incorporated and Nathan Hevrony. (2)
10.3 Option Agreement dated as of January 7, 1992, by and between Utilitech,
Incorporated and Roger Grafftey-Smith.(2)
10.4 Option Agreement dated as of January 7, 1992, by and between Utilitech,
Incorporated and Gabriel Thomas. (2)
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<PAGE> 35
10.5 Note and Warrant Purchase Agreement by and between Decora Industries,
Inc. and Robert W. Johnson IV, dated November 3, 1992. (3)
10.6 Series A Warrant to Purchase Common Stock of Decora Industries, Inc.,
dated November 3, 1992 issued to Robert W. Johnson IV. (3)
10.7 Series B Warrant to Purchase Common Stock of Decora Industries, Inc.,
dated November 3, 1992 issued to Robert W. Johnson IV. (3)
10.8 Form of Option Agreement dated as of January 11, 1993, by and between
Richard A. DeCoste and the Company.(4)
10.9 Promissory Note in the amount of $6,000,000 dated as of July 20, 1994 by
and between Decora Industries, Inc. as borrower and Decora, Incorporated
as lender.(5)
10.10 Form of Option Agreement dated as of July 5, 1994 by and between Decora
Industries, Inc. and Stephen Verchick.(5)
10.11 Form of Option Agreement dated as of July 5, 1994 by and between Decora
Industries, Inc. and Ronald Artzer.(5)
10.12 Form of Option Agreement dated as of August 15, 1994 by and between
Decora Industries, Inc. and Nathan Hevrony.(6)
10.13 Option Agreement dated July 6, 1995 by and between Gabriel Thomas and
Decora Industries, Inc.(7)
10.14 Amended and Restated Note and Warrant Purchase Agreement by and between
Decora Industries, Inc. and Johnson.(8)
10.15 Series C Warrant to Purchase Common Stock of Decora Industries, Inc.(8)
10.16 Form of Exchange Agreement dated March 31, 1996 by and among Decora,
Incorporated, CIGNA Mezzanine Partners, Inc., CIGNA Property and
Casualty and Insurance Company of North America.(9)
10.17 Form of Employment Agreement dated as of June 1, 1997 by and between
Decora Industries, Inc. and Nathan Hevrony.(10)
10.18 Form of Employment Agreement dated as of June 1, 1997 by and between
Decora, Incorporated and Richard DeCoste.(11)
10.19 Form of Employment Agreement dated as of June 1, 1997 by and between
Decora Industries, Inc. and Timothy N. Burditt.(11)
10.20 Certificate of Designation of Series A Preferred Stock of Decora
Industries, Inc. dated September 26, 1997(12)
10.21 Note and Warrant Purchase Agreement dated as of September 26, 1997 among
Decora, Incorporated, Decora Industries, Inc., Dorrance Street Capital
Advisors, LLC and Textron Master Trust.(12)
10.22 Common Warrant Certificate with respect to 2,136,534 shares of Decora
Industries, Inc., Common Stock, dated September 29, 1997 issued by
Decora Industries, Inc. to Textron Master Trust.(12)
33
<PAGE> 36
10.23 Preferred Warrant Certificate with respect to 69,557 shares of Decora
Industries, Inc. Series A Stock, dated September 29, 1997 issued by
Decora Industries, Inc. to Textron Master Trust.(12)
10.24 Contingent Common Warrant Certificate with respect to an indeterminate
number of shares of Decora Industries, Inc. Common Stock, dated
September 29, 1997 issued by Decora Industries, Inc. to Purchaser.(12)
10.25 Credit and Reimbursement Agreement Modification Agreement No. 2 dated
September 26, 1997 by and between the Borrower and Fleet Bank in
connection with a letter of credit issued by Fleet Bank in favor of
Mellon Bank, FSB, as Trustee, concerning the issuance of $2,460,000
industrial revenue development bond.(12)
10.26 Promissory Note in the amount of $15,207,000 dated September 30, 1997 by
Decora Industries, Inc. to Decora, Incorporated.(12)
10.27 Loan Agreement dated September 29, 1997 among Decora Industries
Deutschland GmbH, Decora Industries, Inc. and Dresdner Bank AG (12)
10.28 Form of Notarial Deed dated as of April 28, 1998 between Decora
Industries, Inc. and United States Trust Company of New York relating to
pledge of shares of Decora Industries Deutschland GmbH ("German Pledge
Agreement"). (15)
10.29 Form of Guarantor Pledge Agreement dated as of April 29, 1998 between
Decora Industries, Inc. and United States Trust Company of New York.
(15)
10.30 Form of Amendment to German Pledge Agreement dated as of April 29, 1998
between Decora Industries, Inc. and United States Trust Company of New
York. (15)
10.31 Form of Loan Agreement dated as of April 28, 1998 between Decora,
Incorporated and Konrad Hornschuch AG. (15)
10.32 Form of Security Agreement dated as of April 29, 1998 between Decora,
Incorporated and Konrad Hornschuch AG. (15)
10.33 Form of Restated Revolving Promissory Note dated as of April 29, 1998 by
Decora, Incorporated in favor of Fleet National Bank in the principal
amount of $15,000,000. (15)
10.34 Form of Restated Secured Revolving Line of Credit Agreement dated as of
April 29, 1998 between Decora, Incorporated and Fleet National Bank.
(15)
10.35 Form of Credit and Reimbursement Agreement Modification Agreement No. 3
dated as of April 29, 1998 between Decora, Incorporated and Fleet
National Bank. (15)
10.36 Form of Mortgage Modification and Consolidation Agreement dated as of
April 29, 1998 between Decora, Incorporated and Fleet National Bank.
(15)
10.37 Form of Mortgage dated as of April 29, 1998 between Decora, Incorporated
and Fleet National Bank securing principal indebtedness in the amount of
$2,497,000. (15)
34
<PAGE> 37
10.38 Form of Mortgage dated as of April 29, 1998 between Decora, Incorporated
and Fleet National Bank securing principal indebtedness in the amount of
$499,000. (15)
10.39 Form of Restated Security Agreement dated as of April 29, 1998 between
Decora, Incorporated and Fleet National Bank. (15)
10.40 Form of Environmental Compliance and Indemnification Agreement dated as
of April 29, 1998 between Decora, Incorporated and Fleet National Bank.
(15)
10.41 Form of Option Agreement dated as of January 8, 1998, by and between
Decora Industries, Inc. and Earl A. Wearsch. (15)
10.42 Form of Option Agreement dated as of February 19, 1998, by and between
Decora Industries, Inc. and Nathan Hevrony. (15)
10.43 Form of Option Agreement dated as of February 19, 1998, by and between
Decora Industries, Inc. and Timothy N. Burditt. (15)
10.44 Form of Option Agreement dated as of February 19, 1998, by and between
Decora Industries, Inc. and Richard DeCoste. (15)
10.45 Form of Option Agreement dated as of February 19, 1998, by and between
Decora Industries, Inc. and Earl A. Wearsch. (15)
10.46 Form of Option Agreement dated as of February 19, 1998, by and between
Decora Industries, Inc. and each of its non-employee directors (Messrs.
Artzer, Grafftey-Smith, Thomas and Verchick, respectively).(15)
10.47 Form of Option Agreement dated as of June 1, 1997, by and between Decora
Industries, Inc. and Richard DeCoste. (15)
10.48 Form of Official Statement of Counties of Warren and Washington, New
York, Industrial Development Agency $2,460,000 Tax-exempt Industrial
Development Revenue Bonds (Decora, Incorporated Project), Series 1996.
(14)
10.49 Form of Payment and Deferral Agreement dated as of July 9, 1998 by and
among Decora, Incorporated, Decora Industries, Inc. and each of the
Holders identified and listed on Schedule A attached thereto. (17)
10.50 Form of Option Agreement dated as of August 1, 1998, by and between Rolf
J. Gemmersdorfer and Decora Industries, Inc. (17)
10.51 Form of Employment Agreement dated July 18, 1998 between Konrad
Hornschuch AG and Rolf J. Gemmersdorfer.
10.52 Decora Industries, Inc. Executive Compensation Plan.
(21) Subsidiaries of the Registrant
21.1 Subsidiaries of Decora Industries, Inc. (16)
35
<PAGE> 38
(27) Financial Data Schedule
27.1 Financial Data Schedule.
Notes:
(1) Previously filed as Exhibits to the Company's Report on Form 8-K dated
April 18, 1990.
(2) Previously filed as Exhibits to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992.
(3) Previously filed as Exhibits to the Company's Report on Form 8-K dated
November 5, 1992.
(4) Previously filed as Exhibit to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1993.
(5) Previously filed as Exhibit to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1994.
(6) Previously filed as Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended December 31, 1994.
(7) Previously filed as Exhibit to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1995.
(8) Previously filed as Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended December 31, 1995.
(9) Previously filed as Exhibit to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1996.
(10) Previously filed as Exhibit to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1997.
(11) Previously filed as Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended June 30, 1997.
(12) Previously filed as Exhibit to the Company's Report on Form 8-K dated
October 1, 1997.
(13) Previously filed as Exhibit to the Company's Report on Form 8-K dated
March 31, 1998.
(14) Previously filed as Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended December 31, 1996.
(15) Previously filed as Exhibit to the Company's report on Form 10-K for the
fiscal year ended March 31, 1998.
(16) Previously filed as Exhibit to the Company's Registration Statement No.
333-58989 on Form S-4 as originally filed on July 13, 1998.
(17) Previously filed as Exhibit to Amendment No. 1 of the Company's
Registration Statement No. 333-58989 on Form S-4 as filed on September
4, 1998.
(b) REPORTS ON FORM 8-K
1. No reports on Form 8-K were filed by the Company during the three months
ended March 31, 1999.
36
<PAGE> 39
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF 15(d) 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.
Date: June 28, 1999 By: /s/ Nathan Hevrony
------------------------------
Nathan Hevrony
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Roger Grafftey-Smith Director June 28, 1999
- -------------------------------
Roger Grafftey-Smith
/s/ Gabriel Thomas Director June 28, 1999
- -------------------------------
Gabriel Thomas
/s/ Nathan Hevrony Chief Executive Officer June 28, 1999
- ------------------------------- and Director (Principal
Nathan Hevrony Executive Officer)
/s/ Stephen H. Verchick Director June 28, 1999
- -------------------------------
Stephen H. Verchick
/s/ Ronald A. Artzer Director June 28, 1999
- -------------------------------
Ronald A. Artzer
/s/ Timothy N. Burditt Executive Vice President, June 28, 1999
- ------------------------------- Administration
Timothy N. Burditt (Principal Financial and
Accounting Officer)
</TABLE>
37
<PAGE> 40
DECORA INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Financial Statements Page
----
<S> <C>
The following Consolidated Financial Statements
of Decora Industries, Inc. and Report of Independent
Accountants are filed as part of this report:
Report of Independent Accountants F-2
Consolidated Balance Sheets as of March 31, 1999 and 1998 F-3
Consolidated Statements of Income for the Years
Ended March 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule for the three years ended March 31, 1999
Schedule II - Valuation and Qualifying Accounts F-33
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Decora Industries, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Decora
Industries, Inc. and its subsidiaries at March 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 1999 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule listed
in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform an audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
June 2, 1999
F-2
<PAGE> 42
DECORA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in 000's (except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,158 $ 1,682
Restricted cash 504 125
Accounts receivable, less allowance for
doubtful accounts of $2,479 and $2,148 at
March 31, 1999 and 1998, respectively 26,826 26,049
Inventories 42,676 26,964
Deferred income taxes -- 1,913
Prepaid expenses and other current assets 1,811 1,481
-------- --------
Total current assets 77,975 58,214
Property and equipment, net 54,341 44,152
Goodwill and other intangibles, net 78,081 22,478
Deferred income taxes 3,769 3,787
Deferred financing costs, net 4,171 511
Other assets 2,402 2,074
-------- --------
Total assets $220,739 $131,216
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 43
DECORA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
Amounts in 000's (except share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,547 $ 9,577
Accrued liabilities 12,438 15,661
Accrued interest 5,293 1,443
Current portion of long-term debt 9,467 10,472
Deferred income taxes 242 --
Other current liabilities 4,331 4,928
--------- ---------
Total current liabilities 43,318 42,081
Long-term debt 140,562 50,644
Pension obligation 14,634 13,424
--------- ---------
Total liabilities 198,514 106,149
--------- ---------
Minority interest in subsidiary 3,360 6,978
--------- ---------
Shareholders' equity:
Preferred stock, $.01 par value; 5,000 shares authorized,
none issued -- --
Common stock, $.01 par value; 20,000 shares
authorized; 7,342 and 7,331 shares issued and outstanding
at March 31, 1999 and 1998, respectively 73 73
Additional paid-in capital 33,634 33,775
Accumulated deficit (13,307) (14,984)
Cumulative translation adjustment (918) (775)
Additional minimum pension liability (617) --
--------- ---------
Total shareholders' equity 18,865 18,089
--------- ---------
Commitments and contingencies -- --
--------- ---------
Total liabilities and shareholders' equity $ 220,739 $ 131,216
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 44
DECORA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Amounts in 000's (except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Net sales $ 176,577 $ 98,407 $ 41,082
Cost of goods sold 113,168 68,220 30,503
--------- --------- ---------
Gross profit 63,409 30,187 10,579
Selling, general and administrative expenses 41,849 17,677 5,853
Non-recurring charges -- 1,461 --
--------- --------- ---------
Operating income 21,560 11,049 4,726
Interest expense, net 14,085 3,829 2,319
--------- --------- ---------
Income before income taxes,
minority interest and extraordinary item 7,475 7,220 2,407
Income tax provision (benefit) 3,230 3,278 (1,159)
--------- --------- ---------
Income before minority interest and extraordinary item 4,245 3,942 3,566
Minority interest in earnings of subsidiary 549 1,212 --
--------- --------- ---------
Income before extraordinary item 3,696 2,730 3,566
Extraordinary item, net of income taxes (2,019) -- --
--------- --------- ---------
Net income $ 1,677 $ 2,730 $ 3,566
========= ========= =========
Per share of common stock:
Income before extraordinary item
Basic $ .50 $ .38 $ .51
Diluted .44 .35 .46
Extraordinary item
Basic (.27) -- --
Diluted (.24) -- --
Net income
Basic .23 .38 .51
Diluted .20 .35 .46
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 45
DECORA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in 000's
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,677 $ 2,730 $ 3,566
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item, net of income taxes 2,019 -- --
Depreciation and amortization 8,492 5,534 2,444
Amortization of debt discount and fees 989 -- --
Minority interest in earnings of subsidiary 549 1,212 --
Provision for doubtful notes receivable -- 789 --
Loss on disposal of property and equipment -- 98 --
Deferred income tax provision (benefit) 1,782 3,284 (1,327)
Net changes in current assets and liabilities (7,939) 2,267 (1,601)
Other, net (1,427) (1,133) --
--------- --------- ---------
Net cash provided by operating activities 6,142 14,781 3,082
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rubbermaid Acquisition (66,038) -- --
Acquisition of Hornschuch shares (5,772) (37,899) --
Acquisition of Tarkett assets (1,549) -- --
Reductions in notes receivable 304 406 290
Purchase of property and equipment (8,693) (1,778) (489)
--------- --------- ---------
Net cash used in investing activities (81,748) (39,271) (199)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 117,813 39,205 5,814
Repayment of long-term debt (29,572) (6,011) (8,362)
Decrease in short-term borrowings (491) (7,216) --
Proceeds from exercise of warrants -- 63 30
Proceeds from issuance of common stock -- 750 --
Payment of warrant exchange obligation (200) -- --
Payment of debt penalties and fees (6,957) (771) (310)
--------- --------- ---------
Net cash provided by (used in) financing activities 80,593 26,020 (2,828)
--------- --------- ---------
Effect of exchange rate fluctuations on
cash and cash equivalents (132) 34 --
--------- --------- ---------
Net increase in cash and cash equivalents 4,855 1,564 55
Cash and cash equivalents at beginning of year 1,807 243 188
--------- --------- ---------
Cash and cash equivalents at end of year $ 6,662 $ 1,807 $ 243
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 46
DECORA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Amounts in 000's
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED NON-
COMMON STOCK OTHER NON- SHAREHOLDER
------------------------ ADDITIONAL ACCUMU- SHAREHOLDER CHANGES IN
PAR PAID-IN LATED CHANGES EQUITY FOR
SHARES VALUE CAPITAL DEFICIT IN EQUITY THE YEAR
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1996 6,886 $ 69 $ 31,350 $(21,280) $ -- $ --
Warrants exercised 8 -- 30 -- -- --
Common shares issued in
warrant exchange 200 2 766 -- -- --
Non-shareholder changes in equity:
Net income -- -- -- 3,566 -- 3,566
-------- -------- -------- -------- -------- --------
Balance at March 31, 1997 7,094 71 32,146 (17,714) -- 3,566
========
Common shares issued in
private placement 187 2 748 -- -- --
Allocable detachable warrants
issued with debt -- -- 818 -- -- --
Warrants exercised 50 -- 63 -- -- --
Non-shareholder changes in equity:
Net income -- -- -- 2,730 -- 2,730
Cumulative translation
adjustment -- -- -- -- (775) (775)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1998 7,331 73 33,775 (14,984) (775) 1,955
========
Common shares issued to
settle litigation 10 -- 52 -- -- --
Common shares issued for services 1 -- 7 -- -- --
Payment of warrant exchange
obligation -- -- (200) -- -- --
Non-shareholder changes in equity:
Net income -- -- -- 1,677 -- 1,677
Cumulative translation
adjustment -- -- -- -- (143) (143)
Additional minimum pension
liability -- -- -- -- (617) (617)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999 7,342 $ 73 $ 33,634 $(13,307) $ (1,535) $ 917
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 47
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Decora Industries, Inc. ("DII" and, together with its subsidiaries, the
"Company") is a leading manufacturer and marketer of self-adhesive
consumer decorative and surface coverings and other specialty industrial
products. The Company is a holding company and operates primarily
through two subsidiaries, Decora, Incorporated ("Decora"), a
wholly-owned subsidiary based in the U.S., and Konrad Hornschuch AG
("Hornschuch"), which is based in Germany and 90% owned by Decora
Industries Deutschland GmbH ("DI Deutschland"), which, in turn, is
wholly-owned by DII. Hornschuch's results have been included since its
acquisition on October 1, 1997 (see Note 2). The Company's principal
products are sold under the Con-Tact and d-c-fix brands. The Company
operates in two business segments, consumer and industrial.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company. All significant intercompany balances and transactions have
been eliminated in consolidation.
REVERSE STOCK SPLIT
In December 1997, the Company's shareholders approved a one-for-five
reverse stock split which was effective December 29, 1997. The
presentations of common shares and per share amounts have been restated,
as appropriate, to reflect the reverse stock split.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of cash, accounts receivable, accounts payable and
accrued expenses approximate their carrying values. Financial
instruments, when acquired, are held for purposes other than trading.
The fair value of the Company's senior secured notes has been determined
based upon current market rates (see Note 7). The balance of the
Company's debt, in combination with interest rate swap agreements, bears
current market rates of interest or is payable on demand. Accordingly,
the carrying amount is considered a reasonable approximation of fair
value.
CASH AND CASH EQUIVALENTS
The Company invests surplus cash in highly liquid debt instruments which
have original maturities of less than three months and are considered to
be cash equivalents. Certain debt agreements require the payment of
monthly sinking fund deposits in order to retire the debt. Cash balances
transferred for this purpose are considered restricted and are
separately stated in the accompanying financial statements.
REVENUES AND RECEIVABLES
Sales are recognized when products are shipped. Returns are accounted
for on the accrual basis. The Company's receivables are generally
concentrated from customers in the U.S. and Europe. A portion of the
sales made outside of Germany are covered by confirmed letters of credit
or credit insurance. The Company does not generally require collateral
for sales made within the United States.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market.
F-8
<PAGE> 48
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally five to fifty years.
GOODWILL AND OTHER INTANGIBLES
The excess of the aggregate purchase price over the fair values of the
net assets of businesses and product lines acquired has been recorded as
goodwill and is being amortized on the straight-line method over forty
years. Other intangibles are amortized over periods ranging from three
to forty years.
LONG-LIVED ASSETS
The Company assesses impairment losses to be recorded on long-lived
assets when indications of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amounts. No impairment charges were required for fiscal
1999, 1998 or 1997.
NET INCOME PER SHARE
Effective fiscal 1998, net income per share is calculated in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. Under SFAS No. 128, the Company is required to
report both basic net income per share based on the weighted average
number of common shares outstanding and diluted net income per share
based on the weighted average number of common shares outstanding plus
all potentially dilutive common shares issuable. Net income per share
calculations for fiscal 1999, 1998 and 1997 are presented in Note 12.
INCOME TAXES
Income taxes are provided based on the liability method pursuant to SFAS
No. 109, Accounting for Income Taxes. Deferred income taxes are recorded
to reflect expected future tax consequences of events that have been
recognized in the Company's financial statements or its tax returns, but
not both. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted
tax rates in the years in which the differences are expected to reverse.
RESEARCH AND DEVELOPMENT
Research and development costs related to both present and future
products are expensed as incurred and amounted to $2,532,000, $1,024,000
and $216,000 in fiscal 1999, 1998 and 1997, respectively.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock options. Under APB
No. 25, when the exercise price of employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company has adopted the disclosure
only provisions of SFAS No. 123, Accounting for Stock-Based Compensation
(see Note 9).
F-9
<PAGE> 49
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
FOREIGN CURRENCY
The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using year-end exchange rates. Income
statement items are translated at average exchange rates prevailing
during the year. The resulting translation adjustments are recorded as a
separate component of shareholders' equity. Exchange rate gains and
losses on intercompany balances of a long-term investment nature are
also recorded as a component of shareholders' equity. Foreign currency
transaction gains and losses, which historically have been immaterial,
are included in net income. In addition, the Company also will
occasionally enter into foreign currency hedges.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and revenues, costs and expenses during the reporting period. Actual
results may differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to
conform to the current year presentation.
2. ACQUISITIONS
HORNSCHUCH ACQUISITION
On October 1, 1997, the Company acquired 73.2% of the voting stock (the
"Shares") of Hornschuch through a newly formed subsidiary, DI
Deutschland. The Shares and other intangible assets were acquired
directly from Hornschuch's two largest shareholders (the "Hornschuch
Acquisition") in private transactions for total consideration of DM
61,582,280, or approximately $35,000,000. Since October 1, 1997, the
Company has increased its ownership to approximately 90% through open
market purchases and the completion of a tender offer in March 1999.
The purchase of the Shares and other intangible assets was funded by a
combination of debt and equity, including a loan (secured by the Shares)
of approximately $21,205,000 to DI Deutschland from a German bank (the
"Bank Loan"), a subordinated loan of $18,000,000 in the United States
(the "Subordinated Loan") provided by a pension fund (the "Pension
Fund") and a private placement of the Company's common stock in the
amount of $750,000. The Pension Fund was also granted Series A warrants
which are currently exercisable for the purchase of 1,818,000 shares of
common stock of the Company at an exercise price of $5.00 per share. The
total amount raised was sufficient to fund the purchase of the other
intangible assets and up to 75% of the shares of Hornschuch, repay an
existing subordinated debt of $2.9 million and pay a portion of the $2.8
million in closing costs associated with the transaction.
F-10
<PAGE> 50
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
The aggregate cost of Hornschuch shares and other intangible assets
acquired through March 31, 1999 of approximately $44.6 million
(including closing costs of approximately $2.8 million) has been
allocated as of the respective acquisition dates to the assets acquired
and the liabilities assumed as follows:
<TABLE>
<S> <C>
Cash $ 889
Accounts receivable 18,886
Inventories 21,436
Other current assets 1,072
Property, plant and equipment 44,319
Notes receivable 371
Goodwill and other intangibles 13,807
Deferred income taxes 3,400
Other non-current assets 278
Accounts payable (4,976)
Accrued liabilities (12,935)
Other current liabilities (7,475)
Debt (18,696)
Pension obligation (14,332)
Minority interest (1,483)
</TABLE>
RUBBERMAID DECORATIVE COVERINGS GROUP ACQUISITION
On April 29, 1998, the Company acquired certain assets, which had
constituted Rubbermaid's Decorative Coverings Group (the "DCG"), for an
initial 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
calendar sales of the DCG, the purchase price was adjusted downward to
approximately $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 that 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.
F-11
<PAGE> 51
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
The acquisition cost for the DCG of approximately $66.0 million (final
purchase price of $60.5 million, adjusted for acquisition related
closing costs of approximately $4.3 million and costs of $2.7 million
related to the relocation/installation of the Shelf Liner equipment
acquired, less amounts related to transition services of $1.5 million
paid to Rubbermaid) was allocated to the assets acquired and liabilities
assumed as follows:
<TABLE>
<S> <C>
Inventory $ 7,000,000
Property and equipment 3,690,000
Intangible assets:
Con-Tact tradename 20,300,000
Customer relationships 27,400,000
Goodwill 8,567,000
Accrued liabilities (919,000)
------------
$ 66,038,000
============
</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, Hornschuch borrowed under its secured credit facilities
approximately $10.0 million. Of the total amount raised, approximately
$60,800,000 (includes approximately $300,000 of accrued interest) was
paid to Rubbermaid, approximately $32,100,000 was used to refinance
existing debt and related fees (including an $18.0 million 13%
subordinated loan (the "Subordinated Loan") which had been used to
finance the Hornschuch Acquisition), approximately $5,800,000 was used
to acquire additional Hornschuch shares (which increased DI
Deutschland's ownership from 76% to 90%) and approximately $8,800,000
was used to pay acquisition and financing related transaction fees and
expenses. The remaining net proceeds are being used to finance the
acquisition of the remaining 10% equity interest in Hornschuch and for
general corporate purposes, including working capital requirements. At
the same time Decora 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 Decora's accounts receivable and
inventory. As of March 31, 1999, the Credit Facility had not been
utilized.
Direct financing transaction costs incurred of approximately $4.7
million were deferred and are being amortized, using the effective
interest rate method, over the term of the respective financings.
The results for fiscal 1999 were also impacted by a one-time non-cash
charge of approximately $800,000 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.
F-12
<PAGE> 52
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
TARKETT ACQUISITION
In November 1998, Hornschuch acquired certain assets from Tarkett Folien
GmbH and Co. KG, including a customer list and inventory, for
approximately $1.5 million.
PRO FORMA RESULTS
The accompanying Consolidated Statements of Income include the results
of Hornschuch since October 1, 1997. Unaudited pro forma consolidated
operating results for the years ended March 31, 1998 and 1997, assuming
the Hornschuch Acquisition had been made as of April 1, 1996 are
summarized below. The income statements of Hornschuch for the fiscal
years ended March 31, 1998 and 1997 were translated at DM 1.7347 per
dollar and DM 1.5080 per dollar, respectively (000's, except per share
amounts).
<TABLE>
<CAPTION>
UNAUDITED
------------------------------
YEAR ENDED
MARCH 31,
1998 1997
<S> <C> <C>
Net sales $ 158,199 $ 175,061
Net income 2,415 2,113
Basic net income per common share .33 .30
Diluted net income per common share .31 .27
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include adjust-ments as a result of applying purchase accounting and
conversion to generally accepted accounting principles in the United
States, such as 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 amounts are not
necessarily indicative of the operating results that would have occurred
had the acquisition had taken place on the aforementioned date or of
future results of operations of the consolidated entities.
The Rubbermaid Acquisition was an acquisition of product lines for which
separate financial statements were not maintained by Rubbermaid;
therefore, pro forma unaudited consolidated operating results reflecting
the Rubbermaid Acquisition had it occurred prior to April 29, 1998 are
not presented.
F-13
<PAGE> 53
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
3. INVENTORIES
Inventories consist of (000's):
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
<S> <C> <C>
Raw materials $ 8,018 $ 7,335
Work-in-process 8,832 4,634
Finished goods 25,826 14,995
------- -------
$42,676 $26,964
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of (000's except useful life data):
<TABLE>
<CAPTION>
USEFUL MARCH 31,
LIFE 1999 1998
<S> <C> <C> <C>
Land $ 3,746 $ 3,412
Buildings 20-50 18,300 13,956
Machinery and equipment 8-10 34,060 29,565
Furniture and fixtures 5-8 10,315 7,132
Leasehold improvements 5 617 617
Construction-in-progress 4,958 1,560
-------- --------
71,996 56,242
Less: accumulated depreciation (17,655) (12,090)
-------- --------
$ 54,341 $ 44,152
======== ========
</TABLE>
Depreciation expense was $5,737,000, $4,394,000 and $1,652,000 for
fiscal 1999, 1998 and 1997, respectively.
F-14
<PAGE> 54
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
5. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consists of the following (000's):
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
<S> <C> <C>
Goodwill $ 32,717 $ 22,838
Less: accumulated amortization (2,957) (2,201)
-------- --------
29,760 20,637
-------- --------
Customer relationships 27,400 --
Con-Tact trademark 20,300 --
Cobra trademark 2,000 2,000
Other 1,326 800
-------- --------
51,026 2,800
Less: accumulated amortization (2,705) (959)
-------- --------
48,321 1,841
-------- --------
$ 78,081 $ 22,478
======== ========
</TABLE>
Goodwill amortization was $768,000, $458,000 and $285,000 for fiscal
1999, 1998 and 1997, respectively. Amortization of other intangibles was
$1,809,000, $198,000 and $133,000 for fiscal 1999, 1998 and 1997,
respectively.
6. EMPLOYEE BENEFIT PLANS
Hornschuch maintains two non-contributory defined benefit pension plans
in Germany. Both pension plans are unfunded as the laws requiring
pension funding in Germany are considerably different than those in the
U.S. Plan A represents a combination of individual pension arrangements
negotiated with approximately 37 participants representing past and
present management individuals and is open to additional participants
based on individually negotiated employment contracts. The pension
benefits under Plan A may vary to include only a specified annual
benefit amount or may be based on compensation level and years of
service. Plan B covers all employees of the Company with 1,683 active
and retired participants. Plan B provides for a fixed monthly retirement
benefit after 10 years of service with benefit increases based on
additional years of service. Plan B was closed effective January 1,
1989, and any active participant at that time was permitted to accrue up
to 10 more years of creditable service through December 31, 1998.
F-15
<PAGE> 55
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
The following provides a reconciliation of the projected benefit
obligation ("PBO") for Hornschuch's defined benefit plans (000's):
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
1999 1998
<S> <C> <C>
Balance at beginning of year $ 14,867 $ 15,740
Service cost 160 82
Interest cost 986 483
Unrecognized actuarial loss 1,160 --
Total benefit paid (1,196) (596)
Adjustment for the minimum liability 1,098 --
Other 40 (842)
-------- --------
Balance at end of year $ 17,115 $ 14,867
======== ========
</TABLE>
Based on the purchase accounting for the Hornschuch acquisition, the
full PBO liability of $15,740,000 was recognized at the acquisition
date. The projected benefit obligations at the end of fiscal 1999 and
fiscal 1998 use a discount rate of 6.5% and a salary increase assumption
of 1.5% in the actuarial valuation.
Included in the Company's consolidated balance sheet at March 31, 1999
is a DM 2,000,000 (approximately $1,098,000) additional minimum
liability for Hornschuch's unfunded pension plans. The reduction of
shareholders' equity at March 31, 1999 is reflected (after tax) of DM
876,000 (approximately $481,000). There was no additional minimum
pension liability at March 31, 1998.
Service cost and interest cost were $160,000 and $986,000, respectively,
for the fiscal year ended March 31, 1999 and $82,000 and $483,000,
respectively, for the fiscal year ended March 31, 1998.
Decora and its union have executed an agreement to provide retirement
benefits to qualified union employees through the Paper Industry Union
Management Pension Fund (the "Fund"). Based upon this agreement, Decora
contributes a contractually agreed upon amount for each qualifying hour
that a union employee works. Total contributions to the Fund were
$344,000, $302,000 and $334,000 in fiscal 1999, 1998 and 1997,
respectively.
The Company has a profit sharing plan and a 401K plan covering its U.S.
salaried employees. The Company does not contribute to the 401K plan.
The Company contributes to the profit sharing plan based upon Company
performance. Total expense relative to the profit sharing contributions
amounted to $69,000, $200,000 and $175,000 in fiscal 1999, 1998 and
1997, respectively.
F-16
<PAGE> 56
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
7. DEBT
Debt consists of (000's):
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
<S> <C> <C>
DII Senior Secured Notes (a) $ 112,750 $ --
DI Deutschland Credit Facility (b) 20,487 20,203
Decora Subordinated Loan (c) -- 18,000(*)
Hornschuch Lines of Credit (d) 12,365 7,783
Decora Term Loans (e) 122 6,910(*)
Hornschuch Term Loans (f) 4,513 2,780
Decora Lines of Credit (g) -- 2,500(*)
Decora Industrial Development Revenue Bonds (h) 2,210 2,460
DII Convertible Notes (i) -- 1,250(*)
--------- ---------
152,447 61,886
Less: Amounts due within one year (9,467) (10,472)
Unamortized debt discount (2,418) (770)
--------- ---------
$ 140,562 $ 50,644
========= =========
</TABLE>
* Amounts were paid in full with a portion of the proceeds from
the DII Senior Secured Notes in April 1998.
Amounts maturing in fiscal 2000, 2001, 2002, 2003 and 2004 are (000's):
$9,467, $4,568, $13,854, $3,888 and $3,750, respectively.
(a) In April 1998, 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. The fair value of the
Notes at March 31, 1999 was approximately $107,100,000, which
was determined by the Company using market information provided
by an investment banking firm as to the market value of similar
debt amounts. The estimated fair value of the Notes does not
necessarily reflect the amount at which the debt could be
settled.
F-17
<PAGE> 57
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
(b) On September 29, 1997, DI Deutschland entered into a loan
agreement with a German bank for approximately DM 37.3 million
(approximately $20.5 million at March 31, 1999) to provide a
portion of the financing for the Hornschuch Acquisition. The
loan bears interest at the German interbank borrowing rate plus
2.50%. In addition, DI Deutschland will be charged a fee of
0.50% per annum on the average daily balance of the difference
between the original loan amount and the then current balance.
The interest rate at March 31, 1999 was 5.6%.
The DI Deutschland Credit Facility is to be repaid in
semi-annual installments of approximately DM 3.0 million ($1.6
million) beginning March 30, 1999. The final installment is due
and payable on September 30, 2004. The DI Deutschland Credit
Facility is secured by a pledge of all the capital stock of
Hornschuch owned by DI Deutschland.
DI Deutschland is subject to certain covenants which included a
covenant specifying that DI Deutschland tender an offer for the
remaining minority interest in Hornschuch. The tender offer was
completed on March 8, 1999.
(c) On September 30, 1997, Decora entered into an $18 million
subordinated loan agreement with a Pension Fund to provide a
portion of the financing for the Hornschuch Acquisition. The
loan was paid in full with the proceeds of the Notes. The
Pension Fund was also granted Series A warrants which are
currently exercisable for the purchase of 1,818,000 shares of
common stock of the Company at an exercise price of $5.00 per
share. In addition, the Pension Fund was granted a contingent
warrant to purchase a fixed percentage of certain additional
shares of the Company's common stock which may be issued in the
future. The ability to exercise such contingent warrant is
triggered solely by the issuance of shares of the Company's
common stock in connection with an existing exchange agreement
or the sale of additional shares of common stock of the Company,
the proceeds of which must be used to purchase the outstanding
minority interest of Hornschuch.
(d) Hornschuch has separate lines of credit with its primary lender
and certain other financial institutions. Interest rates under
the lines of credit range from 3.83% to 7.24% at March 31, 1999.
At March 31, 1999, the availability under these lines was DM
11.0 million ($6.0 million).
(e) In September, 1995, Decora borrowed $375,000 from the Washington
County Local Development Corporation. The loan bears interest at
5.00% and is payable in monthly installments ending September 1,
2000. It is secured by certain of Decora's property and
equipment. As of March 31, 1999, the outstanding balance of this
note was $122,000.
At March 31, 1998, Decora also had two term loans with its
primary lender aggregating $6,712,000. The two loans of
$3,837,000 and $2,875,000 bore interest at 30-day LIBOR plus
2.00% and were secured by certain accounts receivable, inventory
and property and equipment; such term loans were repaid in full
in April 1998.
F-18
<PAGE> 58
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
Effective April 1, 1997, Decora entered into an interest rate
swap agreement with its primary bank lender which expires May
31, 1999. The agreement effectively converted $8,523,000 of its
variable rate borrowings into fixed rate obligations. Under the
terms of the agreement, Decora makes payments at a fixed rate of
8.58% and receives variable rate payments at LIBOR plus 200
basis points, repriced at the beginning of each month. While the
underlying debt obligations have been repaid, Decora continues
to make payments under the agreement until expiration in May
1999. The net amount which will be paid or received is included
in interest expense.
(f) Hornschuch has three term loans aggregating DM 8,219,000
(approximately $4,513,000) at March 31, 1999. The first term
loan has a balance of DM 444,000 (approximately $244,000),
matures in September 1999, bears interest at 5% and is secured
by certain assets. The second term loan has a balance of DM
3,325,000 (approximately $1,826,000), matures in March 2006,
bears interest at 4.8% and is also secured by certain assets.
The second loan requires payments of DM 238,000 ($131,000)
semi-annually. The third term loan of DM 4,450,000
(approximately $2,443,000) matures in March 2003, bears interest
at LIBOR plus 0.9% (4.1% at March 31, 1999) and is payable in
semi-annual installments of DM 700,000 (approximately $384,000)
commencing September 30, 1999 and is secured by a new printing
press.
(g) On April 28, 1999, Decora entered into a $15.0 million revolving
line of credit which matures in May 2001 and is secured by
various accounts receivable and inventory. The line of credit
replaced two lines of credit which would have matured in August
1998. The amount outstanding under the facility, at the
borrower's election, bears interest at either the lender's prime
rate or LIBOR plus 2.25 basis points. There were no borrowings
outstanding under the line of credit at March 31, 1999 and the
full capacity of the agreement was available.
Decora had a revolving line of credit of up to $6,000,000 which
would have matured in August 1998 and was secured by various
accounts receivable, inventory and equipment. The amount
outstanding under the facility bore interest at prime plus
1-1/4%. On March 27, 1997, Decora established a second line of
credit of up to $1,000,000 which also would have matured in
August 1998, bore interest at prime plus 1.0% and was secured by
certain accounts receivable. Availability under this credit
facility was limited by specified percentages of certain
international trade accounts receivable. At March 31, 1998, the
amount outstanding under these lines of credit of $2,500,000 was
repaid in full with the proceeds of the Notes.
F-19
<PAGE> 59
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
(h) On November 13, 1996, Decora borrowed $2,460,000 through the
issuance of Tax-Exempt Industrial Development Revenue Bonds
(Decora Project), Series 1996 by the Counties of Warren and
Washington, New York Industrial Development Agency. These bonds
mature on November 1, 2004 and require sinking fund payments of
$20,833 per month beginning November 1997 and bear interest at a
floating rate which is adjusted weekly based on the remarketing
agent's ability to re-market the bonds at par. As of March 31,
1999, the interest rate on the bonds was 3.05%. The bonds are
credit enhanced through a letter of credit issued by Decora's
primary lender and, in addition to interest on the bonds, Decora
pays its primary lender an annual letter of credit fee equal to
1.50% of the outstanding balance of the letter of credit.
(i) In November 1992, the Company borrowed $1,500,000 from a private
lender and issued a convertible note. As part of the
transaction, the Company also issued 17,800 shares of its common
stock, warrants to purchase 45,000 shares of common stock at
$7.00 per share and warrants for an additional 20,000 shares of
common stock at prices contingent upon the future market price
of the Company's common stock. The convertible note was due in
November 1995 and bore interest at 12% per annum, payable in the
form of the Company's common stock. The fair value of the shares
and warrants issued were reflected as debt issuance costs and
amortized to interest expense over the term of the debt
agreement.
In November 1995, the Company and the lender agreed to extend
the note until May 1998. Interest for the extension period
($303,000) and a closing fee ($197,000) were paid at the date of
the extension through the issuance of 156,400 shares of the
Company's common stock and warrants to purchase an additional
163,600 common shares at $3.90 per share exercisable only in the
event that the note is paid in full without conversion. The
prepaid interest expense and the closing fee were amortized over
the term of the extended debt agreement. The note was repaid in
full in May 1998.
(j) Hornschuch is party to three interest rate cap agreements as of
March 31, 1999 for DM 7.0 million, DM 5.6 million and DM 3.0
million which are used to hedge against fluctuations in interest
rates for existing debt balances. As these instruments are used
to hedge existing debt, there is no requirement to record these
agreements fair value.
Hornschuch is also party to two interest rate swap agreements as
of March 31, 1999 for DM 6.0 million and DM 5.0 million. These
agreements were used to convert variable rate debt to fixed rate
debt. For the DM 5.0 million instrument, the related debt had
been repaid early. However, Hornschuch was obliged to maintain
the swap and pay (receive) the difference between Hornschuch's
fixed rate and the original variable rate. The fair value of
this speculative instrument of approximately DM 373,000
(approximately $205,000) is recorded as a current liability in
the accompanying consolidated balance sheet.
F-20
<PAGE> 60
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
8. EXTRAORDINARY ITEM
In conjunction with the Rubbermaid Acquisition, the Company repaid debt
totalling approximately $28.5 million prior to maturity. As a result,
the Company paid a one-time pre-payment penalty of approximately $2.2
million and wrote off unamortized deferred loan costs and debt discount
totalling approximately $1.1 million. Consequently, an extraordinary
charge of approximately $2.0 million (net of income taxes) was recorded
in fiscal 1999.
9. STOCK OPTIONS
The Company has several domestic long-term incentive plans under which
shares of the Company's common stock may be sold to directors, officers
and key employees. Certain other parties have been granted stock options
by the Company in connection with various transactions.
The Company adopted a Stock Option Plan in 1987 (the "1987 Plan")
pursuant to which 340,000 shares of common stock were available for
grant. The 1987 Plan terminated on July 8, 1997. The 1987 Plan is
administered by a committee of Directors of the Company who are not
covered by the 1987 Plan. All options granted under the 1987 Plan
terminate either five or ten years after the date of grant and vest
quarterly over a three-year period subsequent to the date of the grant,
unless modified by the Company.
In 1988, the shareholders of the Company approved the Decora Industries,
Inc. 1988 Employee Stock Purchase Plan (the "1988 Plan") pursuant to
which a total of 100,000 shares of the Company's Common Stock could be
issued to participants during the term of the 1988 Plan at an issue
price of 85% of the fair market value at the date of the purchase. The
1988 Plan was administered by the Board of Directors provided that a
majority were not covered by the 1988 Plan, or by a committee appointed
by the Board of Directors. The 1988 Plan terminated on December 31,
1998; no shares were purchased pursuant to the 1988 Plan.
F-21
<PAGE> 61
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
A summary of stock option activity under all plans for the three years
ended March 31, 1999 follows (000's except average price data):
<TABLE>
<CAPTION>
AVERAGE
OPTIONS PRICE
<S> <C> <C>
Outstanding at:
March 31, 1996 805 $6.80
Granted 164 5.70
Exercised (8) 3.75
Expired (27) 8.50
------
March 31, 1997 934 6.45
Granted 890 5.46
Exercised -- --
Expired (130) 6.38
------
March 31, 1998 1,694 5.94
Granted 390 7.18
Exercised -- --
Expired (145) 5.98
------
March 31, 1999 1,939 $6.19
======
</TABLE>
The following table summarizes information about stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ---------------------
EXERCISE AVERAGE TERM AVERAGE
PRICE SHARES PRICE (MONTHS) SHARES PRICE
<S> <C> <C> <C> <C> <C>
$4.50 - $4.95 60,000 $ 4.75 33.27 40,000 $ 4.75
$5.00 - $5.50 727,000 5.28 44.56 554,000 5.41
$5.55 - $5.95 354,800 5.64 14.43 254,800 5.60
$6.00 - $6.99 360,000 6.24 73.05 184,332 6.17
$7.00 - $7.99 277,000 7.47 54.59 109,000 7.38
$8.00 - $9.30 160,000 8.09 83.00 52,000 8.27
</TABLE>
F-22
<PAGE> 62
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair values on the fiscal 1999, 1998 and
1997 grant dates for those awards, consistent with the requirements of
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net
income and earnings per common share would have been reduced to the pro
forma amounts indicated below (000's except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C> <C>
Net Income - As Reported $ 1,677 $ 2,730 $ 3,566
- Pro Forma 1,564 2,527 3,171
Basic Earnings Per Share - As Reported .23 .38 .51
- Pro Forma .21 .35 .45
Diluted Earnings Per Share - As Reported .20 .35 .46
- Pro Forma .19 .33 .41
</TABLE>
The fair value of each stock option grant has been estimated on the date
of each grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 5.58% 5.49% 6.22%
Expected life (months) 36.9 60.0 45.6
Expected volatility .495 .484 .594
Expected dividend yield -- -- --
</TABLE>
The weighted average grant date fair values of options granted during
fiscal 1999, 1998 and 1997 were $2.41, $1.38, $0.80, respectively.
The Company reserved 95,000 shares of common stock for the future
possible exercise of warrants, which can be exercised at prices ranging
from $2.50 to $7.00 and expire on November 3, 2000.
F-23
<PAGE> 63
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
10. INCOME TAXES
Income taxes are summarized as follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Current provision:
United States:
Federal $ -- $ 9 $ 68
State 15 35 100
Foreign 134 -- --
------- ------- -------
149 44 168
------- ------- -------
Deferred provision (benefit):
United States:
Federal (658) 205 (1,327)
State -- -- --
Foreign 3,739 3,029 --
------- ------- -------
3,081 3,234 (1,327)
------- ------- -------
$ 3,230 $ 3,278 $(1,159)
======= ======= =======
</TABLE>
The income tax benefit resulting from the extraordinary charge in the
fiscal year ended March 31, 1999 was approximately $1,328,000.
The foreign provision for income taxes is based on foreign pre-tax
earnings of approximately $9.1 million and $6.9 million, respectively,
for fiscal years 1999 and 1998. Domestic operations accounted for $(1.6)
million, $320,000 and $2.4 million of pre-tax earnings (loss),
respectively, in fiscal 1999, 1998 and 1997.
F-24
<PAGE> 64
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) are comprised of the following
(000's):
<TABLE>
<CAPTION>
MARCH 31,
1999 1998
<S> <C> <C>
Current deferred tax assets (liabilities):
German statutory accruals $(1,222) $ 1,478
Non-deductible reserves 980 435
------- -------
$ (242) $ 1,913
======= =======
Non-current deferred tax assets (liabilities):
Depreciation $(9,208) $(7,580)
Net operating loss carryforwards 9,314 6,919
Pensions 2,983 3,029
Non-compete agreement 1,714 2,366
Tax credits 304 325
Other, net (1,338) (1,272)
------- -------
$ 3,769 $ 3,787
======= =======
</TABLE>
The provision for (benefit from) income taxes differs from the amount of
income tax determined by applying the applicable U.S. statutory federal
income tax rate to pre-tax income as a result of the following (000's):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Provision at statutory rate $ 2,616 $ 2,527 $ 840
State tax expense 15 35 65
Effect of non-deductible items 140 160 182
Effect of tax credits -- -- (313)
Change in valuation allowance -- -- (1,695)
Other 459 556 (238)
------- ------- -------
Income tax provision (benefit) $ 3,230 $ 3,278 $(1,159)
======= ======= =======
</TABLE>
F-25
<PAGE> 65
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
Approximately $14,751,000 and $7,929,000 of the Company's net operating
loss carryforwards remain available at March 31, 1999 in the United
States and Germany, respectively. Their use is limited to future taxable
earnings in the respective countries. In the United States, the
carryforwards expire over the period 2003 through 2019, while in Germany
the carryforwards have an unlimited life.
At March 31, 1999, foreign subsidiary earnings of $7,359,000 were
considered permanently invested in those businesses. Accordingly, U.S.
income taxes have not been provided on these earnings. Foreign
withholding taxes would be payable to the foreign taxing authorities if
these earnings were remitted. Subject to certain limitations, the
withholding taxes would then be available for use as credits against the
U.S. tax liability.
Management believes that it is more likely than not that the Company
will generate taxable income sufficient to realize the tax benefit
associated with future deductible temporary differences and the net
operating loss carryforwards prior to their expiration. This belief is
based upon, among other factors, recent changes in operations.
Specifically, cost savings associated with capital investments in and
strategic realignment of Decora have improved operating results as well
as the discontinuance of less profitable non-core businesses, including
the 1995 divestiture of the Company's ComTel subsidiary, which had
generated significant operating losses through 1995.
11. NON-RECURRING CHARGES
The Consolidated Statement of Income for fiscal 1998 reflects certain
non-recurring charges totalling $1,461,000. Of these charges, $531,000
related to severance costs for U.S. work force reductions implemented in
anticipation of operating synergies with Hornschuch and $141,000 related
to print tooling redundancies between the two operations. An additional
$789,000 was recorded to reserve against notes receivable which the
Company obtained in fiscal years 1996 and 1995 in conjunction with the
sale of previously discontinued operations.
F-26
<PAGE> 66
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
12. NET INCOME PER SHARE
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 fiscal 1999, 1998 and
1997. The numerators were the same for both calculations for all years
(000's):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
WEIGHTED AVERAGE SHARES:
Shares outstanding at beginning of year 7,331 7,094 6,886
Shares issued on a weighted average-basis 7 142 158
----- ----- -----
Shares used in the calculation of basic EPS 7,338 7,236 7,044
Effect of dilutive securities:
Contingently issuable shares 328 327 568
Options/warrants 757 193 163
----- ----- -----
Shares used in the calculation of diluted EPS 8,423 7,756 7,774
===== ===== =====
</TABLE>
The total number of shares of common stock and common stock equivalents
that were not included in the computation of diluted income per common
share because they were anti-dilutive was approximately 637,000,
3,546,000 and 616,000 for fiscal 1999, 1998 and 1997, respectively.
13. COMMITMENTS AND CONTINGENCIES
Leases - The Company uses certain equipment under lease arrangements,
all of which are accounted for as operating leases. Rent expense was
$1,794,000, $699,000 and $15,000 for fiscal 1999, 1998 and 1997,
respectively. Rental commitments under long-term noncancellable
operating leases are as follows (000's):
<TABLE>
<S> <C>
Fiscal 2000 $ 1,675
Fiscal 2001 1,200
Fiscal 2002 353
Fiscal 2003 102
Fiscal 2004 40
</TABLE>
F-27
<PAGE> 67
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
Legal Proceedings - The Company is involved in various legal
proceedings, the ultimate resolution of which, in the opinion of
management, will not have a materially adverse impact on the financial
condition, results of operations or cash flows of the Company.
Guarantee of Subsidiary Debt - As part of the Hornschuch Acquisition,
the Company acquired Hornschuch's wholly-owned real estate subsidiaries.
Management identified these subsidiaries as non-core operations upon
acquisition and decided to sell them. The subsidiaries carry
approximately $13.8 million in debt, with Hornschuch made a guarantor of
the debt by virtue of its profit pooling agreement with the
subsidiaries. The Company has estimated that the debt exceeds the net
realizable value of these subsidiaries by approximately $4.3 million and
has, therefore, recorded a liability for such same amount.
Arrangement with a prior lender - On June 28, 1996, as part of an
exchange, a lender (the "Holder") received 200,000 shares of the
Company's common stock (the "new common stock"). The new common stock
contained a guaranty (the "Guaranty") requiring that the Company deliver
to the Holder (i) additional shares of the Company's common stock, (ii)
cash or (iii) a combination of additional shares of the Company's common
stock and cash if the Company's common stock price did not exceed $15.00
per share on the valuation date in April 1998 (the "Shortfall Amount").
On July 9, 1998, the Company and the Holder entered into a payment and
deferral agreement (the "Agreement") relative to the Shortfall Amount.
As a result, the Company paid $200,000 in cash to the Holder leaving an
adjusted Shortfall Amount of approximately $2.0 million. The adjusted
Shortfall Amount is accruing interest at 11.5% per annum until June 30,
1999. At that time the Company will deliver to the Holder (i) additional
shares of the Company's common stock, (ii) cash or (iii) a combination
of additional shares of the Company's common stock and cash equal to the
adjusted Shortfall Amount plus accrued interest.
Minimum Purchase Agreement - In conjunction with the Rubbermaid
Acquisition, the Company entered into an exclusive manufacturing
agreement in which the Company is required to purchase at least $6
million of product annually. If the minimum purchase requirement is not
met, the contract can be terminated at the option of the third-party
manufacturer.
Change in Control Agreements - The Company has granted to certain key
executives compensation arrangements such that a change in control of
the Company and their subsequent termination would result in a payment
of a multiple of annual compensation.
F-28
<PAGE> 68
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
14. MAJOR CUSTOMERS
Since the acquisition of Hornschuch on October 1, 1997, the Company's
sales reflect a broader range of customers. Prior to the acquisition of
the DCG (see Note 2), Decora's primary customer was Rubbermaid, which
accounted for 31% and 89% of net sales in fiscal 1998 and 1997,
respectively. Accounts receivable from Rubbermaid at March 31, 1998 were
$4,279,000. The Company has no other unusual credit risks or
concentrations. The Company estimates an allowance for doubtful accounts
based upon the credit worthiness of its customers as well as general
economic conditions.
15. 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,
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.
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 1998 and 1997 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)
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Consumer $121,269 $ 69,900 $ 40,757
Industrial 55,308 28,507 325
-------- -------- --------
Consolidated $176,577 $ 98,407 $ 41,082
======== ======== ========
</TABLE>
F-29
<PAGE> 69
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING PROFITS (000'S)
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Consumer $18,977 $11,290 $ 6,066
Industrial 4,761 2,385 (638)
------- ------- -------
Total segment 23,738 14,675 5,428
General corporate expenses 2,178 2,626 702
------- ------- -------
21,560 11,049 4,726
Interest expense, net 14,085 3,829 2,319
------- ------- -------
Consolidated income before income taxes,
minority interest and extraordinary item $ 7,475 $ 7,220 $ 2,407
======= ======= =======
</TABLE>
DEPRECIATION AND AMORTIZATION (000'S)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Consumer $6,857 $3,691 $2,425
Industrial 2,624 1,843 19
------ ------ ------
Consolidated $9,481 $5,534 $2,444
====== ====== ======
</TABLE>
GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
NET SALES (000'S)
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
United States $ 64,368 $ 31,703 $ 36,920
International:
Germany 51,926 30,351 3,273
Other 60,283 36,353 889
-------- -------- --------
Consolidated $176,577 $ 98,407 $ 41,082
======== ======== ========
</TABLE>
F-30
<PAGE> 70
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LONG-LIVED ASSETS (000'S)
MARCH 31,
1999 1998
<S> <C> <C>
United States $ 76,052 $ 17,512
International:
Germany 55,825 48,608
Other 545 510
-------- --------
Consolidated $132,422 $ 66,630
======== ========
</TABLE>
16. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in current assets and liabilities, exclusive of acquisitions,
were as follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Increase in accounts receivable $(1,329) $(1,951) $(2,017)
(Increase) decrease in inventory (7,238) (1,176) 564
Increase in other assets (296) (19) (205)
Increase in accounts payable 1,863 2,884 140
Increase (decrease) in accrued liabilities 1,613 2,968 (83)
Decrease in other current liabilities (2,552) (439) --
------- ------- -------
(7,939) 2,267 (1,601)
======= ======= =======
Supplemental cash flow information is as follows (000s):
Cash paid during the year for interest $ 8,259 $ 2,140 $ 1,871
======= ======= =======
Cash paid during the year for income taxes $ 651 $ 184 $ 194
======= ======= =======
</TABLE>
During fiscal 1997, 200,000 shares of common stock and notes payable in
the amount of $874,000 were issued upon the conversion of $1,642,000 of
warrants to purchase stock in a subsidiary.
F-31
<PAGE> 71
DECORA INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
17. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
(Amounts in 000's, except per share data)
lst 2nd 3rd 4th
<S> <C> <C> <C> <C>
FISCAL 1999:
Net sales $ 46,478 $ 49,018 $ 41,174 $ 39,907
Gross profit 14,791 19,337 14,533 14,748
Income before extraordinary item 1,294 1,321 485 596
Extraordinary item (2,019) -- -- --
Net income (loss) (725) 1,321 485 596
Basic income (loss) per common share:
Income before extraordinary item .18 .18 .06 .08
Extraordinary item (.28) -- -- --
Net income (loss) (.10) .18 .06 .08
Diluted income (loss) per common share:
Income before extraordinary item .15 .16 .05 .07
Extraordinary item (.24) -- -- --
Net income (loss) (.09) .16 .05 .07
FISCAL 1998:
Net sales $ 9,147 $ 10,308 $ 36,909 $ 42,043
Gross profit 2,591 2,410 9,715 15,471
Net income (loss) 583 (489)* 241 2,395
Net income (loss) per share:
Basic $ .08 $ (.07) $ .03 $ .33
Diluted .08 (.07) .03 .31
</TABLE>
* The second quarter of fiscal 1998 reflects a non-recurring charge of
$1,461,000.
F-32
<PAGE> 72
DECORA INDUSTRIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
-------------------------
ADDITIONS
BALANCE CHARGED BALANCE
AT (CREDITED) ADDITIONS DEDUCTIONS ACQUISITION TRANS- AT
BEGINNING TO COSTS & TO FROM OF LATION END OF
DESCRIPTION OF PERIOD EXPENSES GOODWILL ACCOUNTS HORNSCHUCH ADJUSTMENT PERIOD
<S> <C> <C> <C> <C> <C> <C> <C>
Reserve deducted from asset
to which it applied:
For the year ended
March 31, 1999
Accounts receivable
Reserves 2,148 1,229 919 1,885(a) -- 68 2,497
For the year ended
March 31, 1998
Accounts receivable
Reserves 499 146 -- 1,572(a) 3,195 120 2,148
For the year ended
March 31, 1997
Accounts receivable
Reserves 202 554 -- 257(a) -- -- 499
</TABLE>
(a) Uncollectible receivables written off net of recoveries
F-33
<PAGE> 1
EXHIBIT 10.51
Between
Konrad Hornschuch AG, Weissbach
-- hereinafter: "KHAG" --
represented by the Chairman of the Supervisory Board,
Dr. Walter Kuna
and
Mr. Rolf J. Gemmersdorfer
the following
EMPLOYMENT AGREEMENT
is concluded:
SS. 1 ACTIVITIES
(1) Effective as of 1 August 1998, Mr. Rolf J. Gemmersdorfer enters KHAG's
service as Chairman of the Management Board.
Mr. Gemmersdorfer is aware of the fact that in accordance with the
Take-Over Codex the majority shareholder is to make a compensation
offer to the minority shareholders and that the Company may possibly be
converted into a partnership.
(2) Mr. Gemmersdorfer is obligated to conduct the Company's business with
the care of a prudent businessman in accordance with the statutory
regulations, the provisions of the Articles of Association, the Rules
of Procedure for the Management Board and this Employment Agreement,
and to represent the Company.
The Management Board's overall responsibility is not affected by any
departmental division.
(3) Without the Supervisory Board's consent Mr. Gemmersdorfer may during
the term of the employment not engaged in any secondary activities,
whether against or without valuable consideration.
For the purpose of realization of synergies between Decora Industries
Inc. ("Decora") and KHAG, Mr. Gemmersdorfer may accept a position with
Decora or with a company affiliated with it.
<PAGE> 2
SS. 2 REMUNERATION
(1) Mr. Gemmersdorfer will receive for his activities a fixed annual basic
salary in the amount of
DM 500,000,--
for the first time on a pro-rata basis for calendar year 1998. The
salary has to be paid in twelve equal monthly installments each time
subsequently at the end of a month subject to deduction of taxes and
social security contributions.
(2) In addition, Mr. Gemmersdorfer will receive a variable remuneration of
DM 200,000,-- for business year 1999 and for the years 2000 through
2003 a variable remuneration in the amount of DM 250,000,-- each,
provided that the respective budget targets adopted by the Supervisory
Board will be achieved.
The variable remuneration is calculated as follows:
1. Achievement of the targeted KHAG profit before taxes in US GAAP
(30% of the variable remuneration).
2. Achievement of the targeted KHAG cash flow in US GAAP (30% of the
variable remuneration).
3. Planned synergies between Decora and KHAG will be achieved after
adoption by the Supervisory Board (40% of the variable
remuneration).
Planning is the planning of the Management Board as coordinated
with the Supervisory Board for the respective business year.
4. For the business year 1999, the target remuneration for criteria
1-3 amounts to:
DM 200,000.--
For the business years 2000 through 2003, the target
remunerations for criteria 1-3 amount to:
DM 250,000.--
The calculation of the remuneration is effected in the following
way:
2
<PAGE> 3
Remuneration for each criterion starts with a target achievement
exceeding 85%.
a. For each percentage point over 85% up to 100%, 6.67% of the
target remuneration will be paid, i.e., in case of
<TABLE>
<CAPTION>
---------------------------------- --------------------------- --------------------------
Target Achievement Calculation Payment Factor
---------------------------------- --------------------------- --------------------------
<S> <C> <C>
85% 0.07% x 0 0%
---------------------------------- --------------------------- --------------------------
100% 6.67% x 15 100%
---------------------------------- --------------------------- --------------------------
---------------------------------- --------------------------- --------------------------
</TABLE>
Example in case of 100% achievement of all criteria in:
1999: DM 200,000.--
2000 - 2003: DM 250,000.--
b. For each percentage point over 100% up to 110%, 1% of the
target remuneration will be paid additionally, i.e. in case
of
<TABLE>
<CAPTION>
---------------------------------- --------------------------- --------------------------
Target Achievement Calculation Payment Factor
---------------------------------- --------------------------- --------------------------
<S> <C> <C>
101% 1% x 1 1%
---------------------------------- --------------------------- --------------------------
110% 1% x 10 10%
---------------------------------- --------------------------- --------------------------
---------------------------------- --------------------------- --------------------------
</TABLE>
Example in case of 110% achievement of all criteria
in:
1999: DM 220,000.--
2000 - 2003: DM 275,000.--
c. For each percentage point over 110%, 3% of the target
remuneration will be paid additionally, i.e. in case
of
<PAGE> 4
<TABLE>
<CAPTION>
---------------------------------- --------------------------- --------------------------
Target Achievement Calculation Payment Factor
---------------------------------- --------------------------- --------------------------
<S> <C> <C>
120% 3% x 10 30%
---------------------------------- --------------------------- --------------------------
130% 3% x 20 60%
---------------------------------- --------------------------- --------------------------
---------------------------------- --------------------------- --------------------------
</TABLE>
Example in case of 120% achievement of all criteria in:
1999: DM 280,000.--
2000 - 2003: DM 350,000.--
Example in case of 130% achievement of all criteria in:
1999: DM 340,000.--
2000 - 2003: DM 425,000.--
d. The variable remuneration may as a maximum be equal to the
amount of the fixed remuneration and may not exceed the
latter.
This management bonus is due after adoption of the annual
accounts by the Supervisory Board.
SS. 3 REMOVAL COSTS, TRANSITIONAL ARRANGEMENT, TRAVEL EXPENSES, BUSINESS
ENTERTAINMENT EXPENSES, MOTOR VEHICLE
(1) Within 12 months after the start of this Employment Agreement, Mr.
Gemmersdorfer will relocate his domicile from Bad Homburg to 74679
Weissbach or into the Weissbach region.
KHAG will assume the costs for the removal firm hired to handle the
move as well as the broker's commission for rented property as
customary in the locality.
(2) Up to the day of the move, but for no more than 12 months after the
start of this Employment Agreement, KHAG will assume the costs for a
second residence up to a maximum gross amount of DM 1,000,-- per month.
(3) In case of business travel on KHAG's behalf, Mr. Gemmersdorfer is
entitled to reimbursement of his travel and business entertainment
expenses in such amount as is
4
<PAGE> 5
reimbursed tax-free to management-level employees (per diem, hotel
expenses in accordance with receipt, first class tickets, first class
transcontinental flights).
(4) An Audi AB 2.71 with car telephone and other fittings is available to
Mr. Gemmersdorfer for business trips and may also be used for private
purposes. The Company will bear operation and maintenance costs.
Payment of tax on the benefit in money's worth on the basis of tax
directives as well as social security contributions will be on Mr.
Gemmersdorfer's account.
(5) KHAG will assume the costs for the private telephone; income tax
accruing thereupon as well as social security contributions will have
to be borne by Mr. Gemmersdorfer.
SS. 4 INSURANCE
KHAG will take out for Mr. Gemmersdorfer the following personal
insurance, whose premiums will during the term of this Agreement have
to be paid by KHAG:
a. For death by accident DM 1,000,000.--
b. for the event of permanent disablement DM 2,000,000.--
c. for additional medical costs DM 20,000.--
d. as bridging compensation DM 300,000.--
Furthermore, a baggage insurance in the amount of DM 10,000.-- will be
taken out for Mr. Gemmersdorfer on KHAG's account.
Possibly accruing income tax and social security contributions on the
premiums or insurance benefits will be on Mr. Gemmersdorfer's account.
The insurance is valid for both the professional and the private areas.
Benefits from such personal insurance will be effected in addition to
possible benefits in accordance with ss.ss. 7-11.
SS. 5 LEAVE
Mr. Gemmersdorfer is entitled to annual leave of 30 working days, which
may also be taken parts. For 1998 there is a proportionate leave
entitlement. Mr. Gemmersdorfer will coordinate his vacation times with
the Chairman of the Supervisory Board under consideration of business
matters.
Leave days not taken during a calendar year will become forfeited on
31 March of the following calendar year.
5
<PAGE> 6
SS. 6 INVENTIONS
(1) KHAG is entitled to any Inventions made by Mr. Gemmersdorfer in KHAG's
special fields and improvements of inventions. Should industrial
property rights be applied for, then this will be done in KHAG's name:
the inventor, whose statutory claims to remuneration will remain
unaffected by this, will be named. Incidentally, the provisions of the
Employee Invention Act of 22.7.1957 (Federal Law Gazette
--Bundeegesetzblatt-- 1967 Part 1 pages 758 et seq.) and the
implementing regulations issued about it will be applicable.
(2) The same applies to possible inventions by Mr. Gemmersdorfer in the
special fields of KHAG's subsidiaries.
SS. 7 MEDICAL CHECK-UP
Mr. Gemmersdorfer undertakes to have a thorough medical check-up
performed at Deutache Klinik fur Diagnostik DKD in Wiesbaden once per
calendar year.
Costs will be assumed by KHAG up to an amount of DM 2,000.--. Should
Mr. Gemmersdorfer's health insurance refund a portion of the medical
costs and should this not cause any disadvantages for the return of
premium, then KHAG will only assume such amount as not refunded by the
health insurance.
SS. 8 ILLNESS, DEATH
(1) Should Mr. Gemmersdorfer due to an illness be prevented from performing
his activities, then he will continue to receive his undiminished fixed
remuneration in accordance with ss. 2 Para. (1) for a period of six
months.
(2) In the event of Mr. Gemmersdorfer's death during the time of his active
services or during his retirement, such remuneration or pension will be
paid to his surviving dependents for three months, calculated as of the
first month following the month of Mr. Gemmersdorfer's death.
SS. 9 RETIREMENT PENSION
(1) Mr. Gemmersdorfer will obtain a claim to old-age pension pursuant to
Paragraphs (2) through (4) provided that he has been in the Company's
services for five full years of service.
6
<PAGE> 7
(2) Upon retirement on reaching the age of 65, Mr. Gemmersdorfer will
receive an old-age pension for life of at most 50% (fifty of hundred)
of the remuneration pursuant to ss. 2 Para. (1). Thereby, the
remuneration pursuant to ss. 2 Para. (1) last received by Mr.
Gemmersdorfer prior to his retirement from service will be decisive.
(3) The old age pension will for each year of service completed with KHAG
after the start of this Agreement be 3% of the decisive remuneration
(please see (2)), but no more than 50% of such remuneration. Only full
years of service with us will be taken into consideration.
(4) a. Should Mr. Gemmersdorfer due to cancellation, termination or
non-extension retire from his employment prior to reaching the age of
65 and should be meet the conditions of Para. (1), then his claim to
old-age pension will be left to him in the amount as applicable in
accordance with Para. (2) at the time of his retirement.
b. Should Mr. Gemmersdorfer pass away in such case as described in
a) after reaching the age of 65, then his present wife, Mrs. Heike
Gemmersdorfer, and the children descending from this marriage will
receive a widow's and orphan's pension pursuant to ss.ss. 11 and 12.
(5) In addition to the retirement pension listed in Paragraphs (1) through
(4), the premium for a life insurance taken out by Mr. Gemmersdorfer in
the amount of DM 1,800.-- p.m. will be paid by KHAG up to the gross
amount of DM 25,000.-- p.a., i.e. subject to deduction of social
security contributions and income tax to be paid by Mr. Gemmersdorfer.
Possible income taxes and social security contributions accruing
additionally will have to be borne by Mr. Gemmersdorfer. The
entitlement to a pension (retirement capital share) acquired by this
payment - during the term of employment - will be counted against
future pension payment in accordance with ss. 9 (1) through (4). The
same applies to ss.ss. 11 and 12.
SS. 10 OCCUPATIONAL DISABILITY
In the event of occupational disability, Mr. Gemmersdorfer -- provided
that he is in KHAG's services --will receive an occupational disability
pension in the amount of 50% of the remuneration in accordance with ss.
2 Para. (1).
SS. 11 WIDOW'S PENSION
(1) Should Mr. Gemmersdorfer pass away, then his present wife, Mrs. Heike
Gemmersdorfer, will receive a widow's pension.
7
<PAGE> 8
Such widow's pension will amount to 50% of the pension that Mr.
Gemmersdorfer did in fact receive at the time of his death and/or of
the old-age pension that Mr. Gemmersdorfer could have claimed had his
employment with the Company continued up to his reaching the age of 65,
whereby the remuneration last received in accordance with ss. 2 Para.
(1) will be decisive.
(2) Payment of the widow's pension will start upon the end of the payments
in accordance with ss. B (2). The widow's pension will be granted for
life, but no longer than up to a possible remarriage. The widow's
pension commitment will become discharged in the event of absolute
divorce of the marriage.
SS. 12 ORPHAN'S PENSION
(1) In the event of Mr. Gemmersdorfer's death, his children descending from
his marriage with Mrs. Heike Gemmersdorfer will receive an orphans'
pension at the same conditions as orphans' pensions are in accordance
with the Federal Act for the Remuneration of Public Officials granted
to surviving dependents of public officials.
(2) The orphans' pension will for each orphan (but for no more than three
orphans) amount to 25% of the old-age pension that Mr. Gemmersdorfer
did in fact receive at the time of his death and/or of the old-age
pension that Mr. Gemmersdorfer could have claimed had his employment
with the Company continued up to his reaching the age of 65, whereby
the remuneration last received in accordance with ss. 2 Para. (1) will
be decisive.
As long as a widow's pension in accordance with ss. 11 is granted as
well as the orphans' pension, the above rate will be reduced to 15%.
Widow's and orphans' pensions together may not exceed the old-age
pension that Mr. Gemmersdorfer could have claimed had his employment
with the Company continued up to his reaching the age of 65, whereby
the remuneration last received in accordance with ss. 2 Para. (1) will
be decisive; otherwise they will be cut back on a pro-rata basis.
(3) The orphans' pensions will be paid as of the time as of which in
accordance with ss. 11 the widow's pension will have to be paid. They
will and in each case with the completion of the professional training,
but no later than upon completion of the 27th year of life.
SS. 13 SECRECY
(1) Mr. Gemmersdorfer is obligated to maintain secrecy about all business
transactions, trade secrets, operating methods and other confidential
information he becomes privy to at KHAG and its subsidiaries due to his
activities as a KHAG Management Board member. This obligation will
remain in existence even after his withdrawal from KHAG's services.
8
<PAGE> 9
(2) All written instructions, drawings, notes, memoranda or records
regarding such trade secrets or confidential information that are in
Mr. Gemmersdorfer's possession during the term of this Agreement are
KHAG's property and have to be returned upon request and in any case in
the event of termination of this Agreement. Mr. Gemmersdorfer will not
keep any copies or excerpts of records. The same responsibility applies
to his heirs.
SS. 14 TERMINATION OF EMPLOYMENT
(1) Except in the event of expiration of the term of this Agreement in
accordance withss.15, the employment will end:
a. Upon reaching the age of 65 or
b. if Mr. Gemmersdorfer should become permanently disabled in
accordance with the social security legislation or
c. in the event of revocation of the appointment in accordance with
ss. 84 Para. (3) Companies Act (Aktiengeestz). Illness lasting
for more than six months may also constitute an important reason
for such revocation of appointment.
(2) 12 months prior to the end of the term of this Agreement in accordance
with ss. 15, both parties will declare whether the cooperation shall be
continued after the expiration of the Agreement. Such declaration will
have to be made in writing.
(3) In case of premature termination of this Agreement during the first
three years, Mr. Gemmersdorfer will notwithstanding the remaining term
of the Agreement be entitled to a maximum claim for remuneration for
the remaining term of this Agreement inclusive of a settlement in the
amount of two annual salaries in accordance with ss. 2 Para. (1).
SS. 15 TERM OF AGREEMENT
This Agreement starts on 1 August 1998 and will expire on 31 July 2003.
In the event of reappointment, this Agreement will be extended for the
term of such reappointment.
SS. 16 FINAL REMARKS
(1) All modifications and amendments to this Agreement require written form
in order to be valid; this requirement may not be excluded by oral
agreement.
9
<PAGE> 10
(2) Should individual provisions of this Agreement be or become totally or
partially invalid or should there be a gap in this Agreement, then the
validity of the remaining provisions shall remain unaffected. Instead
of the invalid provision such valid provision will be deemed as agreed
upon as corresponds as closely as possible to the meaning and purpose
of the invalid provision.
The Agreement will enter into force subject to the KHAG Personnel
Committee's consent to this Agreement and the resolution by the KHAG
Supervisory Board concerning the appointment.
Konigstein, 18 July 1998 Konigstein, 18 July 1998
- ---------------------------------- ----------------------------
Konrad Hornschuch AG Rolf J. Gemmersdorfer
represented by the Chairman of the
Supervisory Board, Dr. Walter Kuna
10
<PAGE> 1
EXHIBIT 10.52
DECORA INDUSTRIES, INC.
EXECUTIVE INCENTIVE PLAN
<PAGE> 2
DECORA INDUSTRIES, INC.
EXECUTIVE INCENTIVE PLAN
1. PURPOSE
A. Decora Industries, Inc. Executive Incentive Plan is designed to
support the Company's compensation philosophy of rewarding employees
who, through superior individual and team efforts, contribute to the
achievement of the Company's business objectives.
B. This Plan is designed to:
- Focus on achievement of Company financial objectives.
- Motivate employees to plan and control operations and expenses
which contribute to the achievement of Company objectives.
- Build teamwork and strengthen group performance.
- Recognize superior performance by rewarding individual and group
efforts.
- Provide incentive opportunities which when combined with a sound
base salary program ensures that the Company effectively competes
in recruiting and retaining qualified personnel.
2. PARTICIPATION
Participation in the Plan is limited to the following executives
Chairman and Chief Executive Officer President of Decora Inc.
Executive Vice President for Administration and Finance
3. INCENTIVE OPPORTUNITY
The incentive opportunity is defined as a percentage of the individual's
base salary earned during the fiscal year. The incentive opportunity for
the participants is:
Chairman and Chief Executive Officer 100%
President of Decora Inc. 75%
Executive Vice President for Administration and Finance 75%
4. COMPANY FINANCIAL OBJECTIVES AND AWARD PAYOUT
A. At the beginning of each fiscal year, financial objectives will be
established.
<PAGE> 3
B. Incentive payments are based on the level of Operating Profit/EBITDA
achievement:
<TABLE>
<S> <C>
Chairman and Chief Executive Officer 100% Corporate Performance
President, Decora Inc. 60% on North American Performance
15% on Corporate Performance
Executive Vice President Administration 75% Corporate Performance
</TABLE>
5. PAYMENT CALCULATION
Incentive amounts will be calculated by determining the actual
Operating Profit/EBITDA versus the target specified in the Annual
Operating Plan. Each percentage point variance in performance impacts
the payment by 2% points.
o The maximum payment will be based upon achievement of 120% of the
target.
o The minimum payment will be based upon a threshold achievement of
80% of target.
6. ADMINISTRATION
A. The following are administrative guidelines for the DECORA INDUSTRIES,
INC. Incentive Plan:
1. The Compensation Committee will administer the Plan, and has
final approval of the provisions and administration of the Plan.
2. Individual award amounts will be determined following the fiscal
year closeout and plan payments will be made as soon as
practicable thereafter.
3. Incentive Targets are based on actual base compensation received
during the fiscal year, i.e., exclusive of bonus moneys (sales
bonus, hiring bonus, etc.), relocation moneys or allowances, and
benefits moneys (except vacation and holiday pay). All awards
will be paid by check.
4. Any incentive payout under the terms of this Plan will be limited
by any government regulations that are in effect at the time of
incentive payout.
5. Termination of employment of a participant prior to the close of
the fiscal year shall result in forfeiture of incentive earnings,
other than in case of death, disability, or retirement. In case
of death, the participant's estate shall receive these payments.
Payment, if any, shall be made at the regular times after the
final financial results of the Company have been approved.
6. A participant who terminates employment after the close of the
fiscal year, but before incentive compensation is paid, shall
receive an incentive payment per the terms of the Plan.
7. The Incentive Plan is a one-year Plan only, and will be reviewed
on a year-to-year basis and revised or canceled, as determined
appropriate by the Compensation Committee.
2
<PAGE> 4
8. The Compensation Committee will approve bonus Awards Payout, as
well as participation definitions, qualifications, percentages,
and incentive targets. All changes, additions deletions, etc., to
the Plan can only be made with prior approval from the Committee.
9. The Compensation Committee retains the right to alter the Plan
provisions at any time and for any reason.
3
<PAGE> 5
<TABLE>
<CAPTION>
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------------------------------
DCI %VS North %VS % of Nathan Tim @ Earl @
American Incentive @
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA Plan Operating Inc Plan Opportunity 100% 75% 60% 15% Total
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$37,800 120% $22,800 120% 140% $455,000 $194,250 $155,400 $38,850 $194,250
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$36,225 115% $21,850 115% 130% $422,500 $180,375 $144,300 $36,075 $180,375
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$34,650 110% $20,900 110% 120% $390,000 $166,500 $133,200 $33,300 $166,500
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$33,075 105% $19,950 105% 110% $357,500 $152,625 $122,100 $30,525 $152,625
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$31,500 100% $19,000 100% 100% $325,000 $138,750 $111,000 $27,750 $138,750
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$29,925 95% $18,050 95% 90% $292,500 $124,875 $99,900 $24,975 $124,875
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$28,350 90% $17,100 90% 80% $260,000 $111,000 $88,800 $22,200 $111,000
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$26,775 85% $16,150 85% 70% $227,500 $97,125 $77,700 $19,425 $97,125
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
$25,200 80% $15,200 80% 60% $195,000 $83,250 $66,600 $16,650 83,250
- ---------- ----------- ---------------- ----------- -------------- ------------- ------------- ------------ ------------ ----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,662
<SECURITIES> 0
<RECEIVABLES> 29,305
<ALLOWANCES> (2,479)
<INVENTORY> 42,676
<CURRENT-ASSETS> 77,975
<PP&E> 71,996
<DEPRECIATION> (17,655)
<TOTAL-ASSETS> 220,739
<CURRENT-LIABILITIES> 43,318
<BONDS> 150,029
0
0
<COMMON> 73
<OTHER-SE> 18,792
<TOTAL-LIABILITY-AND-EQUITY> 220,739
<SALES> 176,577
<TOTAL-REVENUES> 176,577
<CGS> 113,168
<TOTAL-COSTS> 41,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,229
<INTEREST-EXPENSE> 14,085
<INCOME-PRETAX> 7,475
<INCOME-TAX> 3,230
<INCOME-CONTINUING> 3,696
<DISCONTINUED> 0
<EXTRAORDINARY> (2,019)
<CHANGES> 0
<NET-INCOME> 1,677
<EPS-BASIC> .23
<EPS-DILUTED> .20
</TABLE>
