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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number 0-16072
DECORA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0003300
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE MILL STREET
FORT EDWARD, NY 12828
(address of principal executive office) (Zip code)
Registrant's telephone number
(including area code) (518) 747-6255
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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At August 3, 2000 there were 7,823,877 shares of Common Stock of the registrant
outstanding. This document consists of 26 pages.
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TABLE OF CONTENTS
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PAGE
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PART 1 FINANCIAL INFORMATION
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Item 1 Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2000 and March 31, 2000 3-4
Condensed Consolidated Statements of
Income for the three months ended
June 30, 2000 and 1999 5
Condensed Consolidated Statements of
Cash Flows for the three months ended
June 30, 2000 and 1999 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 17
PART II OTHER INFORMATION 18
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SIGNATURES 26
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents $ 430 $ 665
Restricted cash 590 114
Accounts receivable, less allowance 30,835 28,555
Inventories 38,105 37,036
Prepaid expenses and other current assets 3,529 1,828
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Total current assets 73,489 68,198
Property and equipment, net 48,515 49,668
Goodwill and other intangibles, net 76,620 77,415
Deferred income taxes -- --
Deferred financing costs, net 4,310 3,675
Other assets 3,673 3,463
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Total assets $206,607 $202,419
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
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(UNAUDITED)
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,064 $ 11,992
Accrued liabilities 14,211 16,141
Accrued interest 2,383 5,813
Current portion of long-term debt 46,432 31,434
Deferred income taxes 625 1,304
Other current liabilities 3,136 2,924
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Total current liabilities 81,851 69,608
Long-term debt 118,215 122,253
Deferred income taxes, long-term 1,574 1,467
Pension obligation 12,375 12,618
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Total liabilities 214,015 205,946
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Minority interest in subsidiary 3,388 2,796
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Shareholders' equity:
Preferred stock, $.01 par value;
5,000 shares authorized, none issued -- --
Common stock, $.01 par value;
20,000 shares authorized;
7,823,887 and 7,823,887 shares issued and outstanding
at June 30, 2000 and March 31, 2000, respectively 78 78
Additional paid-in capital 33,144 33,144
Accumulated deficit (38,952) (35,353)
Cumulative translation adjustment (4,484) (3,604)
Additional minimum pension liability (582) (588)
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Total shareholders' equity (deficit) (10,796) (6,323)
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Total liabilities and shareholders' equity $ 206,607 $ 202,419
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
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(UNAUDITED)
<S> <C> <C>
Net sales $ 40,510 $ 44,392
Cost of goods sold 28,107 28,872
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Gross profit 12,403 15,520
Selling, general and administrative expenses 10,868 10,115
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Operating income 1,535 5,405
Interest expense, net 4,603 3,834
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Income (loss) before income taxes and minority
interest (3,068) 1,571
Income tax provision 441 699
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Income (loss) before minority interest (3,509) 872
Minority interest in earnings of subsidiary 78 120
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Net income (loss) $ (3,587) $ 752
======== ========
Per share of common stock:
Net income (loss)
Basic (0.46) 0.10
Diluted (0.46) 0.09
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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THREE MONTHS ENDED JUNE 30,
2000 1999
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(UNAUDITED)
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Cash flows from operating activities:
Net income (loss) $ (3,587) $ 752
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,927 2,016
Amortization of debt discounts and fees 195 272
Minority interest in earnings of subsidiary 78 120
Deferred tax provision (56) 816
Net changes in current assets and liabilities (8,350) (8,965)
Other, net 174 (494)
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Net cash provided by (used in) operating activities (9,619) (5,483)
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Cash flows from investing activities:
Rubbermaid acquisition (320)
Other acquisitions (607)
Purchase of property and equipment (485) (1,482)
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Net cash used in investing activities (485) (2,409)
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Cash flows from financing activities:
Issuance of long-term debt-net of issuance costs 10,461 9,755
Repayment of long-term debt (4,448) (2,937)
Net change in short-term borrowing 4,407 (200)
Proceeds from exercise of options -- 120
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Net cash provided by financing activities 10,420 6,738
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Effect of exchange rate fluctuations on cash
and cash equivalents (75) (141)
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Net increase (decrease) in cash and cash equivalents 241 (1,295)
Cash and cash equivalents at beginning of period 779 6,662
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Cash and cash equivalents at end of period $ 1,020 $ 5,367
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Integration of Financial Statements Reported on Form 10-K
The accompanying Condensed Consolidated Financial Statements should be read in
conjunction with Decora Industries, Inc.'s ("DII" and together with its
subsidiaries, the "Company") Consolidated Financial Statements included in its
Form 10-K for the fiscal year ended March 31, 2000, filed with the Securities
and Exchange Commission (File No. 000-16072) (the "Form 10-K"). In the opinion
of the Company, the accompanying Condensed Consolidated Financial Statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the results for the interim periods.
NOTE 2 - Inventories
Inventories at June 30, 2000 and March 31, 2000 consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
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(IN THOUSANDS)
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Raw Materials $ 6,209 $ 6,862
Work-in-Process 7,424 7,581
Finished Goods 24,472 22,593
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$38,105 $37,036
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</TABLE>
NOTE 3 - Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
(IN THOUSANDS)
2000 1999
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<S> <C> <C>
Net income (loss) $ (3,587) $ 752
Cumulative translation adjustment (880) (1,140)
Additional minimum pension liability 6 23
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$ (4,461) $ (365)
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</TABLE>
NOTE 4 - Net Income Per Share
The number of shares of common stock and common stock equivalents used in the
computation of net income (loss) per common share, assuming dilution for each
period, is the weighted average number of common shares outstanding during the
periods and, if dilutive, common stock options, warrants and convertible
securities which are considered
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common stock equivalents. The following is a reconciliation of the denominators
for determining basic and diluted net income per common share for the three
months ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
(IN THOUSANDS)
2000 1999
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Weighted average shares:
Shares outstanding at beginning
of period 7,824 7,342
Shares issued 0 65
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Shares used in the calculation
of Basic EPS 7,824 7,407
Effect of dilutive securities:
Contingently issuable shares 0 361
Options/Warrants 0 537
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Adjusted weighted average shares 7,824 8,305
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</TABLE>
The total number of shares of common stock and common stock equivalents that
were not included in the computation of diluted income (loss) per common share
because they were anti-dilutive was approximately 745,000 and 857,000 for the
three months ended June 30, 2000 and 1999, respectively.
NOTE 5 - Segment Financial Data
The Company's operating subsidiaries design, develop, and manufacture and sell
products, classified in two principal operating segments. The company's
operating segments were generally determined on the basis of strategic business
units within the operating subsidiaries which require different marketing
strategies.
Consumer products include global sales of self-adhesive, decorative and surface
protection products sold in a wide variety of retail stores worldwide.
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.
.
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OPERATING SEGMENTS
NET SALES (000'S)
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THREE MONTHS ENDED JUNE 30,
2000 1999
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<S> <C> <C>
Consumer $ 28,517 $ 31,061
Industrial 11,993 13,331
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Consolidated $ 40,510 $ 44,392
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</TABLE>
OPERATING PROFITS (000'S)
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<CAPTION>
THREE MONTHS ENDED JUNE 30,
2000 1999
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<S> <C> <C>
Consumer $ 2,169 $ 5,062
Industrial 786 1,004
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Total segment 2,955 6,066
General corporate expenses 1,420 661
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1,535 5,405
Interest expense, net 4,603 3,834
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Consolidated income before income taxes,
minority interest and extraordinary item $(3,068) $ 1,571
======== =========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects," "estimates," or words of similar meaning. Similarly,
references to the Company's future plans, objectives or goals are
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and under the heading "Certain Trends and Uncertainties" in Part II,
Item 7 of the Company's Annual Report for the fiscal year ended March 31, 2000
on Form 10-K. These risks and uncertainties could cause the actual results to
differ materially from those anticipated as of the date of this report.
Shareholders, potential investors, and other readers are urged to consider these
factors in evaluating the forward-looking statements, and are cautioned not to
rely on such forward-looking statements. The forward-looking statements included
herein are only made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
GENERAL
Prior to October 1997, the Company was operating primarily as a toll
manufacturer under an exclusive agreement with Rubbermaid Incorporated with
approximately 90% of its sales to Rubbermaid. Since October 1, 1997, the Company
has been transforming itself into a vertically integrated, world-wide leader in
the self-adhesive consumer decorative products category through a series of
acquisitions and restructuring of operations including the following:
- The October 1, 1997 acquisition by the Company's wholly-owned
subsidiary, Decora Industries Deutschland GmbH ("DI Deutschland") of
approximately 73.2% of the shares of Konrad Hornschuch AG
("Hornschuch") (since increased to approximately 90% as of March 31,
2000) (the "Hornschuch Acquisition");
- The April 29, 1998 acquisition of the assets of Rubbermaid's
Decorative Coverings Group, including the Con-Tact(R) brand name and
related product lines ("the Rubbermaid Acquisition");
- The acquisition of EtchArt, a manufacturer of decorative, window and
glass covering product line known as "Wallpaper for Windows" in 1999;
and
- The establishment of a totally new, self-reliant organization in North
America, including sales, marketing, customer service, distribution
and financial operations, together with associated computer systems.
Prior to the
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fiscal year ended March 31, 1999, these functions had been provided by
Rubbermaid.
During fiscal 2000, 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 2000 was the second year to
include a full twelve months of results from Hornschuch and the first year to
include a full twelve months of results from the North American operations
subsequent to the Rubbermaid Acquisition. Following the Rubermaid acquisition,
significant effort and investment was required to build a sales, marketing and
product delivery infrastructure. During the year, management focused on
completing the transitioning of 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.
In Europe, the Company's main emphasis was to complete a strategic business and
product mix and to solidify its management structure, a process which was
completed last year. 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 2001 while integrating its consumer product plans with the Company's
global marketing and product strategy.
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 dominant 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 build on its share of market, increase
margins, and, as a result to increase shareholder value.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999.
Net sales for the three months ended June 30, 2000 were $40,510,000 as compared
with net sales of $44,392,000 for the three months ended June 30, 1999. The
change of $3,882,000 reflects a decrease in Hornschuch net sales of
approximately $1,717,000 in the current year quarter, and a decrease in net
sales of $2,165,000 in the North American operations. Net sales at Hornschuch
for the three months ended June 30, 2000 increased by 4.7% over the three months
ended June 30, 1999. However, due to the unfavorable foreign currency
translation adjustment of the Company's European operations (German marks to
U.S. dollar), net sales were reduced by approximately $3,000,000. The decrease
in net sales in the North American operations for the three months ended June
30, 2000 is entirely due to higher than normal sales during April 1999 as a
result of orders carried forward from the last quarter of the 1998 fiscal year
and adjustments for pricing differences from previous quarters. Sales during
the last two months of the quarter ended June 30, 2000 exceeded sales during the
comparable period in 1999.
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Gross profit was $12,403,000, or 30.6% of net sales, for the three months ended
June 30, 2000 as compared with $15,520,000, or 35.0% of net sales, for the three
months ended June 30, 1999. The decrease of $3,117,000 reflects a decrease of
$2,101,000 in gross profit in the North American operations, and a decrease in
gross profit of $1,016,000 at Hornschuch. The decrease in gross margin in the
North American operations is principally due to the reduced sales and higher
relative distribution costs during the current year quarter. The gross profit at
Hornschuch declined in the current year quarter due to an unfavorable currency
translation adjustment (German marks to U.S. dollar) which reduced the gross
margin by approximately $1,200,000.
Selling, general and administrative expenses were $10,868,000 or 26.8% of net
sales, for the three months ended June 30, 2000 as compared with $10,115,000 or
22.8% of net sales, in the three months ended June 30, 1999. The increase of
$753,000 was in large part attributable to the annualized impact of marketing
and staffing costs incurred in the North American subsidiary.
Interest expense, net was $4,603,000 for the three months ended June 30, 2000 as
compared with $3,834,000 in the prior year quarter. The increase of $769,000 is
principally due to higher average balances and interest rates on borrowings for
the current quarter as compared with the prior year quarter.
As a result of the foregoing, the Company recorded a loss before income taxes
and minority interest of $3,068,000 in the three months ended June 30, 2000, as
compared with income of $1,571,000 in the three months ended June 30, 1999. The
decrease in the current year quarter is principally a result of lower sales
partially as a result of the unfavorable foreign currency translation
adjustments, higher selling, general and administrative expenses and higher net
interest expense.
Net loss was $3,587,000 for the three months ended June 30, 2000, as compared to
a net income of $752,000 for the three months ended June 30, 1999, a decrease of
$4,339,000. The decrease is a result of the above-noted changes, a $258,000
decrease in the provision for income taxes, which reflects a $375,000 decrease
in DI Deutschland's provision for income tax for the three months ended June 30,
2000 over the three months ended June 30, 1999 and the absence of a tax
provision in the current quarter for Decora.
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, and working capital
needs.
BORROWINGS UNDER CREDIT FACILITIES
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. The Company's outstanding indebtedness includes
indebtedness:
- under the Company's $112,750,000 principal amount of 11% senior
secured notes due May 1, 2005 (the "Senior Secured Notes");
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- under a loan of approximately DM37,300,00 (approximately $18,156,000
million at June 30, 2000) from Dresdner Bank to DI Deustschland (the
"DI Deutschland Credit Facility");
- of Hornschuch of approximately DM18,000,00 (approximately $10,000,000)
under its secured credit facilities from German lenders, which funds
were loaned to Decora pursuant to the terms of an intercompany note in
order to finance a portion of the Rubbermaid Acquisition;
- under Hornschuch's term loans from German lenders aggregating
approximately DM7,050,000 (approximately $3,423,000 at June 30, 2000);
- of Hornschuch under its lines of credit of approximately DM5,200,000
(approximately $2,500,000 at June 30, 2000);
- of Decora under a five year note due September 1, 2000 from the
Washington County Local Development Corporation, the outstanding
balance of which was approximately $1,960,000 as of June 30, 2000; and
- of Decora under its syndicated secured credit facility from Ableco
Finance, LLC ("Ableco") and The CIT Group/Business Credit, Inc. (the
"Ableco Credit Facility") in the approximate amount of $21,950,000 as
of June 30, 2000, consisting of approximately $11,223,000 in term
loans and $10,727,000 in revolving credit loans.
The terms of the indebtedness described above are set forth in detail in Part
II, Item 7 of the Company's Annual Report on Form 10-K for the year ended March
31, 2000, under the caption entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- Borrowings Under Credit Facilities."
DEFAULTS UNDER CREDIT FACILITIES
During fiscal year 2000, the Company began to experience deteriorating liquidity
as a result of operating losses in its North American Decora operations. These
losses were attributable to, among other factors, lower than expected sales
levels due to the Rubbermaid transition and higher distribution costs associated
with escalating freight charges. Liquidity has also been adversely impacted by
the Company's inability to upstream funds from Hornschuch's operations to DI
Deutschland to assist DI Deutschland in meeting its obligations. Because of
ongoing disputes with the remaining 10% minority interest in Hornschuch,
Hornschuch has not declared a dividend to DI Deutschland which could have been
applied to payment of the debt service on the DI Deutschland Credit Facility.
As a result of the foregoing, during fiscal year 2000 the Company defaulted
under the DI Deutschland Credit Facility and Decora's credit facility with Fleet
Bank, which was refinanced in May 2000 with the proceeds of the Ableco Credit
Facility. The details of the defaults under the DI Deustschland Credit Facility
and the Fleet
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credit facility are set forth in Part II, Item 7 of the Company's Annual Report
on Form 10-K for the year ended March 31, 2000, under the caption entitled,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Defaults Under Credit
Facilities."
As described in Part II, Item 7 of the Company's Annual Report on Form 10-K for
the year ended March 31, 2000, under the caption entitled, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Defaults Under Credit Facilities," on June 12,
2000, Ableco notified Decora that a development having a material adverse effect
had occurred under the Ableco credit facility which constituted an event of
default. This development was the provision by Decora in late May 2000 of
estimates for earnings before interest, depreciation, taxes and amortization for
the fiscal year ended March 31, 2000 which differed from earlier estimates
provided by Decora prior to the closing of the Ableco Credit Facility. Ableco
has advised Decora that it will collect interest at the default rate during the
continuation of the default.
At August 15, 2000, Decora is not able to comply with the financial covenants of
the Ableco Credit Facility without significant accommodations from the Ableco
syndicate. Such event constitutes an event of default under the terms of the
agreement governing the Ableco credit facility.
While the occurrence of a default permits Ableco to accelerate the maturity of
borrowings already made under the Ableco Credit Facility and to prohibit Decora
from making additional borrowings under the facility, to date Ableco has allowed
Decora to draw under the revolving facility and has not notified Decora of its
intention to accelerate repayment.
WORKING CAPITAL AND CONSOLIDATED STATEMENTS OF CASH FLOWS
As shown on the Company's Condensed Consolidated Balance Sheets, the Company's
net working capital decreased from a negative $1,410,000 at March 31, 2000 to a
negative $8,362,000 at June 30, 2000, a decrease of $6,952,000. The change is
due primarily to an increase in the current portion of long term debt and
accounts payable, partially offset by increases in accounts receivable,
inventories, prepaid expenses and a decrease in accrued liabilities.
Consolidated cash balances as of June 30, 2000 were $1,020,000, which are
limited by certain security agreements, minority interests and debt covenants as
to use. The current portion of long-term debt reflects indebtedness outstanding
under the Ableco Credit Facility and the DI Deutschland Credit Facility, due to
the defaults under these facilities as described above under the caption
"Defaults Under Credit Facilities." Absent the outstanding indebtedness included
in current liabilities at June 30, 2000 as a result of these defaults, current
portion of long term debt would have been reduced by $26,513,000, and therefore,
working capital at June 30, 2000 would have been $18,151,000.
Net cash used in operating activities for the three months ended June 30, 2000
was $9,619,000 versus cash flow used by operating activities of $5,483,000 for
the three months ended June 30, 1999. The increase was primarily due to the net
loss for the three month ended June 30, 2000.
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Net cash used in investing activities for the three months ended June 30, 2000
was $485,000 as compared with $2,409,000 in the prior year quarter. The change
resulted primarily from the absence of acquisitions and the reduced purchases of
property, plant and equipment.
Net cash provided by financing activities in the three months ended June 30,
2000 was $10,420,000 as compared with $6,738,000 in the three months ended June
30, 1999. The change was primarily a result of the refinancing of the Fleet line
of credit with the Ableco Credit Facility, as described in detail in Part II,
Item 7 of the Company's annual report on Form 10-K for the fiscal year ended
March 31, 2000, under the caption entitled "Management's Discussion and Analysis
of Financial Conditions and Results of Operations - Liquidity and Capital
Resources - Borrowings Under Credit Facilities."
Capital expenditures for the three months ended June 30, 2000 were $485,000
(including expenditures of $417,000 at Hornschuch) as compared to $1,482,000
(including expenditures of $982,000 at Hornschuch) for the three months ended
June 30, 1999. Expenditures at Decora's North American operations and Hornschuch
are lower than historical averages. During the current fiscal year, the Company
plans to make capital expenditures where necessary and appropriate and intends
to finance such expenditures with operating cash flow and existing lines of
credit.
The Company currently owns, through DI Deutschland, approximately 90% of the
outstanding shares of Hornschuch, a foreign entity. As a result, the Company's
consolidated operations and cash flow have become significantly exposed to
changes in exchange rates between the U.S. dollar and the German Mark/Euro. To
date, the Company has engaged in limited hedging transactions to protect against
fluctuations in exchange rates. Although the Company plans to utilize limited
hedging strategies in the future as the need arises, its profitability will
continue to be affected by fluctuations in foreign exchange rates.
Certain indirect subsidiaries of Hornschuch own two commercial real estate
properties in Germany which are unrelated to its operating business and which
collateralize bank loans totaling approximately $9,492,000. Currently, the
properties are producing rental income sufficient to cover interest payments.
Negotiations to sell the properties are at an advanced stage. While there is no
guarantee that these negotiations will be completed in the near term, management
believes the real estate can be sold at a price sufficient to repay the loans in
full. Hornschuch could be required to pay the amount of any shortfall.
As discussed in more detail in Part II, Item 1, under the caption entitled
"Legal Proceedings," in April 1999, the Company commenced an arbitration
proceeding against Rubbermaid, alleging causes of action for breach of contract
and other claims arising out of the execution and performance of the transition
services agreement between the Company and Rubbermaid during the nine-month
period subsequent to the Rubbermaid Acquisition. The Company also has asserted
claims in federal court against Rubbermaid on account of Rubbermaid's alleged
fraudulent and negligent misrepresentations in connection with the asset
purchase agreement executed in connection with the Rubbermaid Acquisition. Both
matters against Rubbermaid are scheduled to be arbitrated on August 28, 2000.
The Company is seeking in excess of $10 million in damages. Management is
hopeful that the Company will be successful in obtaining an award against
Rubbermaid, which would contribute to improved liquidity. However, no assurances
can be given.
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OUTLOOK
During the past fiscal year, the Company completed its transition in North
America from being a toll manufacturer into a vertically integrated consumer
branded products company. A major objective is to continue to enhance the value
of the Company's consumer brands by capitalizing on each brand's strength and
popularity in its respective region: Con-Tact(R) in North America and d-c-fix(R)
in Europe. The Company has a strong distribution position in the housewares
market in North America and primarily in the home furnishing market in Europe.
The Company has started to capitalize on the Con-Tact(R) brand recognition and
awareness in North America by expanding its product offerings beyond its
housewares and shelving position into the other categories for which the
European products are used. Similarly, by capitalizing on the same strengths of
d-c-fix(R), the North American products, targeted for different applications,
have expanded the product offering in Europe. The Company's new Collections line
is being well received by the trade. The other major objective in the short term
is to continue to rebuild goodwill at certain customers where relationships had
eroded due to poor customer service from Rubbermaid. In this connection, the
Company is vigorously pursuing legal action against Rubbermaid which is detailed
in Part II, Item 1, entitled "Legal Proceedings."
As discussed Part II, Item 7 of the Company's Annual Report on Form 10-K for the
year ended March 31, 2000, under the caption entitled, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Ability of Company to Continue as a Going Concern," there is
substantial doubt about the Company's ability to continue as a going concern.
Scheduled debt maturities during the remainder of fiscal 2001 total $46,432,000,
excluding $12,402,000 for interest payments on the Senior Secured Notes. As
discussed above, due to the Company's current inability to upstream funds from
Hornschuch to DI Deutschland, the Company has defaulted on a DM3,793,760
(approximately $1,850,000) principal and interest payment due to Dresdner Bank
under the DI Deutschland Credit Facility. Also, as discussed above, Decora is in
violation of the financial covenants under the Ableco Credit Facility. Moreover,
operating results have not provided the Company with sufficient cash flow from
its North American operations to make the next interest payment on the Senior
Secured Notes, in the approximate amount of $6,209,000, on November 1, 2000, the
next scheduled interest payment date.
The Company needs additional working capital in order to maintain its current
level of operations. To that end, the Company is aggressively exploring several
alternatives, including additional sources of financing, sales of assets and
potential changes in its capital structure. As reported in its annual report on
Form 10-K for the fiscal year ended March 31, 2000, the Company is also
continuing to consult with its financial advisors and to negotiate with its
lenders with the objective of developing a satisfactory resolution to the
Company's defaulted loans. As discussed in Part II, Item I, under the caption,
"Legal Proceedings," management is also pursuing its claims against Rubbermaid
and is hopeful that the Company will be successful in obtaining an award against
Rubbermaid, which would contribute to improved liquidity. There can be no
assurance that the Company will be successful in any of its endeavors to improve
working capital. If the Company is not successful in obtaining additional
working capital, whether by obtaining additional financing or other means, the
Company's business, financial condition and results of operations would be
materially adversely affected.
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<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information about market risks for the three months ended June 30, 2000 does not
differ materially from that discussed under Item 7A of the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2000.
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<PAGE> 18
DECORA INDUSTRIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In April 1998, the Company acquired the assets of the Decorative Coverings Group
of Rubbermaid Incorporated pursuant to the terms of an asset purchase agreement
(the "Asset Purchase Agreement"). Decora and Rubbermaid also entered into a
service agreement pursuant to which Rubbermaid agreed to provide certain
logistics services for a nine-month transition period following the acquisition
(the "Transition Services Agreement"). On or about April 1, 1999, the Company
commenced a proceeding against Rubbermaid with the American Arbitration
Association. The Company has alleged causes of action for breach of contract,
breach of fiduciary duty, fraud and deceit, conversion, breach of the covenant
of good faith and fair dealing, constructive fraud, and money had and received.
The Company's claims arise from Rubbermaid's failure to perform its obligations
as set forth in the Transition Services Agreement. The Company seeks damages in
excess of $5,000,000 as a result of Rubbermaid's wrongful acts. The Company is
proceeding with the prosecution of its claims in arbitration.
On July 19, 1999, Rubbermaid filed a "counterclaim" against the Company in
connection with the parties' rights and obligation under the Transition Services
Agreement. Rubbermaid now claims an entitlement to an amount of approximately
$200,000 in damages in connection with its counterclaim. The Company intends to
continue to vigorously defend itself against Rubbermaid's claim, which it
believes to be unfounded.
The date of the arbitration hearing with respect to the above matter is August
28, 2000.
On September 16, 1999, the Company commenced a legal action against Rubbermaid
in the United States District Court for the Northern District of Ohio. In the
action, the Company has alleged causes of action for fraudulent and negligent
misrepresentations in connection with the Asset Purchase Agreement. The Company
claims that Rubbermaid fraudulently induced Decora into acquiring Rubbermaid's
Decorative Coverings Group by means of certain material misrepresentations,
including misrepresentations with respect to the status of certain of the
Decorative Covering Group's major customer accounts. The Company seeks damages
in excess of $14,000,000 as a result of Rubbermaid's wrongful acts. In response,
Rubbermaid generally has denied the allegations in the Company's complaint but
has not asserted any affirmative claims, such as a cross-complaint, against the
Company, except that in its prayer for relief, Rubbermaid requests that it be
awarded costs and attorney's fees to which it may be entitled under the terms of
the Asset Purchase Agreement if it were the prevailing party in the action. The
parties have stipulated and the federal court has ordered that the claims
asserted in the federal action are to be arbitrated and that the arbitration is
to commence no later than August 28, 2000.
The Company and its subsidiaries are defendants in pending actions which, in the
opinion of management of the Company, are not material to the Company's
financial condition or results of operations. Although no assurances can be
given regarding the ultimate outcome
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<PAGE> 19
of such matters, the Company has accrued amounts for defense and settlement
costs which the Company considers adequate.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 re placed on resale of the securities.
<TABLE>
<CAPTION>
Date Title Amount Consideration Purchaser
---- ----- ------ ------------- ---------
<S> <C> <C> <C> <C>
5/8/00 Options to purchase 50,000(1) Services Employee
common stock
</TABLE>
(1) These options have an exercise price of $5.00. These options vested
immediately upon grant and expire in May 2005.
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<PAGE> 20
ITEM 3. DEFAULTS BY THE COMPANY ON ITS SENIOR SECURITIES
During fiscal year 2000, the Company began to experience deteriorating liquidity
as a result of operating losses in its Decora operations. These losses were
attributable to, among other factors, lower than expected sales levels due to
the Rubbermaid transition and higher distribution costs associated with
escalating freight charges. Liquidity has also been adversely impacted by
limitations on the Company's ability to upstream funds from Hornschuch's
operations to DI Deutschland to assist DI Deutschland in meeting its
obligations. Because of ongoing disputes with the remaining 10% minority
interest in Hornschuch, Hornschuch has been unable to declare a dividend to DI
Deutschland which could be applied to payment of the debt service on the DI
Deutschland Credit Facility.
As a result of the foregoing, during fiscal year 2000 the Company has defaulted
under some of its credit facilities. In December 1999, the Company became aware
that Decora had failed to meet the minimum fixed charge coverage ratio of its
credit facility with Fleet Bank for the four quarters ended September 30, 1999.
In February 2000, Fleet Bank waived this violation as at September 30, 1999 and
modified the fixed charge coverage ratio covenant for the rolling four quarter
period ended December 31, 1999 to 6.70 to 1.00. The foregoing amendments to the
fixed charge coverage ratio applied only to the rolling four quarter period
ended December 31, 1999 and not to succeeding quarters. In addition, the
February 2000 amendment to the Fleet Bank loan documents revised the definitions
of acceptable accounts receivable and acceptable inventory in such a manner as
to increase the amount available for borrowing under the revolving credit
facility. The February 2000 amendment required DII to make a loan or capital
contribution to Decora in the amount of $3,500,000 by April 27, 2000. However,
this contribution was not made because Decora refinanced the Fleet credit
facility with the proceeds of the Ableco Credit Facility in early May 2000.
As at December 31, 1999 and March 31, 2000, Decora was not in compliance with
the fixed charge coverage ratio covenants of the Fleet credit facility.
Therefore, from January 1, 2000 until the date the Fleet credit facility was
terminated, Fleet Bank collected interest on its outstanding loans at the
default rate of interest equal to the Fleet Bank prime rate plus 2.25 percentage
points per annum.
As a result of the limitations on Hornschuch's ability to pay dividends to DI
Deutschland as described above, on March 30, 2000, DI Deutschland was unable to
meet a principal and interest payment totaling DM 3,793,760(approximately
$1,850,000) due to Dresdner Bank under the DI Deutschland Credit Facility. The
entire amount of this financing has been shown in current liabilities.
On June 12, 2000, Ableco notified Decora that a development having a material
adverse effect had occurred under the Ableco credit facility which constituted
an event of default. This development was the provision by Decora in late May
2000 of estimates for earnings before interest, depreciation, taxes and
amortization for the fiscal year ended March 31, 2000 which differed from
earlier estimates provided by Decora prior to the closing of the Ableco Credit
Facility. Ableco has advised Decora that it will collect interest at the default
rate during the continuation of the default.
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<PAGE> 21
At August 15, 2000, Decora is not able to comply with the financial covenants of
the Ableco Credit Facility without significant accommodations from the Ableco
syndicate. Such event constitutes an event of default under the terms of the
agreement governing the Ableco credit facility.
While the occurrence of a default permits Ableco to accelerate the maturity of
borrowings already made under the Ableco Credit Facility and to prohibit Decora
from making additional borrowings under the facility, to date Ableco has allowed
Decora to draw under the revolving facility and has not notified Decora of its
intention to accelerate repayment.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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)
(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)
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<PAGE> 22
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
10.69 Form of Financing Agreement dated as of May 2, 2000, by and among Decora
Industries, Inc., Decora, Incorporated, Ableco Finance LLC, and The CIT
Group/Business Credit, Inc. (21)
10.70 Form of Term A Note dated May 2, 2000, executed by Decora, Incorporated,
payable to Ableco Finance LLC, in the principal amount of $4,375,000.00
(21)
10.71 Form of Term A Note dated May 2, 2000, executed by Decora, Incorporated,
payable to A2 Funding LP, in the principal amount of $4,375,000.00 (21)
10.72 Form of Term B Note dated May 2, 2000, executed by Decora, Incorporated,
payable to Ableco Finance LLC, in the principal amount of $1,125,000.00
(21)
10.73 Form of Term B Note dated May 2, 2000, executed by Decora, Incorporated,
payable to A2 Funding LP, in the principal amount of $1,125,000.00 (21)
22
<PAGE> 23
10.74 Form of Revolving Credit Note dated May 2, 2000 executed by Decora,
Incorporated, a Delaware corporation, payable to The CIT Group/Business
Credit, Inc., in the principal amount of $14,000,000.00 (21)
10.75 Form of Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing dated May 2, 2000, made by Decora, Incorporated, in favor
of Ableco Finance LLC, in the maximum principal amount of $2,225,000.00
(21)
10.76 Form of Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing dated May 2, 2000, made by Decora, Incorporated in favor
of Ableco Finance LLC, in the maximum principal amount of $2,000,000.00
(21)
10.77 Form of Environmental Indemnity Agreement dated as of May 2, 2000, by
Decora, Incorporated, and Decora Industries, Inc., in favor of Ableco
Finance LLC. (21)
10.78 Form of Borrower Security Agreement dated as of May 2, 2000, made by
Decora, Incorporated, in favor of Ableco Finance LLC (21)
10.79 Form of Borrower Pledge Agreement dated as of May 2, 2000, made by
Decora, Incorporated in favor of Ableco Finance LLC (21)
10.80 Form of Guarantor Security Agreement dated as of May 2, 2000, made by
Decora Industries, Inc. in favor of Ableco Finance LLC (21)
10.81 Form of Guarantor Pledge Agreement dated as of May 2, 2000, made by
Decora Industries, Inc., in favor of Ableco Finance LLC (21)
10.82 Form of Employment & Retainer Agreement dated May 8, 2000 by Decora
Industries, Inc., Tatum CFO Partners, LLP, and Robert J. Hanlon, Jr.
(21) Subsidiaries of the Registrant
21.1 Subsidiaries of Decora Industries, Inc.(16)
23.1 Consent of Independent Certified Public Accountants
(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.
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<PAGE> 24
(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.
(18) Previously filed as Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended June 30, 1999.
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<PAGE> 25
(19) Previously filed as Exhibit to the Company's Report on Form 10-Q for the
fiscal quarter ended September 30, 1999.
(20) Previously filed as an Exhibit to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1999.
(21) Previously filed as an Exhibit to the Company's Report on Form 10-K for
the fiscal year ended March 31, 2000.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 2000.
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<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registered has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
August 14, 2000 DECORA INDUSTRIES, INC.
By: /s/ RONALD A. ARTZER
------------------------------
Ronald A. Artzer
Chief Executive Officer,
President and Chief
Operating Officer
By: /s/ ROBERT J. HANLON, JR.
------------------------------
Robert J. Hanlon, Jr.
Chief Financial Officer
26
