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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1999
Commission File Number 000-16072
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 offices) (Zip code)
Registrant's telephone number
(including area code) (518) 747-6255
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
At February 11, 2000 there were 7,823,887 shares of Common Stock of the
registrant outstanding.
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TABLE OF CONTENTS
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PAGE
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PART 1 FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
as of December 31, 1999 and March 31, 1999 ` 3-4
Condensed Consolidated Statements of
Income for the three and nine months ended
December 31, 1999 and 1998 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended
December 31, 1999 and 1998 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures about
Market Risk 17
PART II OTHER INFORMATION 18
SIGNATURES 22
</TABLE>
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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>
DECEMBER 31, 1999 MARCH 31, 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 555 $ 6,158
Restricted cash 50 504
Accounts receivable, less allowance 30,269 26,826
Inventories 35,806 42,676
Prepaid expenses and other current assets 2,072 1,811
-------- --------
Total current assets 68,752 77,975
Property and equipment, net 52,308 54,341
Goodwill and other intangibles, net 78,652 78,081
Deferred income taxes 3,462 3,769
Deferred financing costs, net 3,882 4,171
Other assets 3,986 2,402
-------- --------
Total assets $211,042 $220,739
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
3
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
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(UNAUDITED)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,339 $ 11,547
Accrued liabilities 8,415 12,438
Accrued interest 2,503 5,293
Current portion of long-term debt 5,890 9,467
Deferred income taxes 1,179 242
Other current liabilities 2,612 4,331
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Total current liabilities 32,938 43,318
Long-term debt 148,461 140,562
Pension obligation 13,153 14,634
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Total liabilities 194,552 198,514
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Minority interest in subsidiary 2,939 3,360
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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; 7,824 and 7,342 shares issued
and outstanding at December 31, 1999 and March 31, 1999,
respectively 74 73
Additional paid-in capital 33,127 33,634
Accumulated deficit (16,246) (13,307)
Cumulative translation adjustment (2,827) (918)
Additional minimum pension liability (577) (617)
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Total shareholders' equity 13,551 18,865
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Total liabilities and shareholders' equity $ 211,042 $ 220,739
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net sales $ 38,002 $ 41,174 $ 125,788 $ 136,670
Cost of goods sold 29,605 26,641 86,490 88,009
--------- --------- --------- ---------
Gross profit 8,397 14,533 39,298 48,661
Selling, general and administrative
expenses 10,257 9,056 31,721 31,423
--------- --------- --------- ---------
Operating income (loss) (1,860) 5,477 7,577 17,238
Interest expense, net 4,038 3,774 11,935 10,446
--------- --------- --------- ---------
Income (loss) before income taxes,
minority interest and extraordinary
item (5,898) 1,703 (4,358) 6,792
Income tax provision (benefit) (2,367) 811 (1,625) 2,926
--------- --------- --------- ---------
Income (loss) before minority interest
and extraordinary item (3,531) 892 (2,733) 3,866
Minority interest in earnings of subsidiary (10) 407 206 766
--------- --------- --------- ---------
Income (loss) before extraordinary item (3,521) 485 (2,939) 3,100
Extraordinary item, net of income taxes -- -- -- (2,019)
--------- --------- --------- ---------
Net income (loss) $ (3,521) $ 485 $ (2,939) $ 1,081
========= ========= ========= =========
Per share of common stock:
Income (loss) before extraordinary item
Basic $ (0.45) $ 0.06 $ (0.38) $ 0.42
Diluted (0.45) 0.05 (0.38) 0.36
Extraordinary item
Basic -- -- -- (0.28)
Diluted -- -- -- (0.24)
Net income (loss)
Basic (0.45) 0.06 (0.38) 0.14
Diluted (0.45) 0.05 (0.38) 0.12
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
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DECORA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
--------------------------------
1999 1998
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Cash flows from operating activities:
Net income (loss) $ (2,939) $ 1,081
Adjustments to reconcile net income
to net cash provided by operating activities:
Extraordinary item, net of income taxes -- 2,019
Depreciation and amortization 6,964 7,329
Amortization of debt discounts and fees 812 720
Minority interest in earnings of subsidiary 206 766
Deferred tax provision 1,358 --
Net changes in current assets and liabilities (6,141) (1,779)
Other, net (3,158) (1,027)
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Net cash provided by (used in) operating activities (2,898) 9,109
--------- ---------
Cash flows from investing activities:
Acquisitions (3,398) (66,780)
Reduction in notes receivable -- 305
Purchase of property and equipment (5,101) (7,732)
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Net cash used in investing activities (8,499) (74,207)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt 13,467 110,086
Repayment of long-term debt (6,072) (29,166)
Change in short-term borrowing (1,078) 7,787
Proceeds from exercise of options 120 --
Payment of warrant exchange obligations (975) (200)
Payment of debt penalties and fees -- (7,087)
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Net cash provided by financing
activities 5,462 81,420
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Effect of exchange rate fluctuations on cash
and cash equivalents (122) 818
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Net increase (decrease) in cash and cash equivalents (6,057) 17,140
Cash and cash equivalents at beginning of period 6,662 1,807
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Cash and cash equivalents at end of period $ 605 $ 18,947
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - Integration of Financial Statements Reported on Form 10-K
The accompanying Condensed Consolidated Financial Statements should be read in
conjunction with Decora Industries, Inc.'s ( "DII" and together with its
subsidiaries, the "Company") Consolidated Financial Statements included in its
Form 10-K for the fiscal year ended March 31, 1999, filed with the Securities
and Exchange Commission (File No. 0-16072) (the "Form 10-K"). In the opinion of
the Company, the accompanying Condensed Consolidated Financial Statements
contain all adjustments, consisting of normal recurring accruals, necessary for
a fair presentation of the results for the interim periods.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". The new standard
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from the changes
in the values of the derivatives would be accounted for depending on whether it
qualifies for hedge accounting. The Company has adopted this standard as of the
beginning of this fiscal year. Adoption of this statement had no material impact
on the financial statements.
Certain reclassifications of prior year amounts have been made to conform to the
current year presentation.
NOTE 2 - Inventories
Inventories at December 31, 1999 and March 31, 1999 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
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<S> <C> <C>
Raw Materials $ 7,046 $ 8,018
Work-in-Process 6,939 8,832
Finished Goods 21,821 25,826
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$35,806 $42,676
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</TABLE>
NOTE 3 - Comprehensive Income
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(3,521) $ 485 $(2,939) $ 1,081
Cumulative translation adjustment (1,376) 121 (1,910) 2,209
Additional minimum pension liability 35 -- 40 --
------- ------- ------- -------
$(4,862) $ 606 $(4,809) $ 3,290
======= ======= ======= =======
</TABLE>
7
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NOTE 4 - Net Income Per Share
The Company adopted SFAS No. 128, as required, in the quarter ended December 31,
1997 with all prior periods being restated. The adoption did not have a
significant impact on net income (loss) per common share reported for the three
and nine months ended December 31, 1999 and 1998.
The number of shares of common stock and common stock equivalents used in the
computation of net income (loss) per common share, assuming dilution for each
period, is the weighted average number of common shares outstanding during the
periods and, if dilutive, common stock options, warrants and convertible
securities which are considered common stock equivalents. The following is a
reconciliation of the denominators for determining basic and diluted net income
(loss) per common share for the three and nine months ended December 31, 1999
and 1998. The denominators for the three and nine months ended December 31, 1999
are the same for both calculations as including the contingently issuable shares
and options/warrants would have been anti-dilutive. The numerators were the same
for both calculations for all periods (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
------------------------ ------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Weighted average shares:
Shares outstanding at beginning
of period 7,824 7,340 7,342 7,331
Shares issued -- -- 295 4
----- ----- ----- -----
Shares used in the calculation
of Basic EPS 7,824 7,340 7,637 7,335
Effect of dilutive securities:
Contingently issuable shares -- 339 -- 339
Options/Warrants -- 1,091 -- 1,058
----- ----- -----
Adjusted weighted average shares 7,824 8,770 7,637 8,732
===== ===== ===== =====
</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 2,824 and 752 for the three months
ended December 31, 1999 and 1998, respectively, and approximately 2,824 and 752
for the nine months ended December 31, 1999 and 1998, respectively.
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NOTE 5 - Segment Financial Data
The Company adopted SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, as required, in fiscal 1999, which changes the way the
Company reports information about its operating segments. The Company's
operating subsidiaries design, develop, and manufacture and sell products,
classified in two principal operating segments. The company's operating segments
were generally determined on the basis of strategic business units within the
operating subsidiaries which require different marketing strategies.
Consumer products include global sales of self-adhesive, decorative and surface
protection products sold in a wide variety of retail stores worldwide.
Industrial products primarily include converted films for use in the manufacture
of cabinets, furniture, automobiles, luggage and shoes which are sold to users
and original equipment manufacturers in diversified markets, principally in
Europe.
Information for fiscal 1999 has been restated from the prior year's presentation
in order to conform to the current year presentation.
OPERATING SEGMENTS
NET SALES (000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Consumer $ 24,945 $ 27,688 $ 85,769 $ 96,263
Industrial 13,057 13,486 40,019 40,407
-------- -------- -------- --------
Consolidated $ 38,002 $ 41,174 $125,788 $136,670
======== ======== ======== ========
</TABLE>
OPERATING PROFITS (000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Consumer $ 181 $ 5,670 $ 8,140 $ 17,990
Industrial (991) 821 1,553 1,917
-------- -------- -------- --------
Total segment (810) 6,491 9,693 19,907
General corporate expenses 1,050 1,014 2,116 2,669
-------- -------- -------- --------
(1,860) 5,477 7,577 17,238
Interest expense, net 4,038 3,774 11,935 10,446
-------- -------- -------- --------
Consolidated income (loss) before
income taxes, minority
interest and extraordinary
item $ (5,898) $ 1,703 $ (4,358) $ 6,792
======== ======== ======== ========
</TABLE>
9
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NOTE 6 - Recent Litigation
In September 1999, the Company filed a complaint in Federal District Court in
Ohio against Rubbermaid Incorporated. The complaint alleges fraud and
misrepresentation by Rubbermaid Incorporated relative to representations made to
the Company during the acquisition of Rubbermaid's Decorative Coverings Group.
The complaint seeks damages resulting from Rubbermaid's actions. See also Part
II, Item 1 Legal Proceedings.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q (the "10-Q") includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and located elsewhere herein
regarding company and industry prospects are forward-looking statements.
Although management believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from management's expectations are disclosed
in this 10-Q and in the annual report of Decora Industries, Inc. ("DII", and
together with its subsidiaries, the "Company") on Form 10-K for the year ended
March 31, 1999.
Prior to October 1997, the Company was operating primarily as a toll
manufacturer under an exclusive agreement with Rubbermaid Incorporated
("Rubbermaid") 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 of approximately 73.2% of the shares of
Konrad Hornschuch AG (since increased to approximately 90% as of
December 31, 1999) by the Company's wholly-owned subsidiary, Decora
Industries Deutschland GmbH (the "Hornschuch Acquisition"). At the last
shareholders' meeting of Konrad Hornschuch AG, which was held on
December 22, 1999, a resolution was adopted to convert Hornschuch from
an AG, a publicly traded stock corporation, to a private entity in the
form of a limited partnership.
- The April 29, 1998 acquisition of certain assets from Rubbermaid (the
"Rubbermaid Acquisition"), including the Con-Tact(R) brand name, which
constituted Rubbermaid's Decorative Coverings Group (the "DCG").
- The acquisition of EtchArt .
- The establishment of a totally new organization in North America,
including sales, marketing, customer service, distribution and financial
operations, together with associated computer systems. Prior to the
current fiscal year these functions had been provided by Rubbermaid.
11
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The following amounts are reflected in thousands:
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1999 VS. THREE MONTHS ENDED DECEMBER 31, 1998.
Net sales for the three months ended December 31, 1999 were $38,002 as compared
with net sales of $41,174 for the three months ended December 31, 1998. The
change of $3,172 resulted, in part, from decreases in net sales at the North
American operations of approximately $1,453, primarily as a result of
distribution issues arising from the transition from Rubbermaid's distribution
system, conversion of product packaging to the Con-Tact(R) brand to eliminate
reference to Rubbermaid and some reduction of SKUs. The reported lower net sales
of $1,719 at the Company's foreign operations, Hornschuch, is due to an
unfavorable foreign currency translation adjustment (German marks to U.S.
dollar) in the current year quarter which reduced net sales by approximately
$3,400, partially offset by sales gains achieved principally in their laminates
business.
Gross profit was $8,397, or 22.1% of net sales, for the three months ended
December 31, 1999, as compared with $14,533, or 35.3% of net sales, for the
three months ended December 31, 1998. The lower gross profit at the North
American operations of $3,774 is primarily attributable to the excess costs
related to the transition of assets and operations from Rubbermaid. Recovery of
these excess costs forms part of the Company's lawsuit against Rubbermaid which
is discussed in more detail in Part II, Item 1. The largest component adversely
impacting gross profit was the recording of a one-time charge of $3,000
(representing approximately 7.9% of total Company sales in the quarter), being
the current book value of slow-moving and excess inventory related to the
Rubbermaid transition which is now being disposed of, and an exceptionally high
level of sales allowances and lower sales in the current year quarter. The
decrease in gross profit at Hornschuch was $2,362, of which $1,100 was due to
adverse foreign currency translation (German mark to U.S. dollar), as compared
to the exchange rate in the prior year quarter. The balance was primarily due to
higher levels of sales allowances and an unfavorable product mix in the current
year quarter as sales of lower-margin industrial products represented a higher
percentage of sales.
Selling, general and administrative expenses were $10,257 or 27.0% of net sales,
for the three months ended December 31, 1999 as compared with $9,056 or 22.0% of
net sales, in the three months ended December 31, 1998. Of the increase of
$1,201, approximately $965 was at Hornschuch due to termination benefits
incurred and provided for workforce reductions which began in the third quarter
and will be complete by June 30, 2000 and a higher level of warranty expenses in
the laminates business. The balance of the increase was in the North American
operations which operated with a fully developed sales, marketing, supply chain
and accounting infrastructure in place, as compared with the prior year quarter
when these functions were in transition from Rubbermaid, partially offset by a
decrease in variable expenses due to the lower North American sales discussed
above.
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Interest expense, net was $4,038 for the three months ended December 31, 1999 as
compared with $3,774 in the prior year quarter. The increase of $264 is
principally due to the current year quarter reflecting higher average borrowings
as compared with the prior year quarter.
As a result of the above, the Company recorded a $5,898 loss before income
taxes, minority interest and extraordinary item in the three months ended
December 31, 1999, as compared with income of $1,703 in the three months ended
December 31, 1998.
As a result of the above-noted changes, a $3,178 decrease in the provision for
income taxes and a $417 decrease in the deduction for the minority interest in
earnings of Hornschuch, a net loss of $3,521 for the three months ended December
31, 1999 was recorded as compared to net income of $485 for the three months
ended December 31, 1998.
NINE MONTHS ENDED DECEMBER 31, 1999 VS. NINE MONTHS ENDED DECEMBER 31, 1998
For the nine months ended December 31, 1999 the Company has operated in North
America for the first time as a vertically integrated consumer products company
with its newly developed infrastructure. Since the Condensed Consolidated
Statements of Income of the Company for the nine months ended December 31, 1998
reflect the effects of only eight months of results from the Rubbermaid
Acquisition, during which time the Company was operating under the transition
agreement with Rubbermaid, the results for the nine months ended December 31,
1999 are not directly comparable with those of the nine months ended December
31, 1998.
Net sales for the nine months ended December 31, 1999 were $125,788 as compared
with net sales of $136,670 for the nine months ended December 31, 1998. The
change of $10,882 resulted from decreases in net sales at Hornschuch and the
North American operations of approximately $7,197 and $3,685, respectively. The
decrease in net sales at Hornschuch is principally due to two factors: 1) In the
first nine months of fiscal year 1999, sales to customers in Russia, primarily
to a single customer, were at an unusually high level. The Russian economy
collapsed at the end of the second quarter of fiscal 1999, and since that time
sales to Eastern Europe have declined sharply. As a result, sales to all
customers in Russia for the first nine months of fiscal 2000 were approximately
$5,300 less than the prior year period. 2) An unfavorable foreign currency
translation adjustment (German marks to U.S. dollar) in the current year period
reduced net sales by approximately $5,700 as compared with the prior year
period. These two factors were partially offset by sales gains achieved in
Hornschuch's laminates business. The lower net sales in North American
operations is primarily a result of manufacturing and distribution issues
arising from the transition from Rubbermaid's distribution system, conversion of
product packaging to the Con-Tact(R) brand to eliminate reference to Rubbermaid
and some reduction of SKUs.
13
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Gross profit was $39,298, or 31.3% of net sales, for the nine months ended
December 31, 1999, as compared to $48,661 or 35.6% of net sales in the prior
year period. The decrease, which occurred primarily in the third quarter, was a
result of a decrease in gross profit at Hornschuch of $4,424, primarily due to
the reduction in higher margin sales to customers in Russia discussed above,
higher levels of sales allowances and an unfavorable product mix in the current
year period. The decrease in gross margin at the North American operations of
$4,939 of which $3,774 occurred in the third quarter, was due to the recording
of a one time charge of $3,000 (approximately 2.4% of total Company net sales)
in the current year period relative to the slow moving and excess inventory
related to the Rubbermaid transition, a higher level of sales allowances and
lower sales volumes in the current year period.
Selling, general and administrative expenses were $31,712 or 25.2% of net sales,
for the nine months ended December 31, 1999 as compared with $31,423 or 23.0% of
net sales, in the nine months ended December 31, 1998. The increase of $289 was
principally a result of higher expenses in the North American operations which
operated throughout the nine months ended December 31, 1999 with a fully
developed sales, marketing, supply chain and accounting infrastructure in place,
as compared with the prior year period when these functions were in transition
from Rubbermaid, partially offset by a decrease in variable expenses due to the
lower sales discussed above.
Interest expense, net was $11,935 for the nine months ended December 31, 1999 as
compared with $10,446 in the prior year period. The increase of $1,489 is
principally due to the current year period reflecting nine months of interest
expense relative to the $112,750 of senior secured notes issued April 29, 1998
(the "Notes") as compared with eight months of interest expense in the prior
year period and higher average balances on other borrowings in the current year
period as compared with prior year.
As a result of the above, the Company recorded a loss before income taxes,
minority interest and extraordinary item of $4,358 in the nine months ended
December 31, 1999, as compared with income of $6,792 in the nine months ended
December 31, 1998.
The Company recognized an extraordinary charge of $2,019 (net of income taxes)
in the nine months ended December 31, 1998 associated with the debt refinancing
and the Rubbermaid Acquisition in April 1998.
As a result of the above-noted changes, a $4,551 decrease in the provision for
income taxes and a $560 decrease in the deduction for the minority interest in
earnings of Hornschuch, a net loss of $2,939 was recorded for the nine months
ended December 31, 1999, as compared with net income of $1,081 for the nine
months ended December 31, 1998.
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.
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As shown on the Condensed Consolidated Balance Sheets, the Company's net working
capital was $34,657 at March 31, 1999 as compared to $35,814 at December 31,
1999, an increase of $1,157. This is primarily due to decreases in the current
portion of long-term debt, accrued liabilities, accrued interest and other
accrued liabilities, and an increase in accounts receivable which, in part,
reflects the transition, late in fiscal 1999, from a single customer
(Rubbermaid) remitting on a fixed payment schedule to a multi-customer
structure. These movements were largely offset by decreases in cash and cash
equivalents and inventories.
During December 1999, the Company became aware that its subsidiary Decora,
Incorporated had failed to meet a certain covenant of its Credit Facility as at
September 30, 1999. Decora, Incorporated's lender waived this violation and, in
addition, agreed to modify the terms of the Credit Facility, availability under
which is based on a factor of the amount of accounts receivable and inventory
held by Decora, Incorporated, to provide more liquidity against its inventories.
As at December 31, 1999 and currently, Decora, Incorporated is in compliance
with all the covenants of its Credit Facility. Hornschuch has lines of credit
with three major German banks. At February 11, 2000, the Company had available
unused lines of credit amounting to $8,200. Consolidated cash balances as of
December 31, 1999 were $605 of which $50 was restricted as to use.
As discussed in the Outlook section, 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. To
further ensure adequate liquidity to meet future debt obligations in addition to
cash from operations, management is pursuing several alternatives, including
liquidation of excess inventory and sale of non-production assets. Management
believes it will continue to meet its debt obligations through the actions
described above, although no assurances can be given.
Net cash flow used in operating activities for the nine months ended December
31, 1999 was $2,898 versus cash flow provided by operating activities of $9,109
for the nine months ended December 31, 1998. The change of $12,007 was primarily
due to the decrease of net income of $4,020 , the extraordinary charge reflected
in the prior year period of $2,019 and the net change of $4,362 in current
assets and liabilities noted above.
Net cash flow used in investing activities for the nine months ended December
31, 1999 was $8,499 as compared with $74,207 in the prior year period. The
change resulted primarily from the effect of the Rubbermaid Acquisition in the
prior year period.
Net cash provided by financing activities in the nine months ended December 31,
1999 was $5,462 as compared with $81,420 in the nine months ended December 31,
1998. The change was primarily a result of the issuance of the Notes in the
prior year period, partially offset by the use of a portion of the proceeds to
repay existing long-term debt.
Capital expenditures for the nine months ended December 31, 1999 were $5,101
(including expenditures of $3,906 at Hornschuch) versus $7,732 for the nine
months ended December 31, 1998. Capital expenditures for the current fiscal year
are anticipated to be significantly lower than prior fiscal years.
15
<PAGE> 16
The Company currently owns, through Decora Industries Deutschland GmbH
approximately 90% of the outstanding shares of a foreign entity (Hornschuch). As
a result, the Company's consolidated operations and cash flow have become
significantly exposed to changes in exchange rates between the U.S. dollar and
the German Mark/Euro. To date, the Company has engaged in limited hedging
transactions to protect against fluctuations in exchange rates. Although the
Company plans to utilize limited hedging strategies in the future as the need
arises, its profitability will continue to be affected by fluctuations in
foreign exchange rates.
Concurrent with the Rubbermaid Acquisition, DII issued the Notes with an
original issue discount of $2,664 resulting in gross cash proceeds of $110,086.
Interest on the notes is paid semi-annually and no principal payments are
required prior to maturity on May 1, 2005. In addition, (i) Hornschuch borrowed
approximately $10,000 under its secured credit facilities, which it loaned to
Decora, Incorporated pursuant to a secured inter-company note, the proceeds of
which were used by Decora, Incorporated to partially finance the acquisition of
the DCG; and (ii) Decora, Incorporated entered into the three year, $15,000
secured Credit Facility.
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 $10,018. 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.
OUTLOOK
During the current fiscal year, the Company has substantially advanced 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 started to expand the product offering in Europe. The Company continues to
present its new Collections line to the trade which is being well received. A
new Arts & Crafts program and new packaging for the EtchArt line have also been
developed. The Company began shipment of its new Collections product line to
both domestic and export customers in late December. In addition, following
annual line reviews the Company has recently been appointed exclusive supplier
with category manager status at certain major customers. 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
16
<PAGE> 17
detailed in Part II, Item 1. "Legal Proceedings".
As a result of the financing associated with the Rubbermaid Acquisition and
Hornschuch Acquisition, the Company has substantial debt in relation to its
shareholders' equity, as well as substantial debt service requirements that are
significant compared to its cash flow from operations. At December 31, 1999, the
Company had consolidated outstanding indebtedness of $154,351 representing
approximately 92% of total capitalization. The Company's ability to service its
debt will depend upon the Company's future operating performance, which will be
affected by prevailing economic conditions and financial, business and other
factors, many of which are beyond the Company's control. If the Company is
unable to service its indebtedness, it may be required to alter its business
plans, restructure or refinance its 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 61% of the Company's
net sales for the nine months ended December 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, 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
Prior to January 1, 2000, the Company had completed the process of reviewing all
equipment and systems in order to determine and remedy any potential Year 2000
issues, and had also completed the process of reviewing the Year 2000 compliance
status with its vendors and customers. The Company, to date, has not experienced
any service disruptions as a result of the Year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information about market risks for the nine months ended December 31, 1999 does
not differ materially from that discussed under Item 7A of the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
17
<PAGE> 18
DECORA INDUSTRIES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 1, 1999, Decora Industries, Inc. and Decora, Incorporated
(collectively, "Decora") commenced a proceeding against Rubbermaid Incorporated
with the American Arbitration Association. Decora 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. Decora's claims arise from Rubbermaid's failure to
perform its obligations under a service agreement Decora entered into with
Rubbermaid for a nine-month transition period subsequent to Decora's acquisition
of Rubbermaid's Decorative Coverings Group. Decora seeks damages in excess of
$5,000,000 as a result of Rubbermaid's wrongful acts. Decora is proceeding with
the prosecution of its claims in the arbitration. The date of the arbitration
hearing is April 24, 2000.
On September 16, 1999, Decora commenced a legal action against Rubbermaid
Incorporated in the United States District Court for the Northern District of
Ohio. In the action, Decora has alleged causes of action for fraud and negligent
misrepresentation in connection with Decora's acquisition in 1998 of
Rubbermaid's Decorative Coverings Group. Decora 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. Decora seeks damages in excess of
$14,000,000 as a result of Rubbermaid's wrongful acts. The parties have agreed
to arbitrate this matter before the American Arbitration Association. The date
of the arbitration is 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 of such matters, the Company has accrued
amounts for defense and settlement costs which the Company considers adequate.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company believes that the transactions described below in which securities
were sold were exempt from registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof as transactions not involving any
public offerings. In each transaction, the number of investors was limited, the
investors were provided with information about the Company and/or access to such
information, and restrictions were placed on the resale of such securities.
18
<PAGE> 19
<TABLE>
<CAPTION>
Date Title Amount Consideration
- -------- ------------------- --------- -------------
<S> <C> <C> <C>
10/18/99 Options to purchase 50,000(1) Services
Common Stock
</TABLE>
(1) Represents employee stock options granted during the quarter ended December
31, 1999. The options are exercisable for a period of five years at a price of
$4.625, subject however, to the provisions of a stock option agreement between
the Company and the recipient. The grant of the options was made subject to the
approval of the Decora Industries, Inc. 1999 Stock Option Plan by the Company's
stockholders. Such approval was obtained at the Company's Annual Meeting of
Stockholders held on October 26, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Shareholders on October
26, 1999.
(b) The following individuals were nominated and elected to serve as
directors:
Nathan Hevrony, Roger Grafftey-Smith, Gabriel Thomas, Stephen H.
Verchick, and Ronald Artzer.
(c) The shareholders voted as follows on the following matters:
1. Election of directors. The voting result for each nominee
is as follows:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
- -------------------- --------- --------------
<S> <C> <C>
Nathan Hevrony 6,194,305 276,851
Roger Grafftey-Smith 6,194,305 276,851
Gabriel Thomas 6,194,305 276,851
Stephen H. Verchick 6,198,305 272,851
Ronald Artzer 6,198,305 272,851
</TABLE>
19
<PAGE> 20
2. Decora Industries, Inc. 1999 Stock Option Plan was approved
by a count of 1,919,136 votes for, 385,215 votes against, 20,694 votes
abstaining and 4,146,110 broker non-votes.
3. The reappointment of the Company's independent public
accountants for the 2000 fiscal year was approved by a count of 6,454,416 votes
for, 11,130 votes against, and 5,610 votes abstaining.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed or incorporated by reference as part of
this Report.
(3) Articles of Incorporation and By-Laws
3.1 Certificate of Incorporation of DII filed on January 28, 1992. (1)
3.2 Amendment No. 1 to DII's Certificate of Incorporation filed on November
2, 1993. (4)
3.3 Certificate of Designation of Series A Preferred Stock of Decora
Industries, Inc. dated September 26, 1997. (2)
3.4 Amendment No. 2 to DII's Certificate of Incorporation filed on December
29, 1997. (4)
3.5 Amendment No. 3 to DII's Certificate of Incorporation filed on December
29, 1997. (4)
3.6 By-laws of DII. (1)
(4) Instruments Defining the Rights of Security Holders
4.1 Certificate of Incorporation and By-laws (see Exhibits 3.1-3.6).
4.2 Form of Specimen Certificate. (3)
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. (3)
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). (3)
20
<PAGE> 21
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). (3)
4.6 Form of Guarantee of Decora, Incorporated dated as of April 29 1998
(included as Exhibit G to Indenture). (3)
4.7 Form of Registration Rights Agreement dated as of April 29, 1998 among
Lazard Freres & Co. LLC, Decora Industries, Inc. and Decora,
Incorporated. (3)
(27) Financial Data Schedule
27.1 Financial Data Schedule.
Notes:
(1) Previously filed as Exhibits to the Company's Report on Form 10-K for
the fiscal year ended March 31, 1992.
(2) Previously filed as Exhibit to the Company's Report on Form 8-K dated
October 1, 1997.
(3) Previously filed as Exhibit to the Company's report on Form 10-K for the
fiscal year ended March 31, 1998.
(4) Previously filed as Exhibit to the Company's Registration Statement No.
333-58989 on Form S-4 filed on July 13, 1998.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three months ended
December 31, 1999
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECORA INDUSTRIES, INC.
(REGISTRANT)
BY /s/ Robert L. Macdonald
----------------------------------
Robert L. Macdonald
Chief Financial Officer
DATED: February 18, 2000
22
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<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
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