UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from _______________ TO _______________.
001-14898
(Commission File Numbers)
ROSEDALE DECORATIVE PRODUCTS LTD.
(Exact name of registrant as specified in its charter)
Ontario, Canada 5110
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
731 Millway Avenue
Concord, Ontario
Canada L4K 3S8
(Address of principal executive offices)
(905) 669-8909
(Registrants' telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES [ X ] NO[ ]
As of June 30, 2002, 2,755,514 shares of Common Stock, no par value per
share, of Rosedale Decorative Products Ltd. were issued and outstanding.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
TABLE OF CONTENTS
Interim Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 2 - 3
Interim Consolidated Statements of Income for the three months ended
June 30, 2002 and June 30,2001 4
Interim Consolidated Statements of Income for the six months ended
June 30, 2002 and June 30,2001 5
Interim Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and June 30, 2001 6 - 7
Interim Consolidated Statements of Stockholders' Equity for the six months
ended June 30, 2002 and December 31, 2001 8
Condensed Notes to Interim Consolidated Financial Statements 9 - 10
1
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
(Amounts expressed in US dollars)
(Unaudited)
2002 2001
$ $
ASSETS
CURRENT ASSETS
Cash 1,502,078 1,897,453
Accounts receivable 5,446,816 4,018,712
Inventory 5,891,055 5,462,180
Prepaid expenses and sundry assets 727,957 883,580
Income taxes recoverable - 41,858
13,567,906 12,303,783
DEFERRED PRODUCT COSTS 502,763 559,329
MORTGAGES RECEIVABLE 325,471 309,820
PROPERTY, PLANT AND EQUIPMENT 3,644,474 3,392,450
18,040,614 16,565,382
See condensed notes to the consolidated financial statements
2
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
(Amounts expressed in US dollars)
(Unaudited)
2002 2001
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness 4,654,069 4,886,846
Accounts payable and accrued expenses 5,140,740 4,226,715
Income tax payable 203,501 -
9,998,310 9,113,561
DUE TO STOCKHOLDERS & DIRECTORS 1,046,650 1,150,573
DEFERRED INCOME TAXES 295,344 281,140
11,340,304 10,545,274
STOCKHOLDERS' EQUITY
COMMON STOCK 5,029,355 5,029,355
ADDITIONAL PAID-IN CAPITAL 142,314 142,314
ACCUMULATED OTHER COMPREHENSIVE LOSS (271,036) (589,034)
RETAINED EARNINGS 1,799,677 1,437,473
6,700,310 6,020,108
18,040,614 16,565,382
See condensed notes to the consolidated financial statements
3
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Income
For the period ended June 30
(Amounts expressed in US dollars)
(Unaudited)
Three-months Three-months
Ended ended
June 30, June 30,
2002 2001
$ $
SALES 6,015,427 4,439,314
COST OF SALES 3,446,944 2,295,320
GROSS PROFIT 2,568,483 2,143,994
OPERATING EXPENSES
General and administrative 713,593 731,429
Selling 805,382 858,219
Design studio 248,801 200,680
Book development costs (recovery) (64,278) 25,307
Amortization 380,300 237,331
TOTAL OPERATING EXPENSES 2,083,798 2,052,966
OPERATING INCOME 484,685 91,028
Interest expense (57,906) (134,222)
Exchange gain on Foreign Exchange Contracts 95,001 313,172
INCOME BEFORE INCOME TAXES 521,780 269,978
Income taxes (Recovery) 196,837 (13,091)
NET INCOME 324,943 283,069
Basic and diluted Net Income Per Share 0.12 0.10
Weighted average number of common shares
Outstanding 2,755,514 2,756,982
See condensed notes to the consolidated financial statements
4
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Operations
For the period ended June 30
(Amounts expressed in US dollars)
(Unaudited)
Six-months Six-months
Ended ended
June 30, June 30,
2002 2001
$ $
SALES 11,253,827 9,132,759
COST OF SALES 6,721,135 5,030,965
GROSS PROFIT 4,532,692 4,101,794
OPERATING EXPENSES
General and administrative 1,389,476 1,356,197
Selling 1,546,774 1,631,730
Design studio 436,467 339,637
Book development costs (recovery) (73,688) 50,834
Amortization 667,279 475,811
TOTAL OPERATING EXPENSES 3,966,308 3,854,209
OPERATING INCOME 566,384 247,585
Interest expense (108,355) (246,165)
Exchange gain (loss) on Foreign Exchange Contracts 126,105 (182,745)
INCOME (LOSS) BEFORE INCOME TAXES 584,134 (181,325)
Income taxes 221,930 -
NET INCOME (LOSS) 362,204 (181,325)
Basic and diluted Net Income (Loss) Per Share 0.13 (0.07)
Weighted average number of common shares
Outstanding 2,755,514 2,760,517
See condensed notes to the consolidated financial statements
5
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Cash Flows
For the period ended June 30
(Amounts expressed in US dollars)
(Unaudited)
Six-months ended Six-months ended
June 30 June 30,
2002 2001
$ $
Cash flows from operating activities:
Net income (Loss) 362,204 (181,325)
Adjustments to reconcile net income to net cash used in operating
activities:
Amortization of Capital Assets 517,266 427,528
Amortization of deferred product costs 150,013 99,117
Exchange (gain) loss on foreign exchange contracts (126,105) 182,745
Increase in accounts receivable (1,179,938) (133,597)
Increase in inventory (147,286) (862,175)
Decrease in prepaid expenses and sundry assets 192,885 389,827
(Increase) Decrease in accounts payable and accrued expenses 800,783 (649,222)
Increase (decrease) in income taxes payable/recoverable 238,355 (12,049)
Total adjustments 445,973 (557,826)
Net cash provided by (used in) operating activities 808,177 (739,151)
Cash flows from investing activities:
Deferred product costs incurred (68,314) (147,907)
Purchases of property, plant and equipment (594,929) (623,789)
Net cash used in investing activities (663,243) (771,696)
See condensed notes to the consolidated financial statements
6
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of Cash Flows
For the period ended June 30
(Amounts expressed in US dollars)
(Unaudited)
Six-months ended Six-months ended
June 30, June 30,
2002 2001
$ $
Cash flows from financing activities:
(Repayment of) Proceeds from bank indebtedness (461,992) 84,288
Proceeds from loans with affiliated companies - 4,473
Purchase of Treasury Stock - (8,728)
Repayment of directors loans (156,081) (29,733)
Net cash provided by (used in) financing activities (618,073) 50,300
Effect of foreign currency exchange rate changes 77,764 (43,819)
Net decrease in cash and cash equivalents (395,375) (1,504,366)
Cash and cash equivalents, January 1, 2002 1,897,453 2,524,394
End of six month period ended June 30, 2002 1,502,078 1,020,028
Income taxes paid 30,671 14,791
Interest paid 133,906 259,589
See condensed notes to the consolidated financial statements
7
ROSEDALE DECORATIVE PRODUCTS LTD.
Interim Consolidated Statements of changes in Stockholders' Equity
(Amounts expressed in US dollars)
(Unaudited)
Common Accumulated
Stock Common Additional Other
Number of Stock Paid-in Retained Comprehensive Comprehensive
Shares Amount Capital Earnings Income (loss) Income (loss)
------------ ------------ ------------ ------------ ----------------- ---------------
$ $ $ $ $
Balance as of December 31,
2000 2,764,314 5,038,083 142,314 2,002,846 - (195,670)
Purchase of treasury stock (8,800) (8,728) - - - -
Foreign currency translation - - - - (393,364) (393,364)
Net loss for the year - - - (565,373) (565,373) -
Balance as of December 31,
2001 2,755,514 5,029,355 142,314 1,437,473 (958,737) (589,034)
Foreign currency translation - - - - 317,998 317,998
Net profit for the
six-month period to
June 30, 2002 - - - 362,204 362,204 -
Balance as of June,
2002 2,755,514 5,029,355 142,314 1,799,677 680,202 (271,036)
See condensed notes to the consolidated financial statements
8
ROSEDALE DECORATIVE PRODUCTS LTD.
Condensed Notes to Consolidated Financial Statements
As of June 30,2002
(Amounts expressed in US dollars)
(Unaudited)
1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do
not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of all
recurring accruals) considered necessary for fair presentation have
been included. Operating results for the interim periods are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2002. Interim financial statements should be
read in conjunction with the Company's annual audited financial
statements.
The unaudited consolidated financial statements include the accounts
of Rosedale Decorative Products Ltd. ("the company") and its wholly
owned subsidiaries, Rosedale Wallcoverings and Fabrics Inc.
("Rosedale") and Ontario Paint and Wallpaper Limited ("Ontario"),
respectively.
All material inter-company accounts and transactions have been
eliminated.
2. PROPOSED SALE OF SUBSIDIARY
In July 2002, the Company filed a Proxy Statement with the Securities
and Exchange Commission for the approval by shareholders of the sale
of a wholly owned subsidiary, Rosedale Wallcoverings & Fabrics Inc.
("Rosedale") to the Chairman of the Board and Chief Executive
Officer, Alan Fine.
The terms and conditions and impact to the Company resulting from the
proposed transaction is fully set out in pro-forma financial
statements included in the aforementioned Proxy Statement.
The Proxy Statement is currently under review by the Securities and
Exchange Commission.
3. CONTINGENCIES
a) Rosedale has been re-assessed by Canada Customs and Revenue
Agency ("CCRA") and the Province of Ontario for fiscal years
ended December 31, 1993 and December 31, 1994 for additional
corporate income taxes estimated to be $863,000. The company has
objected to these re-assessments and has no obligation to pay
the portion relating to CCRA in the amount of $600,000 until the
objections have been processed. Since the company considers the
re-assessments to be incorrect, no liability has been set up in
the accounts. Should all or part of the re-assessments be
upheld, the additional income taxes would be taken into account
in the year of occurrence.
9
The company has retained a firm of tax specialists to represent
them in presenting their case to CCRA and currently the Notices
of Objections are being considered by the Chief of Appeals.
As at March 31, 2002, Rosedale made payments in respect to the
above income tax re-assessments amounting to approximately
$229,000 to the Province of Ontario. This amount has been
included in prepaid expenses and sundry assets.
b) The company has guaranteed the indebtedness of affiliated
companies in the amount of $561,000 through general security
agreements ranking behind the National Bank of Canada. As at June
30, 2002, the indebtedness of the affiliated companies amounted
to approximately $366,000.
c) The company has guaranteed secured by general security
agreements loans made by the Laurentian Bank of Canada to two
affiliated companies in the amount of approximately $1,300,000.
d) The company has issued standby letters of credit in favour of the
Laurentian Bank of Canada in the amount of $376,000.
10
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT
The information contained in this Report on Form 10-QSB and in other
public statements by the Company and Company officers include or may contain
certain forward-looking statements. When used in this Report or in such
statements, the words "estimate," "project," "intends," "expects," "believes"
and similar expressions are intended to identify forward-looking statements
regarding events and financial trends which may affect the Company's future
operating results and financial position. Such statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
the Company's actual results and financial position to differ materially from
those included within the forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date made. The Company undertakes no obligation to publicly release the
results of any revision to these forward-looking statements to reflect events or
circumstances after the date made or to reflect the occurrence of unanticipated
events.
Results of Operation
Three months ended June 30, 2002 as compared to three months ended June 30,
2001.
Revenues for the three months ended June 30, 2002 were $6,015,427, a 35.5%
increase over prior year revenues of $4,439,314. This increase resulted mainly
from the launch of new collections in the U.S. market in both wallpaper and
fabric. The Export market continued to grow during the second quarter.
Gross profits for the three months ended June 30, 2002 was $2,568,483, as
compared to the same period one-year ago of $2,143,994. This increase in gross
profit is primarily attributable to increased sales.
General and administrative expenses for the Company decreased by 2.4%, to
$713,593 for the three months period ended June 30, 2002 from $731,429 for the
three months ended June 30, 2001. Wages accounted for the majority of this
decrease as the requirements of the retail store were rationalized with savings
being achieved.
Selling expenses have decreased by 6.2% to $805,382 for the three-month
period ended June 30, 2002 as compared to $858,219 for the same period last
year. This savings relates to the Sherwin Williams bin expense incurred in 2000
and 2001, but was not repeated in 2002.
Design studio expenses for the Company increased by 24% to $248,801 for the
three months ended June 30, 2002 versus $200,680 for the same period last year.
Wages accounted for the majority of this increase as the Ontario division
started its own design studio during the second quarter of 2001.
Book development income for the three-month period ended June 30, 2002 was
$64,278 compared to a cost $25,307 for the same period last year. This decrease
in expense can be attributed to profits made on collections this year. We
believe that it is imperative that we keep our books at display counters in the
marketplace, as these sample books are our silent salesperson.
Operating income for the three months ended June 30, 2002 increased to
$484,685 from $91,028 for the three months ended June 30, 2001. This increase is
primarily attributable to the increase in sales.
Interest expense for the Company for the three months ended June 30, 2002
decreased to $57,906 from $134,222 for the three months ended June 30, 2001.
This decrease in interest expense is primarily attributable to lower interest
rates and decreased average borrowings during the period.
The exchange gain on foreign exchange contracts for the three months ended
June 30, 2002 was 95,001 as compared to $313,172 for the same period last year.
This occurred as the Canadian dollar strengthened by almost 0.08 cents during
the quarter increasing the value of the foreign exchange contracts held at the
end of the period.
Net income for the three months ended June 30, 2002 was $324,943 as
compared to $283,069 for the three months ended June 30, 2001. The improvement
relates to increased sales and lower interest charges, which was partially
offset by the lower gain on exchange recorded during the quarter.
Basic and fully diluted earnings per share for the three months ended June
30, 2002 were $0.12 compared to $0.10 for the same period last year.
Six months ended June 30, 2002 as compared to Six months ended June 30, 2001.
Revenues for the six months ended June 30, 2002 were $11,253,827, a 23.2%
increase over prior year revenues of $9,132,759. This increase resulted mainly
from an increase in sales in the U.S. and Export markets of new collections of
wallpaper and fabric. The U.S. and Canadian economy continues to struggle, as
consumer confidence has not rebounded as yet. The Company must continue to
evaluate and meet the requirements of its customers.
Gross profit as a percentage of revenue for the six months ended June 30,
2002 was 40.3%, as compared to the same period one-year ago of 44.9%. This
decrease in gross profit margins can be attributed to a change in the sales mix
and the clearing of slow moving and obsolete inventory. Price increases have
been implemented on newly introduced collections to offset the increases
received from suppliers.
General and administrative expenses for the Company increased by 2.5%, to
$1,389,476 for the six months period ended June 30, 2002 from $1,356,197 for the
six months ended June 30, 2001. Insurance costs have increased dramatically
since September 11th and an additional provision for bad debts accounts for the
majority of this increase.
Selling expenses have decreased by 5.2% to $1,546,774 for the six-month
period ended June 30, 2002 as compared to $1,631,730 for the same period last
year. The decrease in bin expense accounted for in 2001 relating to the Sherwin
Williams stocking deal was offset partially by increased commissions relating to
the increase in sales.
Design studio expenses for the Company increased by 28.5% to $436,467 for
the six months ended June 30, 2002 versus $339,637 for the same period last
year. This relates to the costs of the new studio introduced by the Ontario
division in the second quarter of 2001 and increased travel costs,
Rosedale develops wallpaper and fabric sample books, which are created for
each collection and sold through distributors. The majority of expenditures for
the creation of sample books are incurred in the quarter before the introduction
of a collection. Some of these expenditures are incurred as early as eight to
ten months in advance. Revenues generated from the sales of sample books are
netted from the costs incurred in the same period and the net amount is shown on
the income statement. Because expenditures are made in the quarter before the
launch of a collection, there is not always a matching of revenues and expenses,
e.g. costs for a January launch would be recorded in the previous year. The
Company ensures that there are firm orders in place from customers before
significant expenditures are incurred to produce the sample books. Therefore,
there is little speculative risk in their production. Book development produced
revenue for the six-month period ended June 30, 2002 of $73,688 compared to a
cost of $50,834 for the same period last year. This decrease in expense can be
attributed to lowering costs of manufacturing the books and increased revenues
on the sale of the sample books.
Operating income for the six months ended June 30, 2002 increased
128.8% to $566,384 from $ 247,585 for the six months ended June 30, 2001. This
relates to our increasing revenues as compared to the previous year.
Interest expense for the Company for the six months ended June 30, 2002
decreased to $108,355 from $246,165 for the six months ended June 30, 2001. This
decrease in interest expense is attributable to lower rates of borrowing,
decreased average borrowings for the operating companies and the waiving of
interest on the loans to shareholders.
The exchange gain on foreign exchange contracts relates to the new FASB
requirement that the ineffective portion of gain or losses attributable to cash
flow hedges be reported in earnings. As the Canadian dollar has strengthened by
almost $0.08 in 2002, the contracts we engaged to protect our margins on U.S.
sales had a positive impact on net income. The exchange gain for the six months
ended June 30, 2002 was $126,105 as compared to an exchange loss of $182,745 for
the six months ended June 30, 2001.
The net income for the six months ended June 30, 2002 was $362,204 as
compared to a net loss of $181,325 for the six months ended June 30, 2001.
Increased revenue and the exchange gain on foreign exchange contracts accounted
for this change.
Basic and fully diluted earnings per share for the six months ended June 30,
2002 were $0.13 compared to $(0.07) for the same period last year. Earnings per
share were calculated based on the weighted average number of shares outstanding
as of June 30, 2002 of 2,755,514 and 2,760,517 shares outstanding as of June 30,
2001.
Liquidity and Capital Resources
The Company had a negative net change in cash of $395,375 for the six
months ended June 30, 2002. Use of cash for the period was primarily
attributable to an increase in accounts receivable, a reduction in accounts
payable and repayment of bank indebtedness.
Cash flows used in investing activities for the six months ending June 30,
2002 were $663,243. This reflected planned capital addition for cylinders,
designs and engravings for new collections. It is the Company's intention to
continue to utilize a good portion of these funds to develop new product lines
of wallpaper and fabric, in addition to continuing the development of our
floorcoverings, ceiling tiles, and area rug product categories.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99 Certifications pursuant to Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
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.
ROSEDALE DECORATIVE PRODUCTS LTD.
Date: August 13, 2002 By: /s/Alan Fine
Alan Fine
Date: August 13, 2002 By: /s/Norman G. Maxwell
Norman G. Maxwell