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 September 30, 1998
[ ] TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from _______________ TO _______________.
333-44747
(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)
(619) 794-2602
(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 November 4, 1998, 2,765,000 shares of Common Stock, par value
$.01 per share, of Rosedale Decorative Products Ltd. were issued and
outstanding.
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
TABLE OF CONTENTS
Interim Balance Sheet as of September 30, 1998 and December 31, 1997 4 - 5
Interim Statement of Income for the three months ended September 30, 1998 6
Interim Statement of Income for the nine months ended September 30, 1998 7
Interim Statement of Cash Flows for the period ended September 30, 1998 8 - 9
Interim Statement of Stockholders' Equity for the period ended
September 30, 1998 10
Notes to Interim Financial Statements 11- 26
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
3
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1998 1997
$ $
ASSETS
CURRENT ASSETS
Cash 3,270,764 442,655
Accounts receivable (note 2) 5,047,985 4,683,912
Inventory (note 3) 6,844,215 7,193,831
Prepaid expenses and sundry assets 627,362 180,096
------------ ------------
15,790,326 12,500,494
LOANS RECEIVABLE FROM AFFILIATED COMPANIES
(note 4) 1,935 36,884
DEFERRED PRODUCT COSTS (note 5) 142,663 641,028
DEFERRED POLICY COSTS (note 6) 52,290 182,873
MORTGAGES RECEIVABLE (note 7) 322,283 402,684
PROPERTY, PLANT AND EQUIPMENT (note 8) 2,172,349 1,930,869
------------ ------------
18,481,846 15,694,832
============ ============
The accompanying notes are an integral part of these financial statements.
4
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1998 1997
$ $
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 9) 3,159,595 3,970,943
Accounts payable and accrued expenses
(note 10) 4,693,529 6,741,431
Income taxes payable 692,528 172,538
Current portion of long-term debt (note 11) 77,187 82,616
------------ ------------
8,622,839 10,967,528
LONG-TERM DEBT (note 11) 754,967 996,981
LOANS PAYABLE TO STOCKHOLDERS 655,856 238,945
ADVANCES FROM DIRECTORS (note 13) 822,048 1,539,791
DEFERRED INCOME TAXES 178,030 190,564
------------ ------------
11,033,740 13,933,809
------------ ------------
STOCKHOLDERS' EQUITY
CAPITAL STOCK (note 14) 4,846,505 163
CUMULATIVE TRANSLATION ADJUSTMENT (361,260) (175,205)
RETAINED EARNINGS 2,962,861 1,936,065
------------ ------------
7,448,106 1,761,023
------------ ------------
18,481,846 15,694,832
============ ============
The accompanying notes are an integral part of these financial statements.
5
ROSEDALE DECORATIVE PRODUCTS LTD.
COMBINED STATEMENT OF INCOME
FOR THE THREE-MONTHS ENDED SEPTEMBER 30,
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Three-months Three-months
September 30, September 30,
1998 1997
$ $
SALES 4,877,612 5,292,734
COST OF SALES 3,027,929 3,415,066
------------ ------------
GROSS PROFIT 1,849,683 1,877,668
------------ ------------
OPERATING EXPENSES
General and administrative 631,846 771,080
Selling 559,040 625,952
Design studio 71,096 231,754
Book development costs 84,729 46,658
Amortization 149,861 143,265
------------ ------------
TOTAL OPERATING EXPENSES 1,496,572 1,818,709
------------ ------------
OPERATING INCOME 353,111 58,959
Interest expense (22,442) 55,014
------------ ------------
INCOME BEFORE INCOME TAXES 375,553 3,945
Income taxes (note 15) 145,590 1,611
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF 229,963 2,334
A CHANGE IN ACCOUNTING PRINCIPLE
Cumulative effect of change in accounting principle (1c) - -
NET INCOME 229,963 2,334
============ ============
Pro Forma Earnings Per Share (note 14) 0.08 0.00
============ ============
Fully Diluted Earnings per Share 0.06 0.00
============ ============
The accompanying notes are an integral part of these financial statements.
6
ROSEDALE DECORATIVE PRODUCTS LTD.
COMBINED STATEMENT OF INCOME
FOR THE NINE-MONTHS ENDED SEPTEMBER 30,
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Nine-months Nine-months
September 30, September 30,
1998 1997
$ $
SALES 15,629,077 16,251,371
COST OF SALES 9,330,554 10,374,682
------------ ------------
GROSS PROFIT 6,298,523 5,782,689
------------ ------------
OPERATING EXPENSES
General and administrative 1,728,767 1,781,740
Selling 1,602,015 1,755,077
Design studio 435,291 628,876
Book development costs 165,991 142,065
Amortization 458,423 429,611
------------ ------------
TOTAL OPERATING EXPENSES 4,390,487 4,737,369
------------ ------------
OPERATING INCOME 1,908,036 1,139,320
Interest expense 198,111 159,722
------------ ------------
INCOME BEFORE INCOME TAXES 1,709,925 979,598
Income taxes (note 15) 683,129 303,675
------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 1,026,796 675,923
Cumulative effect of change in accounting principle (note 1(c)) - 174,202
------------ ------------
NET INCOME 1,026,796 850,125
============ ============
Pro Forma Earnings Per Share (note 14) 0.37 0.31
============ ============
Fully Diluted Earnings per Share 0.26 0.21
============ ============
The accompanying notes are an integral part of these financial statements.
7
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Nine-months Nine-months
September 30 September 30,
1998 1997
$ $
Cash flows from operating activities:
Net income 1,026,796 850,125
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization 458,423 549,611
(Increase) decrease in deferred product costs 498,365 (310,059)
(Increase) decrease in accounts receivable (364,073) (1,647,732)
(Increase) decrease in inventory 349,617 (1,165,691)
(Increase) decrease in prepaid expenses and sundry assets (447,266) 43,013
Increase (decrease) in accounts payable and accrued expenses (2,047,902) 1,043,722
Increase (decrease) in income taxes payable 519,990 111,855
Increase (decrease) in deferred income taxes (12,532) -
------------ ------------
Total adjustments (1,045,378) (1,375,281)
------------ ------------
Net cash provided by (used in) operating activities (18,582) (525,056)
------------ ------------
Cash flows from investing activities:
(Increase) decrease in deferred policy costs 130,583 125,826
Purchases of property, plant and equipment (699,903) (553,240)
(Increase) decrease in mortgages receivable 80,401 (385,746)
------------ ------------
Net cash used in investing activities (488,919) (813,160)
============ ============
The accompanying notes are an integral part of these financial statements.
8
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Nine-months Nine-months
September 30, September 30,
1998 1997
$ $
Cash flows from financing activities:
Proceeds from share capital 4,846,342 0
Proceeds from (repayment of) bank indebtedness (811,348) 428,299
(Repayment of) proceeds from loans with affiliated companies 34,949 61,049
Proceeds from (repayment of) long-term debt (247,443) (97,415)
Proceeds from (repayment of) stockholders' loans 416,911 (25,427)
Proceeds from (repayment of) loans with directors (717,744) 134,085
------------ ------------
Net cash provided by financing activities 3,521,667 500,591
------------ ------------
Effect of foreign currency exchange rate changes (186,057) 23,366
------------ ------------
Net (decrease) increase in cash and cash equivalents 2,828,109 (814,259)
Cash and cash equivalents, January 1 442,655 1,079,823
------------ ------------
End of nine month period ended September 30 3,270,764 265,564
============ ============
Income taxes paid 75,672 187,432
============ ============
Interest paid 198,111 159,722
============ ============
The accompanying notes are an integral part of these financial statements.
9
ROSEDALE DECORATIVE PRODUCTS LTD.
INTERIM COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
Common
Class A Stock Cumulative
Number of Number of Retained Translation
Shares Shares Amount Earnings Adjustments
--------- --------- --------- ---------- -----------
$ $ $
Balance as of December 31, 1996 20 220 163 1,136,237 (106,297)
Foreign currency translation - - - - (11,487)
Net income for the nine-month
period to September 30, 1997 - - - 850,125 -
-------- ---------- ---------- ---------- ----------
Balance as of September 30, 1997 20 220 163 1,986,362 (117,784)
Balance as of December 31, 1997 20 220 163 1,936,065 (175,203)
Capital stock redeemed (20) (220)
Capital stock issued 0 2,765,000 4,846,342
Foreign currency translation - - - - (186,057)
Net income for the three-month
period to September 30, 1998 - - - 1,026,796 -
-------- ---------- ---------- ---------- ----------
Balance as of September 30,
1998 0 2,765,000 4,846,505 2,962,861 (361,260)
======== ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
10
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
These financial statements combine the accounts of the following
companies as at the respective interim fiscal periods:
Ontario Paint & Wallpaper Limited September 30, 1998 and 1997
Rosedale Wallcoverings and Fabrics Inc. September 30, 1998 and 1997
Rosedale Decorative Products Ltd. September 30, 1998 and 1997
All material inter-company accounts and transactions have been
eliminated. (see note 14)
b) Principal Activities
The companies, Ontario Paint and Wallpaper Limited and Rosedale
Wallcoverings and Fabrics Inc. were incorporated in Canada on
December 3, 1971 and April 7, 1981 respectively. Rosedale
Decorative Products Ltd. Was incorporated in May 1997. The
companies are principally engaged in the designing, manufacturing
and marketing of wallpapers and decorative fabrics in Canada, U.S.
and Europe.
c) Deferred Product costs
Expenditures relating to the design and distribution of wallpaper
and fabric sample books consisting of book development and design
costs relating to collections that have not been launched are
deferred and amortized over a three-year period on a straight-line
basis. Proceeds from the sale of sample books are offset against the
book development costs when received.
d) Cash and Cash Equivalents (Bank Indebtedness)
Cash and cash equivalents (bank indebtedness) includes cash on hand,
amounts due from and to banks, and any other highly liquid
investments purchased with a maturity of three months or less. The
carrying amounts approximate fair values because of the short
maturity of those instruments.
e) Other Current Financial Instruments
The carrying amount of the companies' accounts receivable and
payable approximates fair value because of the short maturity of
these instruments.
11
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
f) Long-term Financial Instruments
The fair value of each of the companies' long-term financial
assets and debt instruments is based on the amount of future
cash flows associated with each instrument discounted using an
estimate of what the companies' current borrowing rate for
similar instruments of comparable maturity would be.
g) Inventory
Inventory is valued at the lower of cost and fair market value.
Cost is determined on the first-in, first-out basis.
h) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are
amortized on the basis of their estimated useful lives at the
under-noted rates and methods:
Leasehold improvements 10% Straight-line
Cylinders and related design costs 5 years Straight-line
Equipment furniture and fixtures 20% Declining balance
Computer equipment 30% and 20% Declining balance
Automobile 30% Declining balance
Amortization for assets acquired during the year is recorded at
one-half of the indicated rates, which approximate when they
were put into use.
i) Income taxes
The companies account for income tax under the provisions of
Statement of Financial Accounting Standards No. 109, which
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognised for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities.
12
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
j) Foreign Currency Translation
The companies maintain their books and records in Canadian
dollars. Foreign currency transactions are translated using the
temporal method. Under this method, all monetary items are
translated into Canadian funds at the rate of exchange
prevailing at balance sheet date. Non-monetary items are
translated at historical rates. Income and expenses are
translated at the rate in effect on the transaction dates.
Transaction gains and losses are included in the determination
of earnings for the year.
The translation of the financial statements from Canadian
dollars ("CDN $") into United States dollars is performed for
the convenience of the reader. Balance sheet accounts are
translated using closing exchange rates in effect at the balance
sheet date and income and expense accounts are translated using
an average exchange rate prevailing during each reporting
period. No representation is made that the Canadian dollar
amounts could have been, or could be, converted into United
Sates dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation
are included in the cumulative translation adjustments in
stockholders' equity.
k) Sales
Sales represent the invoiced value of goods supplied to
customers. Sales are recognised upon the passage of title to the
customers.
l) Net Income per Weighted Average Common Stock
Net income per common stock is computed by dividing net income
for the year by the weighted average number of common stock
outstanding as presented on a pro-forma basis as explained in
note 14 (d).
m) Use of Estimates
The preparation of financial statements requires management to
make estimates and assumptions that affect certain reported
amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
n) Accounting Changes
On January 1, 1997, the companies adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the companies' result of operations.
13
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
n) Accounting Changes (cont'd)
In December 1995, SFAS No. 123, Accounting for Stock-Based
Compensation, was issued. It introduced the use of a fair
value-based method of accounting for stock-based compensation.
It encourages, but does not require, companies to recognise
compensation expense for stock-based compensation to employees
based on the new fair value accounting rules. Companies that
choose not to adopt the new rules will continue to apply the
existing accounting rules contained in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees.
However, SFAS No. 123 requires companies that choose not to
adopt the new fair value accounting rules to disclose pro forma
net income and earnings per share under the new method. SFAS No.
123 is effective for financial statements for fiscal years
beginning after December 15, 1995. The companies have adopted
the disclosure provisions of SFAS No. 123.
2. ACCOUNTS RECEIVABLE
1998 1997
$ $
Accounts receivable 5,145,905 5,655,789
Less: Allowance for doubtful accounts 97,920 128,545
---------- ----------
Accounts receivable, net 5,047,985 5,527,244
========== ==========
3. INVENTORY
1998 1997
$ $
Inventory comprised the following:
Raw materials 142,948 31,000
Finished goods 6,701,267 7,361,079
---------- ----------
6,844,215 7,392,079
========== ==========
14
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
4. LOANS RECEIVABLE FROM AFFILIATED COMPANIES
The loans receivable from affiliated companies which are related
through common ownership bear interest at prime plus 1.5%, have no
specific repayment terms, and are not expected to be repaid prior to
October 1, 1999.
5. DEFERRED PRODUCT COSTS
1998 1997
$ $
Book development costs 844,737 848,996
Deferred software costs 58,338 62,915
---------- ----------
Cost 903,075 911,911
---------- ----------
Less: Accumulated amortization
Book development costs 734,899 208,299
Deferred software costs 25,513 12,584
---------- ----------
760,412 270,883
---------- ----------
Net Deferred Product Costs 142,663 641,028
========== ==========
6. DEFERRED POLICY COSTS
Deferred policy costs represents the prepaid portion of premiums on
the life insurance policies referred to in note 20.
15
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
7. MORTGAGES RECEIVABLE
Second mortgages from companies related through common ownership, secured
by land and buildings, bear interest at 9% and are payable on
demand. No repayments are expected prior to October 1, 1999.
1998 1997
$ $
1216748 Ontario Inc. 168,999 198,714
1217576 Ontario Inc. 153,284 185,717
---------- ----------
322,283 384,461
========== ==========
The fair value of the mortgages receivable is estimated to be $360,000.
8. PROPERTY, PLANT AND EQUIPMENT
1998 1997
$ $
Leasehold improvements 29,271 32,451
Automobile 18,738 20,774
Equipment and furniture 283,890 264,469
Furniture and fixtures 239,037 300,632
Computer and equipment 337,791 339,830
Cylinders and related design costs 3,516,697 2,772,742
---------- ----------
Cost 4,425,424 3,730,898
---------- ----------
Less: Accumulated amortization
Leasehold improvements 11,965 10,020
Automobile 16,165 16,695
Equipment and furniture 199,468 186,593
Furniture and fixtures 172,423 196,044
Computer and equipment 228,544 226,030
Cylinders and related design costs 1,624,500 1,659,841
---------- ----------
2,253,075 2,295,223
---------- ----------
Net Assets 2,172,349 1,435,675
========== ==========
16
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
9. BANK INDEBTEDNESS
The companies have available credit facilities up to a maximum of
$6,635,000 ($10,160,000 Canadian), which bear interest at rates
varying between the bank's prime rate and prime plus .25%. The
indebtedness is secured by general assignments of book debts, pledge
of inventory under Section 427 of the Bank Act of Canada, general
security agreements providing a first floating charge over all
assets, guarantees and postponement of claims to a maximum of
$1,633,000 from the companies, guarantees from affiliated companies
up to $555,000, assignment of life insurance of $1,307,000 on the
lives of two key officers and assignment of fire insurance.
10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1998 1997
$ $
Accounts payable and accrued expenses is
comprised of the following:
Trade payables 4,371,552 6,430,613
Accrued expenses 321,977 38,846
---------- ----------
4,693,529 6,469,459
========== ==========
11. LONG-TERM DEBT
1998 1997
$ $
a) Settlement Payable
Settlement of a claim initiated by a
third party payable $7,242 monthly. The
fair value of the settlement payable is
estimated to be $100,000 96,479 192,534
---------- ----------
17
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
11. LONG-TERM DEBT (cont'd)
1998 1997
$ $
Balance forward 96,479 192,534
b) Insurance Loan
Amount in excess of cash surrender values
of life insurance policies (note 20) which
is payable on demand but is expected to
become due for payment in the year 2004.
The loan bears interest at prime plus 1.5%
and is secured by letters of guarantee
from a major Canadian Chartered Bank and a
second collateral mortgage on the assets
of the companies 735,675 693,650
---------- ----------
832,154 886,184
Less: Current portion (77,187) (192,534)
---------- ----------
Long-term portion 754,967 693,650
========== ==========
12. LOANS PAYABLE TO STOCKHOLDERS
Stockholder's advances are secured by general security agreements,
bears interest at prime plus 1.5%, have no specific repayment terms,
and the stockholders are not expected to demand repayment prior to
October 1, 1999.
13. ADVANCES FROM DIRECTORS
Advances from directors are secured by general security agreements,
bears interest at prime plus 1.5%, have no specific repayment terms,
and the directors are not expected to demand repayment prior to
October 1, 1999.
18
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
14. CAPITAL STOCK
a) Ontario Paint & Wallpaper Limited
Authorized
500,020 Class A Preference shares, 8% non-cumulative,
non-voting, redeemable at $12,500 per share
25,000 Class B Preference shares, 8% non-cumulative,
non-voting, redeemable at paid up amount
249,980 Common shares
Issued
1998 1997
$ $
20 Class A Preference shares 0 1
20 Common shares 0 2
--------- ---------
0 3
========= =========
b) Rosedale Wallcoverings and Fabrics Inc.
Authorized
3,600 Preference shares, 9% non-cumulative, non-voting,
redeemable at the amount paid up plus a premium of 10%
4,000 Common shares
Issued
1998 1997
$ $
200 Common shares 0 160
========= =========
19
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
14. CAPITAL STOCK (cont'd)
c) Rosedale Decorative Products Ltd.
Authorized
Unlimited number of common shares
Issued
1998 1997
$ $
2,765,000 Common Shares 4,846,505 0
========= =========
d) Issued - Combined
1998 1997
$ $
20 Class A Preference shares 0 1
220 Common Shares 0 162
2,765,000 Common Shares 4,846,505 0
--------- ---------
4,846,505 163
========= =========
d) Weighted Average Number of Common Shares
On May 14, 1997, a newly incorporated holding company, Rosedale
Decorative Products Ltd. (the "Registrant"), was formed by the
shareholders of the companies for the purpose of consolidating
and reorganizing their 100% ownership interests in anticipation
of an initial public offering. This reorganization was carried
out using the pooling of interests method.
For the purpose of determining earnings per share, the weighted
average number of common shares has been presented on a pro-forma
basis.
This re-organization resulted in the transfer of all the
outstanding common shares of the parent companies of Ontario and
Rosedale held by the Fine and Ackerman families to the
Registrant in exchange for 1,500,000 common shares of the
Registrant.
On June 18, 1998, the Company issued 1,100,000 common shares to
the public.
The Company issued 165,000 common shares to the public on July 20, 1998.
20
Accordingly, the earnings per share data are presented herein on a pro-forma
basis assuming that the weighted average number of shares issued is 2,765,000.
Fully diluted earnings per share include 1,265,000 warrants increasing the
average number of shares to 4,030,000.
21
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
15. INCOME TAXES
1998 1997
$ $
a) Current 692,528 187,432
Deferred 178,030 -
---------- ----------
870,558 187,432
========== ==========
b) Deferred income taxes represented the tax charges derived from
temporary differences between amortization of property, plant
and equipment and amounts deducted from taxable income.
c) Rosedale has operating losses of approximately $770,000 which is
expected to he used to reduce future taxable income. The
potential tax benefit relating to the losses have been
recognized in the accounts to the extent that they reduce
deferred taxes. The deductibility of these losses if available
expires as follows:
2001 $ 432,000
2002 312,000
2004 26,000
----------
$ 770,000
==========
Rosedale has been reassessed by Revenue Canada and the Province
of Ontario for fiscal year ended December 31, 1993 and December
31, 1994 in the amount of approximately $690,000 [see note 18
(b)]. Should the assessments be upheld, the benefits of these
losses may not be realized.
22
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
16. RELATED PARTY TRANSACTIONS
Amounts due from or paid to companies which are related through
common ownership.
1998 1997
$ $
Loan - 966578 Ontario Inc. 0 7,216
Loan - 976168 Ontario Inc. 1,935 33,748
Mortgage receivable - 1216748 Ontario Inc. 168,999 198,744
Mortgage receivable - 1217576 Ontario Inc. 153,284 185,177
Rent paid - 966578 Ontario Inc. 12,211 4,993
17. SEGMENTED INFORMATION
Rosedale is engaged primarily in the design, manufacturing,
marketing, and distribution and Ontario is engaged primarily in the
marketing and distribution of wallpaper and designer fabrics.
a) The breakdown of sales by geographic area is as follows:
PERIOD ENDED SEPTEMBER 30, 1998 THREE MONTHS NINE MONTHS
-----------------------------------------------------------------------
United States of America $ 3,974,672 $ 9,389,876
Canada 735,703 5,253,973
Other 167,237 985,228
------------ -------------
$ 4,877,612 $ 15,629,077
============ =============
PERIOD ENDED SEPTEMBER 30, 1997
United States of America $ 2,176,878 $ 7,575,868
Canada 2,570,314 7,163,159
Other 545,542 1,512,344
------------ -------------
$ 5,292,734 $ 16,251,371
============ =============
23
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
17. SEGMENTED INFORMATION (cont'd)
a) The companies' accounting records do not readily provide
information on net income by geographic area. Management is of
the opinion that the proportion of net income based principally
on sales, presented below, would fairly present the results of
operations by geographic area.
PERIOD ENDED SEPTEMBER 30, 1998 THREE MONTHS NINE MONTHS
-----------------------------------------------------------------------
United States of America $ 215,290 $ 616,894
Canada 10,504 345,174
Other 4,169 64,728
------------ -------------
$ 229,963 $ 1,026,796
============ =============
PERIOD ENDED SEPTEMBER 30, 1997
United States of America $ 959 $ 396,158
Canada 1,134 374,905
Other 241 79,062
------------ -------------
$ 2,334 $ 850,125
============ =============
b) The breakdown of identifiable assets by geographic area is as follows:
PERIOD ENDED SEPTEMBER 30, 1998
United States of America $ 3,697,125
Canada 13,288,104
Other 1,496,617
-------------
$ 18,481,846
=============
PERIOD ENDED SEPTEMBER 30, 1997
United States of America $ 1,149,550
Canada 13,133,391
Other 1,411,891
-------------
$ 15,694,832
=============
24
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
17. SEGMENTED INFORMATION (cont'd)
c) Sales to major customers are as follows:
1998 1997
Sales $ 4,943,227 $ 2,267,780
------------ ------------
% of total sales 32% 14%
------------ ------------
Amounts included in accounts receivable $ 1,128,943 $ 333,100
------------ ------------
d) Purchases from major suppliers are as follows:
1998 1997
Purchases $ 4,804,394 $ 4,596,216
------------ ------------
% of total purchases 47% 37%
------------ ------------
Amounts included in accounts payable $ 2,347,141 $ 3,168,656
------------ ------------
18. CONTINGENCIES
a) Rosedale has been re-assessed by Revenue Canada and the Province
of Ontario for fiscal years ended December 31, 1993 and December
31, 1994 for additional taxes estimated to be $690,000. The
Company has objected to these re-assessments and has no
obligation to pay the portion relating to Revenue Canada in the
amount of $450,000 until the objections have been processed. No
provision has been made in the accounts for the additional
taxes.
25
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
19. COMMITMENTS
Minimum payments under operating leases for premises amount to
approximately $321,000 per annum, exclusive of insurance and other
occupancy charges. The leases expire on October 31, 2004. The future
minimum lease payments over the next four years are as follows:
Payable during the following periods:
Within one year $ 321,018
Over one year but not exceeding two years 321,018
Over two years but not exceeding three years 321,018
Over three years but not exceeding four years 321,018
Over four years but not exceeding five years 321,018
Thereafter 347,770
-----------
$ 1,952,860
===========
20. LIFE INSURANCE POLICIES
The companies are the beneficiaries of life insurance policies with
The Prudential of America Life Insurance Company (Canada) ("PruCan")
taken out on the lives of two of the officers and one shareholder for
a total insured value of $22 million. In consideration for this
benefit, the companies agreed to fund the premiums payable on the
policies. Funding is being provided by advances from the Laurentian
Bank of Canada ("Laurentian").
The Laurentian has a legal right of set-off of the cash surrender values of the
life insurance policies against the debt owing to it by the companies.
Accordingly the related assets and liabilities have been offset in the financial
statements.
26
ROSEDALE DECORATIVE PRODUCTS LTD.
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN US DOLLARS)
(UNAUDITED)
20. LIFE INSURANCE POLICIES (cont'd)
The amounts offset were as follows:
Cash surrender value of life insurance policies $ 1,979,519
Advances $ (1,979,519)
The amount in excess of the cash surrender value of the life insurance
policies is included in long-term debt (see note 11).
The advances from Laurentian are payable on demand but are expected to
become due for payment in the year 2004. The companies are liable for the
interest on the advances. Security is provided by first charges on the
insurance policies, letters of credit from a major Canadian chartered
bank and general security agreements creating a second charge over all
corporate assets.
21. FOREIGN EXCHANGE CONTRACTS
As at September 30, 1998, the Company had outstanding foreign exchange
contracts to sell U.S. dollars to the National Bank of Canada to hedge
against fluctuations in foreign currency. The purpose of the Company's
foreign exchange hedging activities is to protect the Company from the
risk that the eventual dollar net cash inflows resulting from the sale
and purchase of products in foreign currencies will not be adversely
affected by changes in exchange rates. It is the Company's policy to use
derivative financial instruments to reduce foreign risks. Fluctuations in
the value of these hedging instruments are offset by fluctuations in the
value of the underlying exposures being hedged. As the contracts are
settled, the related gains or losses, if any, will be reported in the
statements of financial position and income. There is a potential risk of
non-performance by the National Bank of Canada, the financial institution
that the Company has the Foreign Forward Exchange Contracts with.
However, given the National Bank's prominence and financial condition,
the Company believes that this risk is insignificant. The cash
requirements arise as the contracts are exercised to the value of
$18,115,000 (in varying amounts from October 1998 through June 2000). The
following table presents the aggregate notional principal amounts,
carrying values and fair values of the Company's foreign exchange
contracts outstanding at September 30, 1998. Deferred gains and losses on
forward exchange contracts are recognized in earnings when the future
purchases and sales being hedged are recognized. The Company does not
hold or issue financial instruments for trading purposes. The estimated
fair values of the derivatives used to hedge the Company's risks will
fluctuate over time.
September 30, 1998 September 30, 1997
------------------------- ------------------------
Forward Notional Forward Notional
Exchange Principal Carrying Fair Exchange Principal Carrying
Contracts Amounts Value Values Contracts Amounts Values
- --------- ----------- -------- ---------- --------- --------- --------
1998 $ 5,965,000 - ($524,243) - - -
1999 $10,050,000 - ($639,876) - - -
2000 $ 2,100,000 - ($66,624) - - -
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATION
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997.
Revenues for the nine months ended September 30, 1998 were $15,629,077, a
3.8% reduction over prior year revenues of $16,251,371 for the same nine month
period. This decrease was due to the weakening of the Canadian dollar versus the
U.S. dollar, reduced sales to the eastern bloc and a reduction in wallpaper
collections launched this year. Using a consistent exchange rate, revenues would
have remained materially unchanged.
Gross profit for the Company for the nine months ended September 30, 1998
was 40.3% of sales, an increase as compared to the same period one-year ago,
which was 35.6%. This increase in gross profit margin can be attributed to a
change in sales mix due to a decrease in sales to the export market and the
strengthening of the U.S. dollar, of which 60% of our sales arise. As the
majority the Company's of purchases are made in Canadian dollars, a stronger
U.S. dollar will improve gross margin, whereas a strong U.S. dollar has a
negative impact on the conversion of the Canadian sales for the financial
statements.
Selling expenses for the Company decreased by 8.7% to $1,602,015 for the
nine-month period ended September 30, 1998 as compared to $1,755,077 for the
nine-month period ended September 30, 1997. This decrease is attributable to
savings on commissions to sales reductions.
General and administrative expenses for the Company decreased by 3.0%,
to $1,728,767 for the nine-month period ended September 30, 1998 from
$1,781,740 for the nine-months ended September 30, 1997 due to expense
controls.
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 expenditures are incurred as early as nine to eight 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
wallpaper collection, there is not always a matching of revenues and expenses,
for instance, costs for a January launch would be recorded in the previous year.
The Company ensures that there are orders in place from customers before
significant expenditures are incurred to produce the sample books and therefore,
there is little speculative risk in their production. Book development cost for
the nine-month period ended September 30, 1998 was $165,991 compared to $142,065
for the same period last year.
Design studio expenses for the Company decreased to $435,291 for the
nine-months ended September 30, 1998 versus $628,876 for the same period last
year. This reduction is attributable to lower staff requirements as a result of
the implementation of computer-aided design ("CAD") design computer systems for
the studio and the reduction of design purchases for the year.
28
Operating income for the nine-months ended September 30, 1998 increased
67.5% to $1,908,036 from $1,139,320 for the nine-months ended September 30,
1997. This relates to the increase in gross margins and a conscious effort to
control expenses.
Interest expense for the Company for the nine-months ended September 30,
1998 increased 24.8% to $198,111 from $159,722 for the nine-months ended
September 30, 1997. This increase in interest expense is attributable to
higher borrowing costs.
Net income for the nine-months ended September 30, 1998 increased 20.78%
over the same period ended September 30, 1997. The improvement is attributable
to an improved mix of sales, better gross margins and a tighter control of
costs.
Earnings per share for the nine months ended September 30, 1998 were $0.37
compared to $0.31 for the same period last year. Earnings per share were
calculated for both periods based on 2,765,000 shares of common stock issued as
of September 30, 1998.
Fully diluted earnings per share were $0.26 for the nine months ended
September 30, 1998 compared to $0.21 for the comparative period last year. Fully
diluted earnings per share were calculated based on a total of 4,030,000 common
shares which includes 1,265,000 warrants.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997.
Revenues for the three months ended September 30, 1998 were $4,877,612, a
7.86% reduction as compared to the same period last year. Export sales weakened
in the quarter to create part of the shortfall and the missed launch of a new
wallpaper collection also contributed to the decline. However, using consistent
exchange rates, the sales for the quarter would be even.
Gross Profit for the three months ended September 30, 1998 was $1,849,683,
1.5% decrease over the comparative period last year. This relates to the
strengthening of the U.S. dollar which accounted for 60% of the Company's sales.
Gross Profit increased as the majority of our product costs are in Canadian
dollars. As a percentage of sales, the gross profit was 37.9% for the third
quarter of 1998 as compared to 35.5% for the third quarter of 1997.
Selling expenses for the three months ended September 30, 1998 decreased
by 10.7% to $559,040 as compared to the same period last year with
Commissions accounting for the majority of the decrease.
General and administrative expenses decreased by 18.06% for the
three-month period ended September 30, 1998, with a reduction in professional
fees and computer consulting leading the way.
Book development costs increased by $41,071 to $84,729 for the three-month
period ended September 30, 1998.
Design studio expenses for the third quarter decreased due to a
re-allocation design expenses incurred in 1998, as well as continued savings due
to the CAD system.
29
Net Income for the three months ended September 30, 1998 increased
substantially over the same period last year. This can be attributed to
better gross margins and tighter cost controls on expenses.
Earnings per share for the three months ended September 30, 1998 were
$0.08 compared to $0.00 for the previous year. A total of 2,765,000 common
shares were used to make these calculations. Diluted Earnings per share for
the third quarter of 1998 was $0.06 with the third quarter 1997 being $0.00.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a positive net change in cash of $2,828,109 for the nine
months ended September 30, 1998. The principal sources of cash were Net Income
of $1,026,796 and proceeds from share capital of $4,846,342. These items were
off set by cash used to reduce Accounts Payable and Bank Debt. This is a
substantial improvement over the same period in 1997 where $814,259 was used to
fund a sizeable increase in Accounts Receivable and Inventories. Cash flows used
in investing activities for the nine months ending September 30, 1998 were
$488,919. This reflected planned capital addition for cylinders, designs and
engravings for new collections. The Company believes that the proceeds of the
offering, coupled with the income from operations, will fulfill the Company's
working capital needs for at least the next eighteen months. It is the Company's
intention to utilize a good portion of these funds to develop new product lines
of wallpaper and fabric plus continue the development of floor coverings and
ceiling tiles.
OTHER INFORMATION
The Company completed an initial public offering of its common stock and
common stock purchase warrants pursuant to a registration statement declared
effective by the commission on June 18, 1998.
The following are the Company's expenses incurred in connection with the
issuance and distribution of the common stock and warrants in the offering from
the effective date of the registration statement to September 30, 1998.
Underwriters Discounts and Commissions $ 648,312
Expenses paid to or for the Underwriter 211,222
Other expenses (estimate) 589,738
----------
Total expenses $1,449,272
None of the foregoing expenses were paid, directly or indirectly, to any
director or officer of the Company or their associates, to any person who owns
10 percent or more of common stock or warrants of the Company, or to any
affiliate of the Company.
The net offering proceeds of the public offering, including the proceeds of
the over-allotment option, to the Company after deducting for the expenses are
$4,846,342. The Company has used $1,567,398 for working capital.
30
YEAR 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
clearing broker to recognize the Year 2000 could have material adverse effect on
the Company's results of operations. There can be no assurance that the Year
2000 issue can be resolved by any of such third parties prior to the upcoming
change in the century. Although the Company may incur substantial costs,
particularly costs resulting from increased charges by its third party service
providers, as a result of such third party service providers correcting Year
2000 issues, such costs are not sufficiently certain to estimate at this time.
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
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the nine month
period ended September 30, 1998.
31
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: November 4, 1998 By: /s/ Alan Fine
------------------------------
Alan Fine
Date: November 4, 1998 By: /s/ Norman G. Maxwell
------------------------------
Norman G. Maxwell
32