UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7753
DECORATOR INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1001433
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10011 Pines Blvd., Pembroke Pines, Florida 33024
- ------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 436-8909
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $.20 Per Share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes No X
---- ----
Aggregate market value at March 24, 2005 of outstanding shares of Common Stock
other than shares held by officers, directors and their respective associates:
$21,901,221
Number of shares outstanding at March 24, 2005: 2,869,749
DOCUMENTS INCORPORATED BY REFERENCE
Part III- Portions of the Proxy Statement for the
2005 Annual Meeting of Shareholders
CAUTIONARY STATEMENT: THE COMPANY'S REPORTS ON FORM 10-K AND FORM 10-Q, ANY
CURRENT REPORTS ON FORM 8-K, AND ANY OTHER WRITTEN OR ORAL STATEMENTS MADE BY OR
ON BEHALF OF THE COMPANY CONTAIN OR MAY CONTAIN STATEMENTS RELATING TO FUTURE
EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR
BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND
UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE
ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS WILL BE AFFECTED BY THE
LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL
ACCOMMODATIONS AND MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST
RATE FLUCTUATIONS, COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE
COMPANY'S MARKETS, THE COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND
EXPENSES, AND OTHER FACTORS. ANY FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK
ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR
REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
NOTE: AFTER A REVIEW WITH THE SECURITIES AND EXCHANGE COMMISSION OF THE
COMPANY'S PREVIOUSLY FILED FORMS 10-Q FOR 2004, THOSE FILINGS WILL BE AMENDED.
THE AMENDED QUARTERLY BALANCES ARE REFLECTED IN NOTE 11 TO THE FINANCIAL
STATEMENTS.
NOTE: In this report, unless the context otherwise requires, Registrant or
Company means Decorator Industries, Inc. and its subsidiaries, herein sometimes
also called "Decorator Industries". Reference to a particular year or the
captions "For the Year" and "At Year End" refer to the fiscal periods as
follows:
2004 - 52 weeks ended January 1, 2005
2003 - 53 weeks ended January 3, 2004
2002 - 52 weeks ended December 28, 2002
2001 - 52 weeks ended December 29, 2001
2000 - 52 weeks ended December 30, 2000
PART I
------
ITEM 1. BUSINESS.
The Company designs, manufactures and sells a broad range of interior
furnishings, principally draperies, curtains, valance boards, shades, blinds,
bedspreads, comforters, pillows, cushions, and trailer tents. These products are
sold to original equipment manufacturers of recreational vehicles and
manufactured housing and to the hospitality industry (motels/hotels) either
through distributors or directly to the customers.
The Company has one industry segment and one class of products. The
business in which the Company is engaged is very competitive, and the Company
competes with manufacturers located throughout the country. However, no reliable
information is available to enable the Company to determine its relative
position among its competitors. The principal methods of competition are price,
design and service.
During 2004, one customer, Fleetwood Enterprises, Inc., accounted for
approximately 31% of the Company's total sales. In the event of the loss of this
customer, there would be a material adverse effect on the Company. However, that
event is unlikely because in January 2004 the Company executed an agreement to
be the exclusive supplier of Fleetwood's drapery, bedspread and other decor
requirements in the manufactured housing and recreational vehicle industries for
a period of six years. If, at the end of three years, Fleetwood is satisfied
with the performance of the Company under this agreement, it will extend the
terms of this agreement an additional three years. Most of the Company's sales
to Fleetwood are governed by this supply agreement. A second customer, Thor
Industries, Inc., accounted for approximately 11% of the Company's total sales
in 2004. The Company believes that it has good relationships with both of these
customers.
1
The Company's backlog of orders at any given time is not material in
amount and is not significant in the business. No material portion of the
Company's sales or income is derived from customers in foreign countries.
The chief raw materials used by the Company are largely fabrics made
from both natural and man-made fibers. The raw materials are obtained primarily
from converters and mills. The Company is not dependent upon one or a very few
suppliers. Most of its suppliers are large firms with whom, in the opinion of
management, the Company enjoys good relationships. The Company has never
experienced any significant shortage in its supply of raw materials.
The Company has no significant patents, licenses, franchises,
concessions, trademarks or copyrights. Expenditures for research and development
during 2004 and 2003 were not significant.
Compliance with federal, state and local environmental protection
provisions is not expected to have a material effect upon the capital
expenditures, earnings or competitive position of the Company.
The Company employs approximately 650 sales, production, warehouse and
administrative employees and also uses the services of independent sales
representatives.
ITEM 2. PROPERTIES.
The following table summarizes certain information concerning the
Company's properties:
Approx.
Location Principal Use Square Feet Owned/Leased
--------- ------------- ----------- ------------
Haleyville, Alabama Offices, manufacturing and warehouse 54,000 Owned
Red Bay, Alabama Offices, manufacturing and warehouse 33,800 Leased
Phoenix, Arizona Offices, manufacturing and warehouse 35,000 Owned
Lakeland, Florida Offices, manufacturing and warehouse 2,100 Leased
Pembroke Pines, Florida Offices 3,148 Leased
Douglas, Georgia Offices, manufacturing and warehouse 28,000 Owned
Elkhart, Indiana Offices, manufacturing and warehouse 51,000 Owned
Goshen, Indiana Offices, manufacturing and warehouse 55,700 Owned
Bossier, Louisiana Offices, manufacturing and warehouse 20,000 Owned
Salisbury, North Carolina Offices, manufacturing and warehouse 22,800 Leased
Berwick, Pennsylvania Offices, manufacturing and warehouse 12,500 Leased
Bloomsburg, Pennsylvania Offices, manufacturing and warehouse 56,500 Owned
Abbotsford, Wisconsin Offices, manufacturing and warehouse 23,900 Leased
Total Owned 300,200
Total Leased 98,248
The Company considers that its offices, plants, machinery and equipment
are well maintained, adequately insured and suitable for their purposes and that
its plants are adequate for the presently anticipated needs of the business. The
Goshen, IN, Elkhart, IN, and Bloomsburg, PA facilities are subject to mortgages
as mentioned in Note 6 to the financial statements.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed and traded on the American Stock
Exchange, AMEX symbol DII.
Common Stock price information is set forth in the table below.
2004 Sales Prices 2003 Sales Prices
------------------- -------------------
High Low High Low
---- --- ---- ---
First Quarter 8.48 6.35 6.10 4.61
Second Quarter 8.72 7.45 5.50 4.00
Third Quarter 9.29 8.22 5.80 5.15
Fourth Quarter 9.25 7.76 6.80 5.25
As of March 24, 2005, the Company had 282 shareholders of record of its
Common Stock.
Total cash dividend payments were $0.12 per share in 2004 and 2003. The
Company expects to maintain the dividend rate of $0.12 per share in 2005.
At January 1, 2005, the Company had outstanding options under one
shareholder approved option plan. Under the 1995 Incentive Stock Option Plan
("1995 Plan"), the Company may grant options to its key employees for up to
520,832 shares of Common Stock (as adjusted for stock splits). The following is
a summary of the options outstanding under the 1995 Plan at January 1, 2005:
Number of Weighted average Number of shares
shares optioned exercise price available for grant
--------------- ---------------- -------------------
1995 Plan 506,632 $5.78 5,000
The Company also provides a stock grant to its non-employee directors
as compensation for their services as directors. In 2004, the Company awarded
five non-employee directors a total of 9,927 shares. In 2003, the Company
awarded four non-employee directors a total of 8,016 shares. All non-employee
directors receive their shares in a Directors Trust, for which the president of
the Company is the Trustee.
3
ITEM 6. SELECTED FINANCIAL DATA.
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
FOR THE YEAR
- ------------
Net Sales $ 50,449,214 $ 41,803,224 $ 38,641,605 $ 34,782,121 $ 42,609,584
Income from Continuing Operations $ 1,394,698 $ 1,561,778 $ 1,384,379 $ 861,561 $ 1,037,112
Net Income $ 1,394,698 $ 1,561,778 $ 1,384,379 $ 861,561 $ 133,198
------------ ------------ ------------ ------------ ------------
AT YEAR END
- -----------
Total Assets $ 23,962,077 $ 21,088,322 $ 19,480,134 $ 18,365,516 $ 18,855,387
Long Term Obligations $ 1,752,568 $ 1,926,832 $ 1,477,973 $ 1,604,245 $ 1,709,686
Long-term Debt/Total Capitalization 9.98% 11.65% 9.97% 11.40% 12.49%
Working Capital $ 4,167,876 $ 8,007,862 $ 6,191,028 $ 6,074,073 $ 5,154,647
Current Ratio 1.73:1 3.05:1 2.49:1 2.56:1 2.07:1
Stockholders' Equity $ 15,799,668 $ 14,614,621 $ 13,348,108 $ 12,463,950 $ 11,979,479
------------ ------------ ------------ ------------ ------------
PER SHARE
- ---------
Continuing Operations $ 0.50 $ 0.56 $ 0.49 $ 0.31 $ 0.34
Basic $ 0.50 $ 0.56 $ 0.49 $ 0.31 $ 0.04
Diluted $ 0.47 $ 0.55 $ 0.49 $ 0.31 $ 0.04
Book Value $ 5.58 $ 5.22 $ 4.78 $ 4.43 $ 4.29
Cash Dividends Declared $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company provides interior furnishings to original equipment
manufacturers of manufactured housing and recreational vehicles and to the
hospitality market. This interior furnishing market is highly competitive. The
Company faces risk as the demand for its products is affected by the industry
demand in the three markets that the Company serves. Any significant decline in
the demand for manufactured housing, recreational vehicles, or hospitality
accommodations can adversely affect the Company's results of operations or
financial condition.
A large amount of the Company's sales are to a relatively few
recreational vehicle and manufactured housing customers. In 2004, the Company's
top 10 customers accounted for approximately 64% of net sales. The loss of a
large customer can have a significant impact on the Company's results of
operations. In 2004, with the completion of a supply agreement with Fleetwood
Enterprises, the Company is under contract to be the exclusive supplier of
Fleetwood's interior furnishings through at least January 2010. Fleetwood
represented approximately 31% of the Company's net sales in 2004. Fleetwood
operates in both the recreational vehicle and manufactured housing industries.
In August 2004, the Company purchased a facility in Phoenix, Arizona to
manufacture product for customers located in the western United States. This
facility will enable the Company to better supply Fleetwood's west coast
operations and also to solicit new customers.
The Company faces the risk that its furnishings could be provided by
companies with cheaper labor sources, such as from Asian sources. However, the
lack of sufficient lead times from its customers, as well as the customized
nature of many of the Company's products, presents a substantial barrier to
entry for overseas firms.
4
The recreational vehicle market has exhibited strong performance over
the past few years. Total industry shipments of motor homes and travel trailers
have increased from 320,800 in 2003 to 370,100 in 2004. The Company's sales to
this market have increased accordingly.
The manufactured housing market has experienced declining production
since most recent peak shipments of 373,100 units in 1998. Industry shipments in
2004 were about 130,800; virtually flat compared to the 130,900 shipments in
2003. In 2004, the Company's sales to the manufactured housing industry rose
36%, due to the additional business from the Fleetwood supply contract.
Sales to the hospitality industry increased about 8% during 2004 when
compared to the previous year. Hospitality sales are affected by demand for
hospitality accommodations and the growth of the industry.
Sales By Market:
The following table represents net sales to each of the three different
markets that the Company serves for the three fiscal years ended January 1, 2005
(dollars in thousands)
2004 2003 2002
----------------- ----------------- -----------------
Net % of Net % of Net % of
Sales total Sales total Sales total
------- ------- ------- ------- ------- -------
Recreational Vehicle $31,135 62% $25,774 62% $20,636 53%
Manufactured Housing 9,534 19% 7,006 17% 8,940 23%
Hospitality 9,780 19% 9,023 21% 9,066 24%
------- ------- ------- ------- ------- -------
Total Net Sales $50,449 100% $41,803 100% $38,642 100%
======= ======= ======= ======= ======= =======
Critical Accounting Policies:
The methods, estimates and judgments the Company uses in applying its
accounting policies have a significant impact on the results it reports in the
financial statements. Some of the accounting policies require it to make
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. The most critical accounting
estimates include: the valuation of accounts receivable and inventory.
The Company reviews its accounts receivable portfolio frequently,
assessing any past due accounts for collectability. Physical inventory is
conducted at each of the Company's manufacturing facilities at least quarterly,
and inventories are assessed for any slow moving or obsolete items, which
constitutes the main judgment necessary in valuing the inventory. Reserves for
both receivables and inventory are reviewed quarterly and adjusted as required.
Other assumptions the Company faces are the assessment of goodwill,
intangible asset, and long-lived assets for impairment, the calculation of the
provision for income taxes and valuation of deferred tax assets and liabilities.
The Company believes that its assumptions in relation to its critical accounting
policies have been reasonably accurate, and does not foresee any future material
changes in its estimates or assumptions.
5
Liquidity and Financial Resources:
The Company's financial condition reflects the January 2004 acquisition
of Fleetwood's drapery operations in Douglas, Georgia, and the August
2004 purchase of a Phoenix, Arizona manufacturing facility, as shown
below:
1) Working capital at January 1, 2005 was $4,167,876 compared to
$8,007,862 at January 3, 2004.
2) The current ratio was 1.73:1 at year-end 2004 compared to 3.05:1
at year-end 2003.
3) The liquid ratio was 0.83:1 at year-end 2004 compared to 2.00:1 at
year-end 2003.
4) The long-term debt ratio was 9.98% at January 1, 2005 compared to
11.65% a year earlier.
Net accounts receivable decreased $54,744 (1.6%) at January 1, 2005,
when compared to January 3, 2004. Even though sales levels increased, accounts
receivable decreased due to shorter terms arising from the Company's supply
contract with Fleetwood, the receivables servicing agreement the Company employs
for its hospitality receivables, and improvement in collection efforts. Days
Sales Outstanding decreased from 32.7 days at the end of fiscal 2003 to 27.4
days at the end of fiscal 2004.
In January 2004, the Company began assigning certain account
receivables under a "Receivables Servicing and Credit Approved Receivables
Purchasing Agreement" with CIT Group/Commercial Services Inc. Only receivables
from sales to the Hospitality industry may be assigned to CIT. Under the
agreement CIT provides credit checking, credit approval, and collection
responsibilities for the assigned receivables. If CIT approves an order from a
Hospitality customer and the resulting receivables are not paid or disputed by
the Customer within ninety days of sale, CIT will pay the receivable to the
Company and assume ownership of the receivable. CIT begins collection efforts
for the assigned receivables (both approved and not approved) when they are due
(Hospitality sales are made on Net 30 terms). Approved receivables were
approximately $590,000 at January 1, 2005. Hospitality customers are instructed
to make payments directly to CIT and CIT then wires collected funds to the
Company. The Company pays CIT six-tenths of a percent of all assigned
receivables. Management believes this cost will be mostly offset by reductions
in Bad Debt expense and collection costs. The Company entered into this
arrangement to take advantage of CIT's extensive credit checking and collection
capabilities. Management believes this arrangement will improve liquidity.
Net inventories increased $990,254 (24.0%) at January 1, 2005, when
compared to January 3, 2004. The increase in inventories was required to support
higher levels of business, two new locations and as a result of the Fleetwood
acquisition.
Excluding the assets acquired from Fleetwood, capital expenditures for
2004 were $2,266,466 compared to $758,115 in 2003. Of this total, $1,554,421 was
for land, building, and equipment for the opening of the Company's Phoenix,
Arizona facility. At this time, capital spending for 2005 is expected to be
between $500,000 and $700,000.
The Company had no borrowings at year-end under its $5,000,000
revolving line-of-credit. The Company does expect to use this line of credit
periodically during 2005. The final payment of $1,067,472, plus accrued
interest, to Fleetwood Enterprises, Inc. for the acquisition in January 2004 was
paid in January 2005. The line of credit was used to make this payment.
6
Results of Operations:
2004 vs. 2003
The following table shows a comparison of the results of operations between
fiscal 2004 and fiscal 2003:
Fiscal % Fiscal % $ Increase
2004 of Sales 2003 of Sales (Decrease) % Change
------------ ------- ------------ ------- ------------ -------
Net Sales $ 50,449,214 100% $ 41,803,224 100% $ 8,645,990 20.7%
Cost of Products Sold 40,332,649 79.9% 32,679,542 78.2% 7,653,107 23.4%
------------ ------- ------------ ------- ------------ -------
Gross Profit 10,116,565 20.1% 9,123,682 21.8% 992,883 10.9%
Selling and Administrative Expenses 7,798,898 15.5% 6,590,362 15.8% 1,208,536 18.3%
------------ ------- ------------ ------- ------------ -------
Operating Income 2,317,667 4.6% 2,533,320 6.0% (215,653) -8.5%
Other Income (Expense)
Interest, Investment and
Other Income 90,163 0.2% 112,669 0.3% (22,506) -20.0%
Interest Expense (107,132) -0.2% (56,211) -0.1% (50,921) 90.6%
------------ ------- ------------ ------- ------------ -------
Earnings Before Income Taxes 2,300,698 4.6% 2,589,778 6.2% (289,080) -11.2%
Provision for Income Taxes 906,000 1.8% 1,028,000 2.5% (122,000) -11.9%
------------ ------- ------------ ------- ------------ -------
NET INCOME $ 1,394,698 2.8% $ 1,561,778 3.7% $ (167,080) -10.7%
============ ======= ============ ======= ============ =======
Net sales for fiscal 2004 were $50,449,214 compared to $41,803,224 in
fiscal 2003. The net sales increase was 20.7%. Sales to the recreational vehicle
market increased 20.8%, primarily due to increased recreational vehicle market
shipments. Sales to the manufactured housing industry increased 36.1%. The
increase in sales to the manufactured housing market was entirely due to the
additional Fleetwood business. Sales to the hospitality market increased 8.4%.
Cost of goods sold as a percentage of sales was 79.9% in 2004 versus
78.2% in 2003. The major reasons for the increase in this percentage were the
higher costs of production at the facility acquired from Fleetwood and the
transition costs incurred by the Company to re-distribute most of the acquired
business to its other facilities. Without these expenses, the cost of goods sold
percentage would have been 78.9% in 2004. This increase resulted from somewhat
higher costs in both material and labor. The customized nature of the Company's
products made to each of its customers unique specifications, does not enable a
detailed discussion of the effects of changes in prices, costs, volumes, and
product mix on the costs of goods sold percentage. Management does monitor
overall material cost, labor cost, and factory overheads for each of its
manufacturing locations. Management reviews significant variations or changing
trends with general managers. If necessary, appropriate actions are taken to
address issues.
Selling and administrative expenses increased to $7,798,898 in 2004
from $6,590,362 in 2003. As a percentage of sales, selling and administrative
expenses fell from 15.8% to 15.5%. The dollar increase is due mostly to the
amortization of the intangible asset from the Fleetwood acquisition, increased
personnel costs due to Company growth, fees resulting from the Company's credit
servicing agreement,
7
and professional fees arising from labor efficiency studies. The percentage
decrease is due to fixed expenses being spread over a larger sales volume.
Interest, investment and other income decreased 20.0% to $90,163 in 2004, while
interest expense increased $50,921 or 90.6%. These changes resulted primarily
from lower cash balances during 2004 due to the use of cash and the line of
credit to pay for the acquisition of the Fleetwood drapery operation, higher
than normal capital expenditures, and accrued interest expense on inventory
acquired from Fleetwood.
Net income was $1,394,698 in 2004 compared to $1,561,778 in 2003. Net
income as a percent of sales decreased to 2.8% in 2004 compared to 3.7% in 2003.
2003 vs. 2002
The following table shows a comparison of the results of operations
between fiscal 2003 and fiscal 2002:
Fiscal % Fiscal % $ Increase
2003 of Sales 2002 of Sales (Decrease) % Change
------------ -------- ----------- -------- --------- --------
Net Sales $ 41,803,224 100% $ 38,641,605 100% $3,161,619 8.2%
Cost of Products Sold 32,679,542 78.2% 30,281,017 78.4% 2,398,525 7.9%
------------ -------- ----------- -------- ---------
Gross Profit 9,123,682 21.8% 8,360,588 21.6% 763,094 9.1%
Selling and Administrative Expenses 6,590,362 15.8% 6,082,189 15.7% 508,173 8.4%
------------ -------- ------------ -------- ---------
Operating Income 2,533,320 6.0% 2,278,399 5.9% 254,921 11.2%
Other Income (Expense)
Interest, Investment and
Other Income 112,669 0.3% 73,155 0.2% 39,514 54.0%
Interest Expense (56,211) -0.1% (48,175) -0.1% (8,036) 16.7%
------------ -------- ------------ -------- ----------
Earnings Before Income Taxes 2,589,778 6.2% 2,303,379 6.0% 286,399 12.4%
Provision for Income Taxes 1,028,000 2.5% 919,000 2.4% 109,000 11.9%
------------ -------- ------------ -------- ----------
NET INCOME $ 1,561,778 3.7% $1,384,379 3.6% $ 177,399 12.8%
============ ======== ============ ======== ==========
Net sales for fiscal 2003 were $41,803,224 compared to $38,641,605 in
fiscal 2002. The net sales increase was 8.2%. An increase in sales to the
recreational vehicle market more than offset the sales decreases experienced in
the manufactured housing market. The Recreational Vehicle Institute reported
increased vehicle shipments to 320,800 in 2003 as compared to 311,000 for 2002,
an increase of 3.2%. The Manufactured Housing Institute reported a 22.3% decline
in unit production for 2003, the fifth consecutive year of declining production.
The industry manufactured 130,900 units in 2003 versus 373,100 units in 1998 (a
decline of 64.9%). Sales to the hospitality market were virtually equal to the
previous year.
Cost of goods sold as a percentage of sales was 78.2% in 2003 versus
78.4% in 2002, mostly due to fixed factory expenses being allocated over a
higher sales volume.
8
Selling and administrative expenses increased to $6,590,362 in 2003
from $6,082,129 in 2002. This was primarily due to larger performance bonuses,
one-time increases in the cost of officer's life insurance, and charges relating
to the ongoing implementation of a Enterprise-Resource-Planning (ERP) system.
The one-time cost of officer's life insurance was caused by Sarbanes-Oxley's
elimination of split-dollar life policies for executives and from the cost of
converting a key-man policy to a higher rated carrier. Also, fiscal 2003 was a
53 week year which caused certain expenses, such as salaries and wages, to be
somewhat higher in 2003.
Interest and investment income rose 54% to $112,669 in 2003. This was
due to higher average cash and investment balances when compared to the prior
year.
Net income was $1,561,778 in 2003 compared to $1,384,379 in 2002. Net
income as a percent of sales increased to 3.7% in 2003 compared to 3.6% in 2002.
This was due to a higher sales volume.
EBITDA
EBITDA represents income before income taxes, interest expense,
depreciation and amortization and is an approximation of cash flow from
operations before tax. The Company uses EBITDA as an internal measure of
performance and believes it is a useful and commonly used measure of financial
performance in addition to income before taxes and other profitability measures
under Generally Accepted Accounting Principals ("GAAP")
EBITDA is not a measure of performance under GAAP. EBITDA should not be
construed as an alternative to operating income and income before taxes as an
indicator of the Company's operations in accordance with GAAP. Nor is EBITDA an
alternative to cash flow from operating activities in accordance with GAAP. The
Company's definition of EBITDA can differ from that of other companies.
The following table reconciles Net Income, the most comparable measure
under GAAP, to EBITDA for each of the three fiscal years ended January 1, 2005:
2004 2003 2002
---------- ---------- ----------
Net Income $1,394,698 $1,561,778 $1,384,379
Add:
Income tax 906,000 1,028,000 919,000
Interest Expense 107,132 56,211 48,175
Depreciation and
amortization 1,407,986 711,443 680,908
---------- ---------- ----------
EBITDA $3,815,816 $3,357,432 $3,032,462
========== ========== ==========
9
Contractual Obligations
The following table summarizes the Company's financial obligations as
of January 1, 2005:
(in thousands)
2010 and
2005 2006 2007 2008 2009 thereafter Total
------ ------ ------ ------ ------ ------ ------
Employment Contracts $ 370 $ 370 $ 346 $ 244 $ 245 $ 733 $2,308
Operating Leases 322 189 67 37 30 2 647
Long Term Debt- Principal 171 212 206 599 120 615 1,923
Long Term Debt- Interest 53 47 41 26 30 15 212
------ ------ ------ ------ ------ ------ ------
Total $ 916 $ 818 $ 660 $ 906 $ 425 $1,365 $5,090
====== ====== ====== ====== ====== ====== ======
Interest on long term debt consists of both fixed and variable interest
rate obligations. Projected interest rates on variable interest rate obligations
are the interest rates in effect as of January 1, 2005. See Item 7A,
"Quantitative and Qualitative Disclosures about Market Risk", for further
information about uncertainties from fixed and variable interest rate
obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company faces minimum potential market risk in its long-term debt.
The Company had four separate long-term debt agreements outstanding as of
January 1, 2005.
The Company faces the risk that if market interest rates increase, the
two interest rate obligations of the Company with a variable interest rate would
require higher payments of interest. As of January 1, 2005, the bond secured by
the Company's Goshen, Indiana property of $1,115,000 had a variable interest
rate of 2.14% per annum. Each increase of 1% could increase interest expense by
approximately $11,000 in 2005 and lower amounts in successive years as principal
is paid down, terminating in 2014. Also, the $175,000 bond on the Company's
Bloomsburg, Pennsylvania property had a variable interest rate of 2.08% at
January 1, 2005. Each increase of 1% in market rates could cause an increase in
interest expense of less than $2,000 in 2005 and lower amounts in successive
years as principal is paid down, terminating in 2008. Interest rates are
exclusive of letter of credit fees paid to third parties to guarantee the
payment of these obligations, which fees are 1% or less, and are not subject to
increase.
The Company believes the risks associated with its fixed rate
obligations are minimal, as the Company believes the current rates approximate
current market rates, and that the current market rates are unlikely to go
significantly lower. Should market interest rates rise significantly, the
Company would benefit in that it would have locked in a lower fixed rate that
will remain in effect for the life of the loan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, financial statements schedule, and reports of
independent certified public accountants listed in Item 15(a) of this report are
filed under this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
10
ITEM 9A. CONTROLS AND PROCEDURES
(a) The Company's principal executive officer and principal financial officer
have reviewed the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of January 1, 2005 and have
concluded that they were adequate and effective. As discussed in Note 11-
Quarterly Financial Information, the Company restated previously reported
quarterly financial results for 2004. The Company has determined that the
restatement of quarterly results was not the result of a weakness in internal
controls.
(b) During the most recent fiscal quarter, there were no changes in the
Company's internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 1, 2005. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 1, 2005. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 1, 2005. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 1, 2005. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
January 1, 2005. Such information is incorporated herein by reference.
11
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
-----------------------------------------------------------
Financial Statements and Schedules
----------------------------------
(1) Independent Auditors' Report
(2) Balance Sheets - January 1, 2005 and January 3, 2004
(3) Statements of Earnings for the three fiscal years ended January 1,
2005
(4) Statements of Stockholders' Equity for the three fiscal years ended
January 1, 2005
(5) Statements of Cash Flows for the three fiscal years ended January 1,
2005
(6) Notes to the Financial Statements
(7) Independent Auditors' Report on Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required or are
inapplicable or the information is included in the financial statements or
notes thereto.
Exhibits
=-------
3A Articles of Incorporation as amended to date, filed as Exhibit
3A to Form 10-K for the fiscal year ended December 28, 1985
and incorporated herein by reference.
3B.1 By-laws as amended to date, filed as Exhibit 3B.1 to Form 10-Q
for the Quarter ended July 2, 1988 and incorporated herein by
reference.
10E Lease dated February 9, 1984 between registrant, as lessee,
and Leon and Eleanor Bradshaw covering property at 500 North
Long Street, Salisbury, North Carolina, filed as Exhibit
10(b)(4)(iv) to Registration Statement No. 2-92853 and
incorporated herein by reference.
10H Lease Agreement dated December 13, 1983 covering property at
101 West Linden Street, Abbotsford, Wisconsin, and assignment
thereof to the registrant, as lessee, dated October 2, 1985,
filed as Exhibit 10H to Form 10-K for the fiscal year ended
December 28, 1985 and incorporated herein by reference.
10H.1 Lease Modification Agreement dated May 20, 1988 regarding
Exhibit 10H, filed as Exhibit 10H.1 to Form 10-K for the
fiscal year ended December 31, 1988 and incorporated herein by
reference.
10H.2 Lease Modification Agreement dated September 30, 1996
regarding Exhibit 10H, filed as Exhibit 10H.2 to Form 10-K for
the fiscal year ended December 28, 1996 and incorporated
herein by reference.
12
10M.1 Medical and Dental Reimbursement Plan, as amended to date,
filed as Exhibit 10M.1 to Form 10-K for the fiscal year ended
January 3, 1987 and incorporated herein by reference.*
10T Employment Agreement dated August 2, 1994 between the
registrant and William Bassett, filed as Exhibit 10T to Form
10-Q for the quarter ended July 2, 1994 and incorporated
herein by reference.*
10T.1 Amendment dated July 29, 2003 to Employment Agreement between
the registrant and William Bassett, filed as Exhibit 10T.1 to
Form 10-Q for the quarter ended June 28, 2003 and incorporated
herein by reference.*
10T.2 Amendment dated May 25, 2004 to Employment Agreement between
the registrant and William Bassett, filed as Exhibit 10T.2 to
Form 10-Q for the quarter ended July 3, 2004 and incorporated
herein by reference.*
10U.3 1995 Incentive Stock Option Plan, as amended, filed as Exhibit
10U.3 to Form 10-Q for the quarter ended July 3, 2004 and
incorporated herein by reference.*
10W.1- Amended and Restated Stock Plan for Non-Employee Directors and
related Grantor Trust Agreement, as amended, effective July 1,
2004, filed as Exhibit 10W.1 to Form 10-Q for the quarter
ended July 3, 2004 and incorporated herein by reference.*
10Y Revolving line of credit agreement with Washington Mutual Bank
dated April 16, 2004, filed herewith.
10Z Asset Purchase Agreement dated as of January 23, 2004, between
registrant and Fleetwood Homes of Georgia, Inc. relating to
drapery manufacturing plant in Douglas, Georgia, filed as
Exhibit 10Z to Form 8-K dated February 4, 2004 and
incorporated herein by reference.
11S Computation of diluted income per share, filed herewith.
14 Code of Conduct and Ethics, filed as Exhibit 14 to Form 10-K
for the fiscal year ended January 3, 2004 and incorporated
herein by reference.
23E Consent of Independent Auditors, filed herewith.
31.1 Certification of President, filed herewith.
31.2 Certification of Chief Financial Officer, filed herewith.
32 Certificate required by 18 U.S.C. ss.1350, filed herewith.
- ---------------
* Management contract or compensatory plan.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 2004.
13
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
DECORATOR INDUSTRIES, INC.
(Registrant)
By: /s/ Michael K. Solomon
---------------------------
Michael K. Solomon
Chief Financial Officer
Dated: March 31, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signiture Title Date
- --------- ----- ----
/s/ William A. Bassett Chairman, President, March 31, 2005
- ----------------------------- Chief Executive Office
William A. Bassett and Director
/s/ Michael K. Solomon Vice President, Treasurer, March 31, 2005
- ----------------------------- Principal Financial and
Michael K. Solomon Accounting Officer
/s/ Joseph N. Ellis Director March 31, 2005
- -----------------------------
Joseph N. Ellis
/s/ Ellen Downey
- ----------------------------- Director March 31, 2005
Ellen Downey
/s/ Thomas Dusthimer
- ----------------------------- Director March 31, 2005
Thomas Dusthimer
/s/ William Dixon Director March 31, 2005
- -----------------------------
William Dixon
14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
DECORATOR INDUSTRIES, INC.
We have audited the accompanying balance sheets of Decorator
Industries, Inc. (a Pennsylvania corporation) as of January 1, 2005 and January
3, 2004 and the related statements of earnings, stockholders' equity and cash
flows for each of the three fiscal years in the period ended January 1, 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the auditing standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Decorator
Industries, Inc. as of January 1, 2005 and January 3, 2004, and the results of
its operations and its cash flows for each of the three fiscal years in the
period ended January 1, 2005 in conformity with accounting principles generally
accepted in the United States of America.
LOUIS PLUNG & COMPANY, LLP
Certified Public Accountants
Pittsburgh, Pennsylvania
February 12, 2005 (March 24, 2005 as to Notes 11 and 12)
F-1
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
January 1, January 3,
2005 2004
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and Cash Equivalents $ 730,539 $ 3,991,631
Accounts Receivable, less allowance for
doubtful accounts ($144,077 and $200,598) 3,464,674 3,519,418
Inventories 5,113,651 4,123,397
Other Current Assets 588,853 274,285
----------- -----------
TOTAL CURRENT ASSETS 9,897,717 11,908,731
----------- -----------
Property and Equipment
Land, Buildings & Improvements 7,250,064 5,114,341
Machinery, Equipment, Furniture & Fixtures 6,482,534 6,064,877
----------- -----------
Total Property and Equipment 13,732,598 11,179,218
Less: Accumulated Depreciation and Amortization 5,874,855 5,157,452
----------- -----------
Net Property and Equipment 7,857,743 6,021,766
----------- -----------
Goodwill, less accumulated Amortization of
$1,348,569 2,731,717 2,731,717
Identifiable intangible asset, less accumulated
Amortization of $611,713 3,283,278 --
Other Assets 191,622 426,108
----------- -----------
TOTAL ASSETS $23,962,077 $21,088,322
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 2,539,252 $ 1,878,683
Current Maturities of Long-term Debt 170,709 166,251
Accrued Expenses:
Compensation 1,016,262 940,158
Acquisition Liability 1,067,472 --
Other 936,146 915,777
----------- -----------
TOTAL CURRENT LIABILITIES 5,729,841 3,900,869
----------- -----------
Long-Term Debt 1,752,568 1,926,832
Deferred Income Taxes 680,000 646,000
----------- -----------
TOTAL LIABILITIES 8,162,409 6,473,701
----------- -----------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares,
10,000,000; Issued shares, 4,489,728 and
4,485,728 897,946 897,146
Paid-in Capital 1,423,275 1,426,435
Retained Earnings 21,633,044 20,576,497
----------- -----------
23,954,265 22,900,078
Less: Treasury stock, at cost: 1,660,197 and
1,686,840 shares 8,154,597 8,285,457
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,799,668 14,614,621
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,962,077 $21,088,322
=========== ===========
The accompanying notes are an integral part of the financial statements
F-2
For the Fiscal Year
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net Sales $ 50,449,214 $ 41,803,224 $ 38,641,605
Cost of Products Sold 40,332,649 32,679,542 30,281,017
------------ ------------ ------------
Gross Profit 10,116,565 9,123,682 8,360,588
Selling and Administrative Expenses 7,798,898 6,590,362 6,082,189
------------ ------------ ------------
Operating Income 2,317,667 2,533,320 2,278,399
Other Income (Expense)
Interest, Investment and
Other Income 90,163 112,669 73,155
Interest Expense (107,132) (56,211) (48,175)
------------ ------------ ------------
Earnings Before Income Taxes 2,300,698 2,589,778 2,303,379
Provision for Income Taxes 906,000 1,028,000 919,000
------------ ------------ ------------
NET INCOME $ 1,394,698 $ 1,561,778 $ 1,384,379
============ ============ ============
EARNINGS PER SHARE
BASIC $ 0.50 $ 0.56 $ 0.49
============ ============ ============
DILUTED $ 0.47 $ 0.55 $ 0.49
============ ============ ============
Weighted Average Number of
Shares Outstanding
Basic 2,816,661 2,794,286 2,793,781
Diluted 2,966,787 2,827,602 2,830,307
The accompanying notes are an integral part of the financial statements.
F-3
DECORATOR INDUSTRIES, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
---------- ----------- ------------ ----------- ------------
BALANCE AT
DECEMBER 29, 2001 $ 897,127 $ 1,425,437 $ 18,300,698 $(8,159,312) $ 12,463,950
Transactions for 2002
Net profit 1,384,379 1,384,379
Issuance of stock for
Directors compensation 389 44,859 45,248
Purchase of Common
Stock for treasury (210,376) (210,376)
Dividends paid (335,093) (335,093)
---------- ----------- ------------ ----------- ------------
BALANCE AT
DECEMBER 28, 2002 $ 897,127 $ 1,425,826 $ 19,349,984 $(8,324,829) $ 13,348,108
Transactions for 2003
Net profit 1,561,778 1,561,778
Issuance of stock for
Directors compensation 628 39,372 40,000
Dividends paid (335,265) (335,265)
Conversion of $.10 par
value shares to $.20
par value shares 19 (19) 0
---------- ----------- ------------ ----------- ------------
BALANCE AT
JANUARY 3, 2004 $ 897,146 $ 1,426,435 $ 20,576,497 $(8,285,457) $ 14,614,621
Transactions for 2004
Net profit 1,394,698 1,394,698
Issuance of stock for
Exercise of options 800 (34,406) 82,106 48,500
Issuance of stock for
Directors compensation 31,246 48,754 80,000
Dividends paid (338,151) (338,151)
---------- ----------- ------------ ----------- -------------
BALANCE AT
JANUARY 1, 2005 $ 897,946 $ 1,423,275 $ 21,633,044 $(8,154,597) $ 15,799,668
========== =========== ============ =========== ============
The accompanying notes are an integral part of the financial statements.
F-4
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
For the Fiscal Year
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,394,698 $ 1,561,778 $ 1,384,379
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,407,986 711,443 680,908
Provision for Losses on Accounts Receivable -- 40,000 52,500
Deferred Taxes 51,000 148,000 126,000
Loss on Disposal of Assets 11,079 11,575 18,226
Increase (Decrease) from Changes in:
Accounts Receivable 54,744 (144,789) 58,248
Inventories 77,218 264,673 (598,405)
Prepaid Expenses (331,568) 138,335 20,162
Other Assets 226,182 (6,591) (155,166)
Accounts Payable 660,569 (181,188) (42,859)
Accrued Expenses 96,473 (106,497) 140,284
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,648,381 2,436,739 1,684,277
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions (4,269,422) -- --
Capital Expenditures (2,266,446) (758,115) (1,290,149)
Proceeds from Property Dispositions 5,852 2,150 9,250
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (6,530,016) (755,965) (1,280,899)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (169,806) (151,640) (104,963)
Dividend Payments (338,151) (335,265) (335,093)
Proceeds from Exercise of Stock Options 48,500 -- --
Issuance of Stock for Directors' Trust 80,000 40,000 45,248
Proceeds on Debt from Building -- 640,000 --
Purchase of Common Stock for Treasury -- -- (210,376)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (379,457) 193,095 (605,184)
Net (Decrease) Increase in Cash and Cash Equivalents (3,261,092) 1,873,869 (201,806)
Cash and Cash Equivalents at Beginning of Year 3,991,631 2,117,762 2,319,568
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 730,539 $ 3,991,631 $ 2,117,762
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 54,483 $ 42,522 $ 32,150
Income Taxes $ 1,135,437 $ 745,259 $ 987,323
The accompanying notes are an integral part of the financial statements.
F-5
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Nature of Operations
--------------------
The Company designs, manufactures and sells a broad range of interior
furnishings, principally draperies, curtains, shades, blinds,
bedspreads, valance boards, comforters, pillows, cushions, and trailer
tents. These products are sold to original equipment manufacturers of
recreational vehicles and manufactured housing and to the hospitality
industry (motels/hotels) either through distributors or directly to the
customers.
The Company has one industry segment and one class of products. The
business in which the Company is engaged is very competitive, and the
Company competes with manufacturers located throughout the country.
However, no reliable information is available to enable the Company to
determine its relative position among its competitors. The principal
methods of competition are price, design and service.
Fiscal Year
-----------
The Company's fiscal year is a 52-53 week period ending the Saturday
nearest to December 31, which results in every sixth year containing 53
weeks. Fiscal year 2004 was a 52-week period ending January 1, 2005,
Fiscal year 2003 was a 53-week period ending January 3, 2004; and
Fiscal year 2002 was a 52-week period ending December 28, 2002.
Revenue Recognition
--------------------
The Company recognizes revenue when the sale is made, which is upon
shipment of the goods to the Company's customers.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Depreciation
-------------------------
Buildings and equipment are stated at cost, and depreciated on
straight-line methods over estimated useful lives. Leasehold
improvements are capitalized and amortized over the assets' estimated
useful lives or remaining terms of leases, if shorter. Equipment is
depreciated over 3-10 years, buildings over 20-40 years and leasehold
improvements over 5-10 years.
Excess of Cost over Net Assets Acquired
---------------------------------------
The excess of investment costs over the fair value of net assets
related to the acquisitions of Haleyville Manufacturing (1973), Liberia
Manufacturing (1985) and Specialty Windows (1997) was being amortized
over a period of 40 years. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" the Company no longer amortizes goodwill. Accordingly, no
goodwill was amortized in 2002 and thereafter. Starting in 2002 the
Company was required to evaluate the remaining goodwill of $2,731,717
for possible impairment. The Company tests its goodwill annually for
impairment. Management has evaluated the goodwill as of January 1, 2005
and determined that no impairment exists.
F-6
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
The Company has an identifiable intangible asset of $3,283,278 arising
from the January 2004 purchase of its Douglas, Georgia facility from
Fleetwood Enterprises, Inc. and the related supply agreement. This is
due to $3,894,991 of acquisition expenses less $611,713 of amortization
in 2004 for this intangible asset. This intangible asset will be
amortized over the life of the agreement with Fleetwood. The agreement
to expand its relationship and become Fleetwood's exclusive supplier of
selected interior furnishing products was the primary factor in
compelling the Company to make the acquisition. The asset is currently
being amortized over six years. The remaining benefits of the agreement
with Fleetwood exceed the remaining capitalized cost of the intangible
asset.
Impairment of Long Lived Assets
-------------------------------
The Company reviews long-lived assets held and used, excluding
indefinite-lived intangible assets (see "Goodwill and Other Intangible
Assets"), for impairment when circumstances indicate that the carrying
amount of assets may not be recoverable. In accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
the Company assesses the recoverability of long-lived assets by
determining whether the depreciation or amortization of an asset over
its remaining life can be recovered based upon management's best
estimate of the undiscounted future operating cash flows (excluding
interest charges) attributed to the long-lived asset and related
liabilities. If the sum of such undiscounted cash flows is less than
the carrying value of the asset, there is an indicator of impairment.
The amount of impairment, if any, represents the excess of the carrying
value of the asset over fair value. Fair value is determined by quoted
market price, if available, or an estimate of projected future
operating cash flows, discounted using a rate that reflects the related
operating segment's average cost of funds. Long-lived assets, including
indefinite-lived intangible assets, to be disposed of are reported at
the lower of carrying amount or fair value less costs to sell.
Reclassification
----------------
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Cash and Cash Equivalents
-------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.
Cash and cash equivalents consist of the following:
2004 2003
-------- ----------
General Funds $730,539 $ (502,354)
Overnight repurchase agreements -- 4,493,985
-------- ----------
$730,539 $3,991,631
======== ==========
Deferred Income Taxes
----------------------
The Company accounts for income taxes in accordance with the Statement
of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," which requires the recognition of
F-7
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
deferred tax liabilities and assets at currently enacted tax rates for
the expected future tax consequences of events that have been included
in the financial statements or tax returns.
Freight Costs
-------------
Freight costs associated with acquiring inventories are charged to cost
of goods sold when incurred. Freight costs for delivering products to
customers are included in revenues from sales at the time the goods are
shipped.
Advertising Expenses
--------------------
Advertising expenses are minimal and are expensed as incurred.
Credit Risk
-----------
The Company sells to three distinct markets, original equipment
manufacturers ("OEM's") of manufactured housing, OEM's of recreational
vehicles, and to the hospitality industry. To the extent that economic
conditions might severely impact these markets, the Company could
suffer an abnormal credit loss.
The Company sells primarily on thirty day terms. The Company's
customers are spread over a wide geographic area. As such the Company
believes, that it does not have an abnormal concentration of credit
risk within any one geographic area.
In January 2004, the Company began assigning certain account
receivables under a "Receivables Servicing and Credit Approved
Receivables Purchasing Agreement" with CIT Group/Commercial Services
Inc. Only receivables from sales to the Hospitality industry may be
assigned to CIT. Under the agreement CIT provides credit checking,
credit approval, and collection responsibilities for the assigned
receivables. If CIT approves an order from a Hospitality customer and
the resulting receivables are not paid or disputed by the Customer
within ninety days of sale, CIT will pay the receivable to the Company
and assume ownership of the receivable. CIT begins collection efforts
for the assigned receivables (both approved and not approved) when they
are due (Hospitality sales are made on Net 30 terms). Approved
receivables were approximately $590,000 at January 1, 2005. Hospitality
customers are instructed to make payments directly to CIT and CIT then
wires collected funds to the Company. The Company pays CIT six-tenths
of a percent of all assigned receivables. Management believes this cost
was mostly offset by reductions in Bad Debt expense and collection
costs in 2004. The Company entered into this arrangement to take
advantage of CIT's extensive credit checking and collection
capabilities. Management believes this arrangement has improved
liquidity.
Estimates
---------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Actual results may differ from these
estimates and assumptions.
Fair Value of Financial Instruments
-----------------------------------
Marketable securities are carried at fair value. Gains of $4,157 and
$6,439 are included in income for the years ended January 1, 2005 and
January 3, 2004, respectively. All other financial instruments are
carried at amounts believed to approximate fair value.
F-8
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Earnings Per Share
------------------
Basic earnings per share is computed by dividing net income by
weighted-average number of shares outstanding. Diluted earnings per
share includes the dilutive effect of stock options. See Note 10
"Earnings Per Share" for computation of EPS.
Stock Based Compensation
------------------------
In accordance with the provisions of SFAS No. 123, the Company follows
the intrinsic value based method of accounting as prescribed by APB 25,
"Accounting for Stock Issued to Employees", for its stock-based
compensation. Accordingly, no compensation cost is recognized.
At January 1, 2005, the Company had options outstanding under a fixed
stock option plan, which is described below. The Company applies APB
Opinion 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's fixed stock
option plan been determined based on the fair value at the grant dates
for awards under these plans consistent with the method of SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
As reported: 2004 2003 2002
----------- ----------- -----------
Net Income $ 1,394,698 $ 1,561,778 $ 1,384,379
Basic Earnings Per Share $ 0.50 $ 0.56 $ 0.49
Diluted Earnings Per Share $ 0.47 $ 0.55 $ 0.49
Stock-based employee cost, net
of tax effects $ 107,844 $ 65,646 $ 94,382
Pro Forma Net Income $ 1,286,854 $ 1,496,132 $ 1,289,997
Pro Forma Earnings Per Share- Basic $ 0.46 $ 0.54 $ 0.46
Pro Forma Earnings Per Share- Diluted $ 0.43 $ 0.53 $ 0.46
During the initial phase-in period of SFAS No. 123 the pro forma
disclosure may not be representative of the impact on the net income in
future years.
The option grants for each year were calculated using the following
assumptions:
Year of Valuation Dividend Expected Risk-free Expected
Grant Method Yield Volatility Interest rate Life
--------- -------------------- ------------ ------------ --------------- ------------
1998 Black-Scholes 2.6% 47.7% 5.6% 5.0 years
1999 Black-Scholes 2.5% 42.8% 5.8% 5.0 years
2002 Black-Scholes 2.3% 41.2% 3.6% 10.0 years
2004 Black-Scholes 1.5% 40.1% 2.8% 5.0 years
Awards granted in 2002 and prior assumed compensation cost was
recognized on a straight-line basis over the requisite service period
for the entire award. Awards granted in 2004 assumed compensation cost
was recognized on a straight line basis over the requisite service
period for each seperately vesting portion of the award. The 2004
awards vested 20% at the end of each year for five years, and the
recognition of compensation cost related to these awards considered
them to be in-substance, multiple awards.
F-9
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Segment Information
-------------------
The Company has one business segment, the interior furnishings
business, and follows the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information".
Recent Accounting Developments
------------------------------
The following Statements of Financial Accounting Standards (SFAS) were
issued by the Financial Accounting Standards Board (FASB).
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS 151"), to clarify that
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage) should be recognized as current period
charges, and that fixed production overheads should be allocated to
inventory based on normal capacity of production facilities. This
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. SFAS No. 151 will have no effect on the
Company's financial statements.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". This Statement revises SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123(R) focuses
primarily on the accounting for transactions in which an entity obtains
employee services in share-based payment transactions. SFAS No. 123(R)
requires companies to recognize in the statement of operations the cost
of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. This
Statement is effective as of the first reporting period that begins
after June 15, 2005. Accordingly, the Company will adopt SFAS No.
123(R) in its third quarter of fiscal 2005. The Company is currently
evaluating the provisions of SFAS No. 123(R) and the impact that it
will have on its share based employee compensation programs. See
"Stock-based Compensation" under Summary of Significant Accounting
Policies for the effect on net income and earnings per share as if the
fair value based method provided by SFAS No. 123 had been applied.
(2) INVENTORIES
-----------
Inventories consisted of the following classifications:
2004 2003
---------- ----------
Raw materials & supplies $4,438,916 $3,506,619
In process & finished goods 674,735 616,778
---------- ----------
$5,113,651 $4,123,397
========== ==========
F-10
(3) LEASES
------
The Company leases certain buildings and equipment used in its
operations. Building leases generally provide that the Company bears
the cost of maintenance and repairs and other operating expenses. Rent
expense was $390,017 in 2004, $397,722 in 2003, and $470,697 in 2002.
Commitments under these leases extend through January 2010 and are as
follows:
2005 $322,238
2006 $188,775
2007 $ 67,404
2008 $ 36,824
2009 $ 30,411
Thereafter $ 1,786
(4) COMMITMENTS
-----------
The Company has a commitment under an employment and non-compete
agreement entered into with an individual in a current management
position. The minimum commitment under this agreement is payable as
follows
2005 $370,228
2006 $370,228
2007 $345,228
2008 $244,428
2009 $244,428
Thereafter $733,284
The commitment is fixed as to cash compensation. The commitment also
includes a long term care policy for the individual. Should premiums for this
long term care policy increase, the Company's liability for this commitment will
increase accordingly.
(5) SIGNIFICANT CUSTOMERS
---------------------
Sales to Fleetwood Enterprises accounted for 30.6%, 26.2% and 23.1% of
Company sales in 2004, 2003 and 2002, respectively. Fleetwood operates
in the manufactured housing and recreational vehicle industries. Sales
to Thor accounted for 10.8%, 8.9% and 7.7% of Company sales in 2004,
2003 and 2002, respectively. Thor operates in the recreational vehicle
industry.
F-11
(6) LONG TERM-DEBT AND CREDIT ARRANGEMENTS
--------------------------------------
Long-term debt consists of the following:
2004 2003
---- ----
Note payable in monthly payments of $2,088 through
August 2007 at 4% interest. This note is secured by
the first mortgage on the Bloomsburg, PA building. $ 60,832 $ 82,972
Note payable in monthly installments of $3,446
principal plus accrued interest at 4.39% monthly
through June 2008. This note is secured by the
Company's Elkhart, IN building. 572,445 615,111
Bond payable in monthly installments through
November 2008. The interest rate is variable and
2.08% at January 1, 2005. This bond is secured by
the Company's Bloomsburg, PA property. 175,000 200,000
Bond payable in quarterly installments through
March 2014. The interest rate is variable and is
2.14% at January 1, 2005. This bond is secured by
the Company's Goshen, IN property. 1,115,000 1,195,000
----------- -----------
1,923,277 2,093,083
Less amount due within one year 170,709 166,251
----------- -----------
$ 1,752,568 $ 1,926,832
=========== ===========
The principal payments on long-term debt for the five years subsequent
to January 1, 2005 are as follows:
2005 $170,709
2006 $211,648
2007 $206,476
2008 $599,444
2009 $120,000
Thereafter $615,000
On April 16, 2004 the Company signed an agreement for a $5,000,000
revolving line of credit with Washington Mutual Bank. The Company has
borrowed up to approximately $427,000 on this line during the third
quarter of 2004 after the purchase of the Company's Phoenix, Arizona
facility, however, there were no outstanding borrowings at January 1,
2005. The Company has borrowed on the line of credit in January 2005 to
pay the final $1,067,472 (plus accrued interest) due to Fleetwood for
the January 2004 acquisition. The Washington Mutual agreement contains
certain financial covenants. The Company was in compliance with these
covenants at January 1, 2005. Under its prior line of credit agreement
with Comerica bank, the maximum borrowings were approximately $520,000
in February 2004.
F-12
(7) EMPLOYEE BENEFIT PLANS
----------------------
On September 1, 1998 the Company began a 401(k) Retirement Savings Plan
available to all eligible employees. To be eligible for the plan, the
employee must be at least 21 years of age and have completed 1 year of
employment. Eligible employees may contribute up to 75% of their
earnings with a maximum of $13,000 for 2004 ($16,000 for employees over
50 years of age) based on the Internal Revenue Service annual
contribution limit. The Company will match 25% of the first 4% of the
employee's contributions up to 1% of each employee's earnings.
Contributions are invested at the direction of the employee to one or
more funds. Company contributions begin to vest after two years, with
100% vesting after five years. Company contributions to the plan were
$46,230 in 2004, $38,052 in 2003, and $44,276 in 2002.
(8) STOCK OPTIONS
--------------
Under the 1984 Incentive Stock Option Plan, which expired in 1994, the
Company granted options to its employees for 804,976 shares (as
adjusted for stock splits). Under the 1995 Incentive Stock Option Plan,
the Company may grant options to its key employees for up to 520,832
(as adjusted for stock splits) shares of Common Stock. Under both
plans, the exercise price of the option equals the fair market price of
the Company's stock on the date of the grant and an option's maximum
term is 10 years. Under the 1995 Incentive Stock Option Plan options
for 260,410 (as adjusted for stock splits) shares were granted in 1996,
options for 7,813 (as adjusted for stock splits) shares were granted in
1997, options for 168,750 (as adjusted for stock splits) shares were
granted in 1998 and options for 98,250 shares were granted in 1999. The
options granted in 1997 and 1996 vest 20% each year starting with the
date of the grant. The options granted in 1999 and 1998, and the 15,000
new options granted in 2002 and 69,700 options granted in 2004, vest
20% each year beginning at the end of the first year. The 166,250
exchanged options granted in 2002 vest 60% at the date of grant, and
20% each at the end of the first and second year.
F-13
(8) STOCK OPTIONS (CONTINUED)
-------------------------
A summary of the status of the Company's outstanding stock options as
of January 1, 2005, January 3, 2004, and December 28, 2002, and changes
during the years ending on those dates is presented below:
2004 2003 2002
------------------------ ------------------------- -------------------------
Exercise Exercise Exercise
Shares (1) Price (2) Shares (1) Price (2) Shares (1) Price (2)
----------- ----------- ----------- ---------- ----------- ----------
Outstanding at beginning of year 476,136 $5.37 476,136 $5.37 502,386 $6.18
Granted 69,700 $8.06 -- -- 181,250 $5.86
Excercised (39,204) $5.12 -- -- -- --
Forfeited/Cancelled -- -- -- -- (207,500) $7.76
--------- --------- ----------
Outstanding at year-end 506,632 $5.78 476,136 $5.37 476,136 $5.37
Options excercisable at year-end 427,932 429,886 390,136
Weighted average fair value of
options granted during the year $2.71 -- $2.45
The following information applies to fixed stock options outstanding at
January 1, 2005:
Number outstanding (1) 506,632
Range of exercise prices $4.80 to $8.10
Weighted-average exercise price $5.78
Weighted-average remaining contractual life 4.62 years
- ---------------
(1) As adjusted for the five-for-four stock splits in June 1997 and July 1998.
(2) Based on the weighted-average exercise price.
On February 22, 2002 the Company made an offer to exchange outstanding
options to purchase shares of the Company's Common Stock with an
exercise price greater than or equal to $7.00 per share for new options
which will be granted under the 1995 Plan. The offer expired on March
22, 2002 and the Company received tenders of options for 207,500
shares. The tendered options were cancelled on March 23, 2002. In
keeping with the Company's normal compensation practices, the actual
number of shares for which each new option will be granted has been
determined with respect to each employee individually. Subject to the
terms and conditions of the offer, the Company granted the new options
on October 9, 2002. The Company granted options for an aggregate of
166,250 shares in exchange for the tendered options that were cancelled
on March 23, 2002. The new options have an exercise price equal to the
fair market value of the Common Stock on the date of grant.
F-14
(9) INCOME TAXES
-------------
A summary of income taxes is as follows:
2004 2003 2002
---------- ---------- ----------
Current:
Federal $ 705,000 $ 719,000 $ 649,000
State 150,000 161,000 144,000
Deferred 51,000 148,000 126,000
---------- ---------- ----------
Total $ 906,000 $1,028,000 $ 919,000
========== ========== ==========
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to net deferred
income tax liability relate to the following:
2004 2003
--------- ---------
Depreciation $ 517,000 $ 505,000
Amortization 298,000 245,000
Inventories, due to additonal cost
recorded for income tax purposes (19,000) (18,000)
Accounts receivable, due to allowance
for doubtful accounts (56,000) (78,000)
Directors' Trust (136,000) (104,000)
Accrued liabilities, due to expenses not yet
deductible for income tax purposes (40,000) (37,000)
--------- ---------
$ 564,000 $ 513,000
========= =========
The net deferred income tax liability is presented in the balance
sheets as follows:
2004 2003
--------- ---------
Current Asset $116,000 $133,000
Long-term Liability 680,000 646,000
The effective income tax rate varied from the statutory Federal tax
rate as follows:
2004 2003 2002
------- ------ -------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 4.2 4.4 4.3
Other 1.2 1.3 1.6
------- ------- -------
Effective income tax rate 39.4% 39.7% 39.9%
======= ======= =======
F-15
(10) EARNINGS PER SHARE
------------------
In accordance with SFAS No. 128, the following is a reconciliation of
the numerators and denominators of the basic and diluted EPS
computations.
2004 2003 2002
---------- ---------- ----------
Numerator:
Net income $1,394,698 $1,561,778 $1,384,379
========== ========== ==========
Denominator
Weighted-average number of
Common Shares outstanding 2,816,661 2,794,286 2,793,781
Dilutive effect of stock
options on net income 150,126 33,316 36,526
---------- ---------- ----------
2,966,787 2,827,602 2,830,307
========== ========== ==========
Diluted earnings per share $ 0.47 $ 0.55 $ 0.49
========== ========== ==========
F-16
(11) QUARTERLY FINANCIAL INFORMATION
-------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ------------ ----------- ----------- ------------
2004 (1)
Net Sales $12,792,048 $ 14,320,830 $ 12,123,515 $ 11,212,821 $ 50,449,214
Gross Profit $ 2,283,228 $ 2,971,783 $ 2,397,845 $ 2,463,709 $ 10,116,565
Net Earnings $ 200,884 $ 538,612 $ 295,020 $ 360,182 $ 1,394,698
Earnings Per Common Share:
Basic $ 0.07 $ 0.19 $ 0.11 $ 0.13 $ 0.50
Diluted $ 0.07 $ 0.18 $ 0.10 $ 0.12 $ 0.47
Average Common
Shares Outstanding:
Basic 2,805,963 2,813,699 2,820,107 2,826,876 2,816,661
Diluted 2,928,728 2,956,044 2,993,534 2,988,844 2,966,787
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ------------ ----------- ----------- ------------
2003
Net Sales $ 9,779,753 $ 10,767,015 $ 10,984,598 $ 10,271,858 $ 41,803,224
Gross Profit $ 2,070,052 $ 2,450,466 $ 2,352,311 $ 2,250,853 $ 9,123,682
Net Earnings $ 307,875 $ 497,928 $ 419,147 $ 336,828 $ 1,561,778
Earnings Per Common Share:
Basic $ 0.11 $ 0.18 $ 0.15 $ 0.12 $ 0.56
Diluted $ 0.11 $ 0.18 $ 0.15 $ 0.11 $ 0.55
Average Common
Shares Outstanding:
Basic 2,791,226 2,793,229 2,795,166 2,797,293 2,794,286
Diluted 2,807,647 2,796,524 2,829,568 2,873,164 2,827,602
(1) The Company restated previous quarterly results for fiscal 2004 that affect
2004 earnings, cash flow, and financial position. The restatement was necessary
following a review by the Securities and Exchange Commission (SEC) regarding the
Company's accounting for the acquisition of Fleetwood Enterprises' Drapery
operation in January 2004.
The Company capitalized certain excess costs incurred during the period that it
was redistributing the productiuon from the acquired facility in Douglas,
Georgia to its other plants. These excess costs were being amortized over the
initial term of the agreement. The SEC felt that these costs should be expensed
as incurred in order to conform with GAAP (Generally Accepted Accounting
Principles).
As a result of this restatement, earnings changed as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ------------ ----------- ----------- ------------
Previously Reported
Net Earnings $ 429,073 $ 592,969 $ 368,985 $ 315,195 $ 1,706,222
Change (228,189) (54,357) (73,965) 44,987 (311,524)
--------- --------- --------- --------- -----------
Restated Net Earnings $ 200,884 $ 538,612 $ 295,020 $ 360,182 $ 1,394,698
========= ========= ========= ========= ===========
F-17
(12) BUSINESS ACQUISITION
--------------------
On January 23, 2004, the Company entered into an agreement, effective
January 26, 2004, to purchase the land, building, machinery, equipment,
inventory and other assets of Fleetwood Enterprises Inc.'s
("Fleetwood") drapery operation in Douglas, Georgia for a purchase
price of $4 million in cash, plus an additional amount for inventory of
$1,067,472. Payment for the inventory was paid to Fleetwood on January
24, 2005 along with accrued interest at 4%.
In connection with the acquisition, the Company and Fleetwood entered
into an agreement for the Company to be the exclusive supplier of
Fleetwood's drapery, bedspread, and other decor requirements for a
period of six years. If, at the end of three years, Fleetwood is
satisfied with the Company's performance under this agreement, it will
extend the terms of this agreement an additional three years.
The acquired business was engaged in the manufacture of curtains,
valances, bedspreads and other decor items. Fleetwood used the acquired
business to supply most of its Manufactured Housing and some of its
Recreational Vehicle requirements for these items. Sales to other
customers were negligible.
The Company has assigned the excess costs of this acquisition over the
value of the asset acquired to an identifiable intangible asset. This
intangible will be amortized over the life of the agreement with
Fleetwood. The agreement to expand its relationship and become
Fleetwood's exclusive supplier of the above mentioned products was the
primary factor in compelling the Company to make the acquisition. The
asset is currently being amortized over six years. The remaining
benefits of the agreement with Fleetwood exceed the remaining
capitalized cost of the intangible asset.
The Company is unable to provide meaningful pro-forma financial
statements for this combination, because it is operating the business
on a substantially different basis than its predecessor.
Fleetwood was the Company's largest customer in 2004, representing
approximately 31% of total sales.
The total acquisition cost and liability is as follows:
Total Acquisition Cost $ 5,336,894
Cash Paid through January 1, 2005 4,269,422
-----------
Acquisition Liability at January 1, 2005 $ 1,067,472
===========
F-18
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
and Stockholders of
DECORATOR INDUSTRIES, INC.
The audit referred to in our opinion dated February 12, 2005 (March
24,2005 as to Notes 11 and 12) on the financial statements as of January 1, 2005
and for each of the three fiscal years then ended includes the related
supplemental financial schedule as listed in Item 15 (a), which, when considered
in relation to the basic financial statements, presents fairly in all material
respects the information shown therein.
LOUIS PLUNG & COMPANY, LLP
Certified Public Accountants
Pittsburgh, Pennsylvania
February 12, 2005 (March 24,2005 as to Notes 11 and 12)
F-19
DECORATOR INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
(1) (2)
Charged to Charged to
Balance at Costs Other Balance at
Beginning And Accounts Deductions End
Description of Period Expenses Described Described of Period
----------- --------- -------- --------- --------- ---------
DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
2004 $ 200,598 0 0 56,521 (A) $ 144,077
2003 $ 202,933 40,000 0 42,335 (A) $ 200,598
2002 $ 221,462 52,500 0 71,029 (A) $ 202,933
(A) Write-off bad debts
ALLOWANCE FOR SALES
RETURNS
2004 $ 44,000 (14,000) 0 0 $ 30,000
2003 $ 54,000 (10,000) 0 0 $ 44,000
2002 $ 42,422 11,578 0 0 $ 54,000
F-20