UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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
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(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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Aggregate market value of common stock held by non-affiliates of the registrant
as of the registrant's most recently completed second fiscal quarter, based on
the closing price of registrant's common stock of $7.97 at July 1, 2005:
$18,185,747
Number of shares of common stock outstanding at March 24, 2006: 2,982,390
DOCUMENTS INCORPORATED BY REFERENCE
Part III- Portions of the Proxy Statement for the 2006
Annual Meeting of Shareholders
CAUTIONARY STATEMENT: THE COMPANY'S REPORTS ON FORM 10-K AND FORM 10-Q, ITS
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: 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:
2005 - 52 weeks ended December 31, 2005
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
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 2005, one customer, Fleetwood Enterprises, Inc., accounted for
22.5% 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. The Company believes that it
has good relations with Fleetwood.
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.
1
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 2005 and 2004 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 731 sales, production, warehouse and
administrative employees and also uses the services of independent sales
representatives.
ITEM 1A. RISK FACTORS.
The Company faces multiple risk factors, including risks that are
industry specific to the markets that the Company serves, and risks that affect
the Company as a whole.
RECREATIONAL VEHICLE MARKET (RV) RISK FACTORS
- ---------------------------------------------
Fuel: Higher costs or shortages of fuel could reduce demand for RV's.
Inventories: Excess inventories at the retail level could temporarily reduce
demand for new RV's.
Cyclicality: The RV market has historically experienced cyclicality. A downturn
in market conditions is possible.
Credit: The lack of available credit for retail purchasers could reduce demand
for new units.
MANUFACTURED HOUSING MARKET (MH) RISK FACTORS
- ---------------------------------------------
Cyclicality: The MH market has historically experienced cyclicality. The market
has been experiencing a prolonged down cycle since 1998 when
approximately 374,000 units were produced nationally. For each of the
past three years, the industry has produced approximately 130,000 units
(excluding FEMA units).
Credit: The lack of available credit for retail purchasers could continue to
reduce the demand for new units.
Repossessions: Increases in the number of repossessed units could reduce the
demand for new units.
Regulations: Changes in zoning regulations and building codes could reduce the
demand for new units.
Geographic Concentration: The Company's sales to the MH industry are
concentrated in the southern United States. This is due to the overall
geographic concentration in the MH industry. In calendar year 2005,
industry shipments to the southern United States were 59.6% of total
industry shipments.
2
HOSPITALITY MARKET RISK FACTORS
- -------------------------------
Competition: The market for the Company's hospitality products is highly
competitive, as its customers are provided with many sourcing choices,
including foreign sources for some products.
Occupancy: A decrease in hospitality occupancy rates could have a negative
impact on both new properties and refurbishing of existing properties.
Decreases in the levels of business and/or leisure travel could reduce
occupancy rates.
Sales Representation: The majority of the Company's hospitality business is
solicited by independent sales representatives. The loss of a few key
representatives could have a negative effect on the Company's revenues.
GENERAL CORPORATE RISK FACTORS
- ------------------------------
Competition: All of the markets served by the Company are highly competitive.
Competitive pricing pressure could result in loss of customers or
decreased profit margins. Barriers to entry for new domestic
competitors are relatively small, thereby increasing the potential for
more competitors. Although the Company has not faced competition from
foreign sources to date, the possibility of such competition does
exist.
Raw Material Acquisition: The Company faces the risk of having to pay increased
prices for purchasing raw material from its suppliers. Should the
Company face price increases that it cannot pass on to its customers,
the results of operations could suffer as a result. If the Company's
suppliers were adversely affected by a disruption in the petroleum or
chemical industries, the Company's costs or ability to deliver product
may also be adversely affected.
Management: The Company is dependent on the management and guidance of William
Bassett, its chairman, CEO, and president. The loss of Mr. Bassett's
services could have a negative impact on the performance and growth of
the Company for some period of time. To a lesser extent, the Company is
dependent on the key management at each of its manufacturing
operations.
Stock Price: The Company's stock is thinly traded. Should a major shareholder
decide to liquidate its position, there could be a negative effect on
the price of the stock until this condition is resolved.
Sarbanes-Oxley: Unless the current requirement for compliance with Section 404
of the Sarbanes-Oxley Act is changed, the Company will experience
higher internal and auditing costs to comply by the end of fiscal 2007.
Significant Customer: Sales to Fleetwood Enterprises represented 22.5% of the
Company's sales in 2005. Although the Company has an agreement with
Fleetwood to be its exclusive supplier of certain products through
January 2010, Fleetwood's performance in its own markets could have a
negative impact on the Company's sales and results of operations. To a
lesser extent, the loss of other major customers could also adversely
affect the Company.
Information Systems: The Company is in the process of upgrading its
Enterprise-Resource-Planning (ERP) system. Any unforeseen difficulties
in the implementation of this system can result in increased future
consulting costs as well as increased depreciation costs for the
installed software.
3
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
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 96,148
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.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
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.
2005 Sales Prices 2004 Sales Prices
----------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $ 9.85 $ 8.01 $ 8.48 $ 6.35
Second Quarter 9.80 7.97 8.72 7.45
Third Quarter 8.84 7.00 9.29 8.22
Fourth Quarter 8.85 7.60 9.25 7.76
As of March 24, 2006, the Company had 256 shareholders of record of its
Common Stock.
Total cash dividend payments were $0.12 per share in 2005 and 2004. The
Company expects to maintain the dividend rate of $0.12 per share in 2006.
At December 31, 2005, the Company had outstanding options under one
shareholder approved option plan. Under the 1995 Incentive Stock Option Plan
("1995 Plan"), the Company has granted 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 December 31, 2005:
Number of shares
available for
Number of shares optioned Weighted average exercise price future options
------------------------- ------------------------------- ----------------
1995 Plan 362,728 $6.19 0
The Company also provides a stock grant to its non-employee directors
as compensation for their services as directors. In 2005, the Company awarded
four non-employee directors a total of 8,487 shares. In 2004, the Company
awarded five non-employee directors a total of 9,927 shares. All non-employee
directors receive their shares in a Directors Trust, for which the president of
the Company is the Trustee. The shares were not registered under the Securities
Act of 1933 in reliance upon Section 4(2) and other exemptions.
The Company made no Common Stock repurchases during fiscal 2005.
5
ITEM 6. SELECTED FINANCIAL DATA.
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
FOR THE YEAR
- ------------
Net Sales $50,525,343 $50,449,214 $41,803,224 $38,641,605 $34,782,121
Net Income $ 1,364,814 $ 1,394,698 $ 1,561,778 $ 1,384,379 $ 861,561
----------- ----------- ----------- ----------- -----------
AT YEAR END
- -----------
Total Assets $24,294,365 $23,962,077 $21,088,322 $19,480,134 $18,365,516
Long Term Obligations $ 1,536,754 $ 1,752,568 $ 1,926,832 $ 1,477,973 $ 1,604,245
Long-term Debt/Total Capitalization 8.25% 9.98% 11.65% 9.97% 11.40%
Working Capital $ 6,092,349 $ 4,167,876 $ 8,007,862 $ 6,191,028 $ 6,074,073
Current Ratio 2.20:1 1.73:1 3.05:1 2.49:1 2.56:1
Stockholders' Equity $17,088,012 $15,799,668 $14,614,621 $13,348,108 $12,463,950
----------- ----------- ----------- ----------- -----------
PER SHARE
- ---------
Basic $ 0.47 $ 0.50 $ 0.56 $ 0.49 $ 0.31
Diluted $ 0.46 $ 0.47 $ 0.55 $ 0.49 $ 0.31
Book Value $ 5.84 $ 5.58 $ 5.22 $ 4.78 $ 4.43
Cash Dividends Declared $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
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 2005, the Company's
top 10 customers accounted for approximately 58% of net sales, as opposed to 64%
in 2004. 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 22.5% of the Company's net sales in 2005. 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 has enabled 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.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The recreational vehicle market experienced a slight overall increase
in 2005. Total industry shipments of motor homes and travel trailers have
increased from 370,100 in 2004 to 384,400 in 2005, exclusive of 15,500 Emergency
Living Units (in connection with the 2005 hurricanes). Travel trailer shipments
by the RV industry increased 10.5% in 2005 when compared to 2004. However,
industry shipment of motor homes decreased by 14.5% in 2005. The reduction in
the Company's sales to the RV industry was directly related to lower production
of travel trailers and motor homes by its customers.
The manufactured housing market has been relatively flat since 2002.
Industry shipments in 2005 were about 146,700; compared to the 130,800 shipments
in 2004. However, the shipments reported by the manufactured housing industry
included a surge in the fourth quarter due to FEMA living units from the 2005
hurricanes. Without these shipments, industry production for 2005 had been up
about 1.7% for the first three quarters of 2005. Excluding the FEMA production,
sales by the manufactured housing industry for all of 2005 was virtually flat
when compared to 2004.
Sales to the hospitality industry increased about 21.3% during 2005
when compared to the previous year. Hospitality sales are affected by demand for
hospitality accommodations and the growth of the industry. This was the highest
volume of annual sales experienced by the Company to this market.
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 December 31,
2005
(dollars in thousands)
2005 2004 2003
------------------- ------------------- -------------------
Net % of Net % of Net % of
Sales total Sales total Sales total
------- ------- ------- ------- ------- -------
Recreational Vehicle $28,621 57% $31,135 62% $25,774 62%
Manufactured Housing 10,044 20% 9,534 19% 7,006 17%
Hospitality 11,860 23% 9,780 19% 9,023 21%
------- ------- ------- ------- ------- -------
Total Net Sales $50,525 100% $50,449 100% $41,803 100%
======= ======= =======
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 inventories are
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.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
Liquidity and Financial Resources:
1) Working capital at December 31, 2005 was $6,092,349 compared
to $4,167,876 at January 1, 2005.
2) The current ratio was 2.20:1 at year-end 2005 compared to
1.73:1 at year-end 2004.
3) The liquid ratio was 1.06:1 at year-end 2005 compared to
0.83:1 at year-end 2004.
4) The long-term debt ratio was 8.25% at December 31, 2005
compared to 9.98% a year earlier.
Net accounts receivable increased $1,109,741 (32.0%) at December 31,
2005, when compared to January 1, 2005. Accounts receivable increased due to the
increase in sales to the recreational vehicle market in the fourth quarter of
2005 compared to 2004, as well as an increased percentage of sales to the
Company's hospitality customers. Days Sales Outstanding (DSO) increased from
27.4 days at the end of fiscal 2004 to 33.1 days at the end of fiscal 2005. The
reason for this increase was mostly an increased proportion of sales to the
hospitality market, which historically have a higher DSO than the other two
markets that the Company serves.
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 $678,000 at December 31, 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 has improved liquidity.
Net inventories increased $686,902 (13.4%) at December 31, 2005, when
compared to January 1, 2005. The increase in inventories was due to increased
levels of fourth quarter business activity, principally in the recreational
vehicle and hospitality markets.
Capital expenditures for 2005 were $579,629 compared to $2,266,466 in
2004, excluding the assets acquired from Fleetwood. The 2004 expenditures
included $1,554,421 for land, building, and equipment for the opening of the
Company's Phoenix, Arizona facility. At this time, capital spending for 2006 is
expected to be in excess of $3,000,000, including approximately $2,400,000 for
new properties and expansion.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company had no borrowings at year-end under its $5,000,000
revolving line-of-credit. The Company does expect to use its line of credit
during 2006. In addition, the Company expects to use a term loan to fund the
real estate additions and expansions.
Results of Operations:
2005 vs. 2004
The following table shows a comparison of the results of operations between
fiscal 2005 and fiscal 2004:
Fiscal % Fiscal % $ Increase
2005 of Sales 2004 of Sales (Decrease) % Change
------------ -------- ------------ -------- ---------- --------
Net Sales $ 50,525,343 100% $ 50,449,214 100% $ 76,129 0.2%
Cost of Products Sold 40,258,115 79.7% 40,332,649 79.9% (74,534) -0.2%
------------ ----- ------------ ----- ---------- -----
Gross Profit 10,267,228 20.3% 10,116,565 20.1% 150,663 1.5%
Selling and Administrative Expenses 8,148,485 16.1% 7,798,898 15.5% 349,587 4.5%
------------ ----- ------------ ----- ---------- -----
Operating Income 2,118,743 4.2% 2,317,667 4.6% (198,924) -8.6%
Other Income (Expense)
Interest, Investment and
Other Income 90,902 0.2% 90,163 0.2% 739 0.8%
Interest Expense (74,831) -0.2% (107,132) -0.2% 32,301 -30.2%
------------ ----- ------------ ----- ---------- -----
Earnings Before Income Taxes 2,134,814 4.2% 2,300,698 4.6% (165,884) -7.2%
Provision for Income Taxes 770,000 1.5% 906,000 1.8% (136,000) -15.0%
------------ ----- ------------ ----- ---------- -----
NET INCOME $ 1,364,814 2.7% $ 1,394,698 2.8% $ (29,884) -2.1%
============ ===== ============ ===== ========== =====
Net sales for fiscal 2005 were $50,525,343 compared to $50,449,214 in
fiscal 2004. The net sales increase was 0.2%. Sales to the recreational vehicle
market decreased 8.1%, primarily due to decreased shipments by its customers.
Sales to the manufactured housing industry increased 5.3%. Sales to the
hospitality market increased 21.3%.
Cost of goods sold as a percentage of sales was 79.7% in 2005 versus
79.9% in 2004. A slight increase in the cost of raw materials as a percentage of
sales was offset by a slight decrease in labor costs as a percentage of sales.
The Company experienced increases in its material costs in the second half of
2005 due to the impact on prices caused by that year's hurricanes. 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.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Selling and administrative expenses increased to $8,148,485 in 2005
from $7,798,898 in 2004. As a percentage of sales, selling and administrative
expenses increased from 15.5% to 16.1%. Most of the increase is attributable to
a decision to convert the Company's ERP system to a different software platform.
Impairment of the old system resulted in a one-time $165,647 pretax charge.
Without this charge, selling and administrative expenses as a percentage of
sales would have been 15.8%. Increased commission expense due to increased
hospitality industry sales was also another major reason for the increase.
Interest, investment and other income remained flat at $90,902 in 2005,
while interest expense decreased $32,301 or 30.2%. The decrease in interest
expense resulted primarily from the final payment of the Fleetwood acquisition
liability in January 2005, partially offset by the effect of higher interest
rates on the Company's variable rate obligations.
Net income was $1,364,814 in 2005 compared to $1,394,698 in 2004. Net
income as a percent of sales decreased to 2.7% in 2005 compared to 2.8% in 2004.
The provision for income taxes, as a percentage of income before taxes,
decreased from 39.4% to 36.1%. This is due to disqualifying dispositions of
employee stock options, for which the Company received an income tax benefit, as
well as the effects of the American Jobs Creation Act, which provide tax
benefits for companies that provide American manufacturing jobs. Without the
previously mentioned charge for the Company's software conversion, the Company
would have experienced an increase in net income for 2005.
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%
============ ===== ============ ==== ============ =====
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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, 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.
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 U.S. Generally Accepted Accounting Principles ("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 December 31,
2005:
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
2005 2004 2003
---------- ---------- ----------
Net Income $1,364,814 $1,394,698 $1,561,778
Add:
Income Tax 770,000 906,000 1,028,000
Interest Expense 74,831 107,132 56,211
Depreciation and
Amortization 1,436,911 1,407,986 711,443
Loss on Disposal
of Assets 165,315 11,079 11,575
---------- ---------- ----------
EBITDA $3,811,871 $3,826,895 $3,369,007
========== ========== ==========
Contractual Obligations
The following table summarizes the Company's financial obligations as
of December 31, 2005:
(in thousands)
2011 and
2006 2007 2008 2009 2010 thereafter Total
------ ------ ------ ------ ------ ---------- ------
Employment Contracts $ 401 $ 376 $ 266 $ 258 $ 244 $ 489 $2,034
Operating Leases 303 102 73 61 31 12 582
Long Term Debt- Principal 212 206 595 120 125 490 1,748
Long Term Debt- Interest 64 56 38 25 20 32 235
------ ------ ------ ------ ------ ------ ------
Total $ 980 $ 740 $ 972 $ 464 $ 420 $1,023 $4,599
====== ====== ====== ====== ====== ====== ======
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 December 31, 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
December 31, 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 December 31, 2005, the bond secured
by the Company's Goshen, Indiana property of $1,035,000 had a variable interest
rate of 3.66% per annum. Each increase of 1% could increase interest expense by
approximately $10,300 in 2006 and lower amounts in successive years as principal
is paid down, terminating in 2014. Also, the $145,833 bond on the Company's
Bloomsburg, Pennsylvania property had a variable interest rate of 3.60% at
December 31, 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
12
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.
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 December 31, 2005 and have
concluded that they were adequate and effective.
(b) During the most recent fiscal quarter, there were no changes in the
Company's internal controls 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 controls over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
13
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 December 31, 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 December 31, 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 December 31, 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 December 31, 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 December 31, 2005. Such information is incorporated herein by reference.
14
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
-----------------------------------------------------------
Financial Statements and Schedules
----------------------------------
(1) Independent Auditors' Report
(2) Balance Sheets - December 31, 2005 and January 1,
2005
(3) Statements of Earnings for the three fiscal years
ended December 31, 2005
(4) Statements of Stockholders' Equity for the three
fiscal years ended December 31, 2005
(5) Statements of Cash Flows for the three fiscal years
ended December 31, 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.
15
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 as Exhibit 10Y to Form 10-K for
the fiscal year ended January 1, 2005 and incorporated herein
by reference.
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 earnings 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.
16
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 29, 2006
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.
Name Title Signature Date
- ---- ----- --------- ----
William A. Bassett Chairman, President, /s/ William A. Bassett March 29, 2006
Chief Executive Officer and ----------------------
Director
Michael K. Solomon Vice President, Treasurer, /s/ Michael K. Solomon March 29, 2006
Secretary, Principal ----------------------
Financial and Accounting
Officer
Joseph N. Ellis Director /s/ Joseph N. Ellis March 29, 2006
----------------------
Ellen Downey Director /s/ Ellen Downey March 29, 2006
----------------------
Thomas Dusthimer Director /s/ Thomas Dusthimer March 29, 2006
----------------------
William Dixon Director /s/ William Dixon March 29, 2006
----------------------
Terrence Murphy Director /s/ Terrance Murphy March 29, 2006
----------------------
17
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 December 31, 2005
and January 1, 2005 and the related statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years
in the period ended December 31, 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 December 31, 2005 and January 1, 2005,
and the results of its operations and its cash flows for each of the
three fiscal years in the period ended December 31, 2005 in conformity
with accounting principles generally accepted in the United States of
America.
LOUIS PLUNG & COMPANY, LLP
Certified Public Accountants
Pittsburgh, Pennsylvania
February 11, 2006
F-1
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
ASSETS December 31, January 1,
------ 2005 2005
------------ -----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 490,377 $ 730,539
Accounts Receivable, less allowance for
doubtful accounts ($131,690 and $144,077) 4,574,415 3,464,674
Inventories 5,800,553 5,113,651
Other Current Assets 311,603 588,853
----------- -----------
TOTAL CURRENT ASSETS 11,176,948 9,897,717
----------- -----------
Property and Equipment
Land, Buildings & Improvements 7,253,742 7,250,064
Machinery, Equipment, Furniture & Fixtures 6,604,629 6,482,534
----------- -----------
Total Property and Equipment 13,858,371 13,732,598
Less: Accumulated Depreciation and Amortization 6,426,548 5,874,855
----------- -----------
Net Property and Equipment 7,431,823 7,857,743
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717
Identifiable intangible asset, less accumulated Amortization
of $1,259,713 and $611,713 2,635,278 3,283,278
Other Assets 318,599 191,622
----------- -----------
TOTAL ASSETS $24,294,365 $23,962,077
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 3,075,795 $ 2,539,252
Current Maturities of Long-term Debt 211,800 170,709
Accrued Expenses:
Compensation 944,109 1,016,262
Acquisition Liability -- 1,067,472
Other 852,895 936,146
----------- -----------
TOTAL CURRENT LIABILITIES 5,084,599 5,729,841
----------- -----------
Long-Term Debt 1,536,754 1,752,568
Deferred Income Taxes 585,000 680,000
----------- -----------
TOTAL LIABILITIES 7,206,353 8,162,409
----------- -----------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares, 10,000,000;
Issued shares, 4,574,490 and 4,489,728 914,898 897,946
Paid-in Capital 1,616,843 1,423,275
Retained Earnings 22,651,391 21,633,044
----------- -----------
25,183,132 23,954,265
Less: Treasury stock, at cost: 1,648,088 and 1,660,197 shares 8,095,120 8,154,597
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 17,088,012 15,799,668
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,294,365 $23,962,077
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
DECORATOR INDUSTRIES, INC
STATEMENTS OF EARNINGS
For the Fiscal Year
------------------------------------------------
2005 2004 2003
------------ ------------ ------------
Net Sales $ 50,525,343 $ 50,449,214 $ 41,803,224
Cost of Products Sold 40,258,115 40,332,649 32,679,542
------------ ------------ ------------
Gross Profit 10,267,228 10,116,565 9,123,682
Selling and Administrative Expenses 8,148,485 7,798,898 6,590,362
------------ ------------ ------------
Operating Income 2,118,743 2,317,667 2,533,320
Other Income (Expense)
Interest, Investment and
Other Income 90,902 90,163 112,669
Interest Expense (74,831) (107,132) (56,211)
------------ ------------ ------------
Earnings Before Income Taxes 2,134,814 2,300,698 2,589,778
Provision for Income Taxes 770,000 906,000 1,028,000
------------ ------------ ------------
NET INCOME $ 1,364,814 $ 1,394,698 $ 1,561,778
============ ============ ============
EARNINGS PER SHARE
BASIC $ 0.47 $ 0.50 $ 0.56
============ ============ ============
DILUTED $ 0.46 $ 0.47 $ 0.55
============ ============ ============
Weighted Average Number of Shares Outstanding
Basic 2,882,196 2,816,661 2,794,286
Diluted 2,998,598 2,966,787 2,827,602
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 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
Transactions for 2005
Net profit 1,364,814 1,364,814
Issuance of stock for
Exercise of options 16,952 165,254 17,791 199,997
Issuance of stock for
Directors compensation 28,314 41,686 70,000
Dividends paid (346,467) (346,467)
--------- ----------- ------------ ----------- ------------
BALANCE AT
DECEMBER 31, 2005 $ 914,898 $ 1,616,843 $ 22,651,391 $(8,095,120) $ 17,088,012
========= =========== ============ =========== ============
The accompanying notes are an integral part of the financial statements.
F-4
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
For the Fiscal Year
---------------------------------------------
2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,364,814 $ 1,394,698 $ 1,561,778
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,436,911 1,407,986 711,443
Provision for Losses on Accounts Receivable 30,000 -- 40,000
Deferred Taxes (64,000) 51,000 148,000
Loss on Disposal of Assets 165,315 11,079 11,575
Increase (Decrease) from Changes in:
Accounts Receivable (1,138,741) 54,744 (144,789)
Inventories (686,902) 77,218 264,673
Prepaid Expenses 233,740 (331,568) 138,335
Other Assets (138,017) 226,182 (6,591)
Accounts Payable 536,543 660,569 (181,188)
Accrued Expenses (152,904) 96,473 (106,497)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,586,759 3,648,381 2,436,739
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions (1,067,472) (4,269,422) --
Capital Expenditures (579,629) (2,266,446) (758,115)
Proceeds from Property Dispositions 71,373 5,852 2,150
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,575,728) (6,530,016) (755,965)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (174,723) (169,806) (151,640)
Dividend Payments (346,467) (338,151) (335,265)
Proceeds from Exercise of Stock Options 199,997 48,500 --
Issuance of Stock for Directors' Trust 70,000 80,000 40,000
Proceeds on Debt from Building -- -- 640,000
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (251,193) (379,457) 193,095
Net (Decrease) Increase in Cash and Cash Equivalents (240,162) (3,261,092) 1,873,869
Cash and Cash Equivalents at Beginning of Year 730,539 3,991,631 2,117,762
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 490,377 $ 730,539 $ 3,991,631
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 105,755 $ 54,483 $ 42,522
Income Taxes $ 612,172 $ 1,135,437 $ 745,259
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 2005 was a 52-week period ended December 31, 2005,
Fiscal year 2004 was a 52-week period ending January 1, 2005, and
Fiscal year 2003 was a 53-week period ending January 3, 2004.
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.
Goodwill and Other Intangible Assets
------------------------------------
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 most recently evaluated the goodwill as of
December 31, 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 $2,635,278 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 $1,259,713 of
accumulated amortization 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
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 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.
All cash balances at December 31, 2005 and January 1, 2005 were in
general deposit and/or checking accounts.
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 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
F-7
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $678,000 at December 31, 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 2005. 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 $205 and
$4,157 are included in income for the years ended December 31, 2005 and
January 1, 2005, respectively. All other financial instruments are
carried at amounts believed to approximate fair value.
F-8
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(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 December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004)
"Share Based Payment" ("SFAS No. 123(R))". This standard revised the
original SFAS No. 123 by requiring the expensing of stock options,
which was to take effect for the Company's third quarter of 2005.
However, on April 14, 2005, the United States Security and Exchange
Commission adopted a rule that changed the required compliance date for
the Company to the beginning of the next fiscal year. The Company will
begin recording the expense of stock options in its financial
statements effective January 1, 2006. For fiscal years 2005 and prior,
the company used the original provisions of SFAS No. 123. The Company
assumes no tax benefit under SFAS 123(R), as all of its stock options
qualify as incentive stock options, and do not qualify for a tax
deduction unless there is a disqualifying disposition.
In accordance with the previous provisions of SFAS No. 123, the Company
followed 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 was
recognized.
At December 31, 2005, the Company had options outstanding under a fixed
stock option plan, which is described below. The Company applied APB
Opinion 25 and related Interpretations in accounting for its plan.
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(R), the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
As reported: 2005 2004 2003
---------- ---------- ----------
Net Income $1,364,814 $1,394,698 $1,561,778
Basic Earnings Per Share $0.47 $0.50 $0.56
Diluted Earnings Per Share $0.46 $0.47 $0.55
Stock-based employee cost $74,548 $163,393 $99,455
Pro Forma Net Income $1,290,266 $1,231,305 $1,462,323
Pro Forma Earnings Per Share- Basic $0.45 $0.44 $0.52
Pro Forma Earnings Per Share- Diluted $0.43 $0.42 $0.52
The Company expects to expense approximately $53,000 in 2006 under
existing option grants.
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.
F-9
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
2005 Black-Scholes 1.3% 41.0% 4.1% 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 and 2005 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 and 2005 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.
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) and
Financial Interpretation (FIN) were issued by the Financial Accounting
Standards Board (FASB):
In December 2004, the FASB issued SFAS No. 123(revised 2004),
"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 was effective as of the first reporting period that begins
after June 15, 2005. However, in April 2005, the United States Security
and Exchange Commission adopted a rule that changed the required
compliance date for the Company to the beginning of the next fiscal
year. Accordingly, the Company will adopt SFAS No. 123(R) beginning
January 1, 2006. The Company expects SFAS No. 123(R) to lead to a
charge of approximately $53,000 in 2006 from the expensing of existing
stock options. 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(R) had been applied.
F-10
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections--a replacement of APB Opinion No. 20 and FASB
Statement No. 3". SFAS No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. It
requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impractical
to determine either the period specific effects or the cumulative
effect of the change. The statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. SFAS No. 154 does not
currently have an effect on the Company's financial statements.
In March 2005, the FASB issued FIN 47, "Accounting for Conditional
Asset Retirement Obligations-an interpretation of FASB Statement No.
143". FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation when incurred if the liability's fair value can be
reasonably estimated. FIN 47 does not currently have an effect on the
Company's financial statements.
(2) INVENTORIES
Inventories consisted of the following classifications:
2005 2004
---------- ----------
Raw materials & supplies $4,982,121 $4,438,916
In process & finished goods 818,432 674,735
---------- ----------
$5,800,553 $5,113,651
========== ==========
(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 $386,862 in 2005, $390,017 in 2004, and $397,722 in 2003.
Commitments under these leases extend through September 2011 and are as
follows:
2006 $303,298
2007 $101,871
2008 $ 73,368
2009 $ 60,711
2010 $ 30,984
Thereafter $ 11,782
F-11
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(4) COMMITMENTS
The Company has commitments under employment, consulting and
non-compete agreements entered into with two individuals. The minimum
commitments under these agreements are payable as follows:
2006 $400,647
2007 $375,647
2008 $265,847
2009 $258,218
2010 $244,333
Thereafter $488,666
The commitments are fixed as to cash compensation. One of 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 22.5%, 30.6% and 26.2% of
Company sales in 2005, 2004 and 2003, respectively. Fleetwood operates
in the manufactured housing and recreational vehicle industries. Sales
to Thor Industries accounted for 9.4%, 10.8% and 8.9% of Company sales
in 2005, 2004 and 2003, respectively. Thor operates in the recreational
vehicle industry.
F-12
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(6) LONG TERM-DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
2005 2004
---------- ----------
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. $ 37,943 $ 60,832
Note payable in monthly payments of $3,556 principal
plus accrued interest at 4.39% monthly through June
2008. This note is secured by the Company's Elkhart,
IN building. 529,778 572,445
Bond payable in monthly installments through
November 2008. The interest rate is variable and is
3.60% at December 31, 2005. This bond is secured by
the Company's Bloomsburg, PA property. 145,833 175,000
Bond payable in quarterly installments through March
2014. The interest rate is variable and is 3.66% at
December 31, 2005. This bond is secured by the
Company's Goshen, IN property. 1,035,000 1,115,000
---------- ----------
1,748,554 1,923,277
Less amount due within one year 211,800 170,709
---------- ----------
$1,536,754 $1,752,568
========== ==========
The principal payments on long-term debt for the five years subsequent
to December 31, 2005 are as follows:
2006 $211,800
2007 $206,476
2008 $595,278
2009 $120,000
2010 $125,000
Thereafter $490,000
On April 16, 2004 the Company signed an agreement for a $5,000,000
revolving line of credit with Washington Mutual Bank. The maximum
borrowed under this line was $629,000 in 2005; however, there were no
outstanding borrowings at December 31, 2005. The Company had 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 December 31, 2005
and January 1, 2005.
F-13
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(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 $14,000 for 2005 ($18,000 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.
Effective January 1, 2006, the Company increased its match to 25% of
the first 6% of the employee's contributions up to 1.5% 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 $49,213 in 2005, $46,230 in 2004, and
$38,052 in 2003.
(8) STOCK OPTIONS
Under the 1995 Incentive Stock Option Plan, (the "Plan"), the Company
has granted options to its key employees for up to 520,832 (as adjusted
for stock splits) shares of Common Stock. Under this Plan, 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.
Pursuant to the Plan, options for 17,500 shares and 69,700 shares were
granted in 2005 and 2004, respectively. No options were granted in 2003
under the Plan. The Plan expired during fiscal 2005, and all options
available under the Plan have been issued. Options granted under the
Plan continue to be valid until their respective expiration dates.
A summary of the status of the Company's outstanding stock options as
of December 31, 2005, January 1, 2005, and January 3, 2004, and changes
during the years ending on those dates is presented below:
2005 2004 2003
------------------------ ------------------------ ------------------------
Exercise Exercise Exercise
Shares (1) Price (2) Shares (1) Price (2) Shares (1) Price (2)
---------- --------- ---------- --------- ---------- ---------
Outstanding at beginning of year 506,632 $5.78 476,136 $5.37 476,136 $5.37
Granted 17,500 9.00 69,700 8.06 -- --
Excercised (148,904) 4.89 (39,204) 5.12 -- --
Forfeited/Cancelled (12,500) 8.87 -- -- -- --
-------- ------- -------
Outstanding at year-end 362,728 $6.19 506,632 $5.78 476,136 $5.37
Options excercisable at year-end 293,468 427,932 429,886
Weighted average fair value of
options granted during the year $3.35 $2.71 --
F-14
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(8) STOCK OPTIONS (CONTINUED)
The following information applies to fixed stock options outstanding at
December 31, 2005:
Number outstanding (1) 362,728
Range of exercise prices $4.80 to $9.30
Weighted-average exercise price $6.19
Weighted-average remaining contractual life 5.03 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.
(9) INCOME TAXES
A summary of income taxes is as follows:
2005 2004 2003
-------- -------- ----------
Current:
Federal $679,000 $705,000 $ 719,000
State 155,000 150,000 161,000
Deferred (64,000) 51,000 148,000
-------- -------- ----------
Total $770,000 $906,000 $1,028,000
======== ======== ==========
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:
2005 2004
--------- ---------
Depreciation $ 397,000 $ 517,000
Amortization 351,000 298,000
Inventories, due to additonal cost
recorded for income tax purposes (17,000) (19,000)
Accounts receivable, due to allowance
for doubtful accounts (51,000) (56,000)
Directors' Trust (163,000) (136,000)
Accrued liabilities, due to expenses not yet
deductible for income tax purposes (17,000) (40,000)
--------- ---------
$ 500,000 $ 564,000
========= =========
The net deferred income tax liability is presented in the balance
sheets as follows:
2005 2004
-------- --------
Current Asset $ 85,000 $116,000
Long-term Liability 585,000 680,000
F-15
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(9) INCOME TAXES (CONTINUED)
The effective income tax rate varied from the statutory Federal tax
rate as follows:
2005 2004 2003
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 4.1 4.2 4.4
Other (2.0) 1.2 1.3
---- ---- ----
Effective income tax rate 36.1% 39.4% 39.7%
==== ==== ====
The Internal Revenue Service ("IRS") is currently examining the
Company's federal income tax returns for 2003 and 2004. At this time,
the IRS has not proposed any adjustments to the returns. As of December
31, 2005, it is not possible to determine if the IRS will have
adjustments to the returns that may result in additional tax. If the
IRS presents any such adjustments, the Company will determine the
financial impact at that time.
(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.
2005 2004 2003
---------- ---------- ----------
Numerator:
Net income $1,364,814 $1,394,698 $1,561,778
========== ========== ==========
Denominator
Weighted-average number of
Common Shares outstanding 2,882,196 2,816,661 2,794,286
Dilutive effect of stock
options on net income 116,402 150,126 33,316
---------- ---------- ----------
2,998,598 2,966,787 2,827,602
========== ========== ==========
Diluted earnings per share $ 0.46 $ 0.47 $ 0.55
========== ========== ==========
F-16
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
2005
Net Sales $12,431,382 $13,275,952 $12,597,173 $12,220,836 $50,525,343
Gross Profit $ 2,601,699 $ 2,588,400 $ 2,498,579 $ 2,578,550 $10,267,228
Net Income $ 418,336 $ 241,317 $ 347,052 $ 358,109 $ 1,364,814
Earnings Per Common Share:
Basic $ 0.15 $ 0.08 $ 0.12 $ 0.12 $ 0.47
Diluted $ 0.14 $ 0.08 $ 0.12 $ 0.12 $ 0.46
Average Common
Shares Outstanding:
Basic 2,852,270 2,880,102 2,882,788 2,913,625 2,882,196
Diluted 2,994,455 3,015,562 2,979,321 3,005,054 2,998,598
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
----------- ----------- ----------- ----------- -----------
2004
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 Income $ 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
F-17
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(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 2005 and 2004,
representing 22.5% and 30.6% of total sales, respectively.
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 11, 2006 on the
financial statements as of December 31, 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 11, 2006
F-19
DECORATOR INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ---------- ------------------------------- ---------- ----------
(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
2005 $144,077 30,000 0 42,387 (A) $ 131,690
2004 $200,598 0 0 56,521 (A) $ 144,077
2003 $202,933 40,000 0 42,335 (A) $ 200,598
(A) Write-off bad debts
ALLOWANCE FOR SALES
RETURNS
2005 $ 30,000 23,663 0 0 $ 53,663
2004 $ 44,000 (14,000) 0 0 $ 30,000
2003 $ 54,000 (10,000) 0 0 $ 44,000
F-20