UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 333-44747
ROSEDALE DECORATIVE PRODUCTS LTD
---------------------------------------
(Exact name of registrant as specified in its charter)
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<S> <C>
Ontario, Canada N/A
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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731 Millway Avenue
Concord, Ontario, Canada L4K 3S8
(Address of principal executive offices) (Zip Code)
(905) 669-8909
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Redeemable Common Stock Purchase Warrants
(Title of Class)
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-B 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-KSB or any amendment to
this Form 10-KSB. [ ]
The Company's revenues for the year ended December 31, 1998 were
$18,790,793
As of March 1, 1999 the aggregate market value of the voting stock held by
non-affiliates of the registrant (based on The Nasdaq Stock Market last sale
price of $1.875 on March 1, 1999) was $5,184,375.
As of March 1, 1999, there were 2,765,000 shares of the registrant's common
stock outstanding.
<PAGE>
PART I.
Item 1. HISTORY OF THE COMPANY
Rosedale Decorative Products, Ltd. (the "Company") commenced operations
as a single retail store, Ontario Paint & Wallpaper Limited, in 1913 and has
operated as a family owned business since its inception. The focus of the
business during its early years was the sale of paint to homeowners and major
contractors. The retail store is still in operation in its original location and
has become a Toronto landmark. In the early 1970's, Ontario Paint & Wallpaper
Limited ("Ontario") diversified into wallpaper distribution. In 1981, the
Company's subsidiary Rosedale Wallcoverings and Fabrics, Inc. ("Rosedale")
commenced operations under the name Desart Wallcoverings Inc. In 1988, Desart
Wallcoverings Inc. changed its name to Rosedale Wallcoverings Inc. and in 1995
the name was changed to Rosedale Wallcoverings & Fabrics Inc. Over the years,
the Company has become one of the largest independent wholesale wallpaper
distributors in Canada. In the early 1990's the Company continued to diversify
by designing wallcovering collections for distribution in Canada, the United
States, Europe, South America and Asia.
On May 14, 1997 the Company was formed by the shareholders of Rosedale
and Ontario for the purpose of consolidating the business of the two
subsidiaries.
General
The Company, through its two wholly-owned subsidiaries, Ontario and
Rosedale, designs, markets and distributes residential wallcoverings and
designer fabrics. The Company also operates a retail paint and wallpaper store
located in downtown Toronto, Canada which has been in continuous operation since
1913. The Company's products include wallpaper and wallpaper borders (which are
collectively referred to as wallcoverings), designer fabrics and paint.
The Company designs wallcovering and designer fabric collections that
it distributes under its own brand names. Wallcoverings and fabrics sold under
Company brand names are manufactured for the Company on an outsource basis by
third party manufacturers. In addition to selling its own brand name
wallcoverings and fabrics, the Company is also a wholesale distributor of
wallcoverings designed and manufactured by other manufacturers. Wholesale
distribution of other manufacturers' wallcoverings is done through the Company's
Ontario subsidiary. Design and distribution of Company brand wallcoverings is
accomplished primarily through its Rosedale subsidiary and, to a lesser extent,
through its Ontario subsidiary.
The Company's Rosedale subsidiary has received a number of industry
recognized awards. Since 1994, the Rosedale subsidiary has been received the
"Estate Award for Excellence in Wallcovering Design" on four separate occasions.
This award is presented by a leading trade publications and is given in
recognition of wallcovering collections that exhibit outstanding design
characteristics. In addition, Rosedale has received the "Hot Line Elite" award
on numerous occasions which is presented by another leading trade publication to
the wallcovering producer whose collections have been cited by independent
retail stores throughout the United States as top sellers. Rosedale has also
twice been named "Supplier of the Year" by its largest distributor, The Blonder
Company (most recently in 1997) despite the fact that its collections represent
only approximately 5% of the total wallcovering collections offered by The
Blonder Company in each year.
Sales of Company's name brand wallcoverings account for approximately
54% of the Company's total revenues and wholesale distribution of wallcoverings
under non-company brand names accounts for approximately 29% of the Company's
total revenues. Sales of designer fabrics account for approximately 12% of the
Company's revenues and the Company's retail paint and wallpaper store generates
approximately
<PAGE>
5% of the Company's annual revenues.
In 1998, the Company distributed approximately 26 Company brand
wallcovering and fabric collections to approximately 10,000 to 20,000 retail
wallpaper and paint stores worldwide. In addition, in 1998, the Company's
Ontario subsidiary distributed approximately 47 non-Company brand wallcovering
collections to approximately 1,700-2,000 home decorating stores in Canada.
The Company believes that its product mix of wallcoverings, designer
fabrics and paints, along with its newer offerings of floor coverings and
ceiling tiles presents significant cross marketing opportunities. Rosedale has
recently introduced wallcovering and fabric sample books that include
coordinated carpets and area rugs; a first in the industry.
Company Brands
The Company designs and distributes approximately ten different lines
of wallcoverings and fabrics sold under the Company's own brand names each year.
A variety of wallcovering and fabric collections are sold under each of the
Company's brand names. Each wallcovering collection sold by the Company consists
of a variety of coordinated wallpapers, borders and fabrics. Collections take
approximately twelve months to develop and are generally available in the
marketplace for a minimum of two years after launch. The Company's Rosedale
subsidiary designs and distributes six wallcovering collections and two fabric
programs per year, sold under five brand names, and the Ontario subsidiary
designs and distributes two wallcovering collections per year, sold under two
brand names. Such products are distributed to approximately 10,000 to 20,000
retail stores and interior designers worldwide.
Wallcovering and designer fabric collections are developed by the
Company's design staff using a variety of color schemes to create thematically
consistent collections. Each collection is tailored to fit the particular target
market for the brand name for which the collection is being created. The
Company's management, design, marketing and sales staff approve collections for
production based upon their assessment of the commercial potential of those
collections in each of the Company's target markets.
Each of the Company's subsidiaries maintains its own design studio and
creative staff. Rosedale's design studio is located in its Concord, Ontario
facility. Recently, the Company's Rosedale subsidiary installed a state of the
art computer aided design (CAD) system, with two workstations, for the creation
and coloring of wallcovering and fabric designs. The system provides Rosedale's
design staff with the ability to produce a wide variety of designs and color
schemes and has reduced the time required for producing finished designs. The
Company's Ontario subsidiary maintains a design studio and staff in London,
England.
Company brand name wallcoverings and fabrics include; Rosedale,
Cambridge Studios, Hamilton House, Kingsway Fabrics, Concord and Ridley Nash.
The Company's brand name wallcoverings and fabrics are targeted for middle and
upper middle income consumers and to the high end interior designer market where
the Company's wallcoverings can compete based upon quality and design. The
Company does not design wallcovering and fabric collections for the lower end of
the market where competition is based primarily upon price.
The Company's Rosedale and Cambridge Studios brands were established in
1987 and 1993, respectively, and are designed and marketed by the Company's
Rosedale subsidiary. The Concord and Ridley Nash lines of wallcoverings were
established in 1992 and 1995, respectively, and are designed by the design staff
of the Company's Ontario subsidiary. Each year, the Company produces
approximately eight different lines of wallcoverings under its Rosedale,
Cambridge Studios, Concord and Ridley Nash brands.
<PAGE>
Wallcovering collections sold under all four brand names are targeted to middle
to and upper middle income consumers.
The Company's Hamilton House brand, which was introduced in 1995 by the
Company's Rosedale subsidiary in order to provide the Company with a brand which
is specifically designed for the interior design market and decorator boutiques.
With the addition of the Hamilton House brand line of wallcoverings, Rosedale's
product mix was expanded to cover all major price categories from the middle
level market through to the high end interior designer market.
The Concord and Ridley Nash brands were established by the Company's
Ontario subsidiary to provide Ontario with its own brand name of wallpaper
products for introduction into the United States market. Both brands are created
in London, England by the Company's design staff. The Company designs and
distributes one wallcovering collection per year under each brand name. Both
lines of wallcoverings are targeted for middle to upper income consumers.
The Company's various brands enable the Company to take advantage of
the changing nature of the North American wholesale distribution business,
including the growth of large national distributors as well as the trend towards
consolidation amongst the smaller regional distributors, and to broaden its
product mix to cover all major price categories with the market with the
exception of the low margin, mass merchant business.
Decorative Fabrics and Floor Coverings
As part of the Company's growth strategy, its Rosedale subsidiary has
recently expanded its product lines to include coordinated products, namely
decorative fabrics, soft window treatments and floor coverings. The Company's
decorative fabric products are sold under the Kingsway Fabrics brand name and
are intended to be utilized by consumers for draperies, upholstery and bed
coverings. The expansion into the coordinated fabric market has been undertaken
in order to take advantage of the tremendous trend towards coordinated selling
in the home decorating industry. These changes encompass the way that products
are introduced into the market as well as the nature of consumer buying habits.
Designer fabrics represent approximately 12% of Rosedale's annual
revenues. Rosedale designs and markets two fabric collections per year which are
coordinated with its wallcovering collections. Recently, Rosedale has added
coordinated area rugs and runners to complement its wallcovering and fabric
offerings.
The Company believes that offering a combination of wallcoverings,
decorative fabrics and floor coverings provides significant opportunities for
cross merchandising of the Company's products. This in turn opens other markets
for the Company's product lines. For example, by offering coordinated lines of
wallcoverings, fabrics, and floor coverings, consumers looking to purchase
wallcoverings will be exposed to the Company's designer fabric and floor
covering lines. The Company believes that it is now able to offer consumers a
complete home decorating package. The end result being that the Company's
products are saleable to a wider variety of retail stores and consumers.
Third Party Manufacturing
Company brand wallcoverings are manufactured for the Company by
wallcovering manufacturers in the United Kingdom, Canada and the United States.
The Company's Rosedale and Cambridge Studios lines of wallcoverings are
manufactured in the United Kingdom by Borden Wallcoverings Ltd. ("Borden") and
Zen Wallcoverings Ltd. ("Zen"). Borden manufacturers the majority of the
Company's wallcoverings and has been a contract manufacturer with the Company
since 1985. The Company's Hamilton House brand is
<PAGE>
manufactured in the United States by Hawthorne Wallcoverings. The Company's
wallcoverings are also manufactured in Canada by Blue Mountain Wallcoverings
Ltd. and Sunworthy Wallcoverings Inc.
Designer fabric collections designed by the Company and sold under the
Kingsway Fabrics brand name are manufactured in the United States by two
manufacturers, Santee Print Works Ltd. ("Santee") and New London Textiles, Inc.
("New London").
The Company generally enters into contracts with its manufacturers to
produce its designs to the Company's specifications on a "make and ship" basis
which means that the manufacturers hold no inventory of the Company's products.
The Company's products are manufactured on a pattern by pattern basis. The terms
and conditions of production are outlined by the Company in written instructions
provided to the manufacturers for each new design that the Company produces. The
Company maintains the exclusive copyrights to each of its designs and the
manufacturers do not have rights to sell the Company's designs unless permitted
by the Company.
Wholesale Distribution of Wallcoverings Manufactured by Third Parties
The Company, through its Ontario subsidiary, is a wholesale distributor of
wallcoverings designed and produced by manufacturers located in the United
Kingdom and Canada. The Company markets wallcovering collections produced by
third party manufactures under each manufacturer's brand names. The Company has
distribution agreements with John Wilman Limited ("John Wilman") and Vymura
International PLC ("Vymura"), located in the United Kingdom, and with Norwall
Group Inc. ("Norwall"), located in Canada. The Company's distribution agreements
with John Wilman, Vymura and Norwall provide the Company with the exclusive
Canadian distribution rights for each manufacturers' wallcovering lines. The
Company believes that its position as one of the few remaining distributors not
owned by a manufacturing facility, makes it an attractive distributor to
manufacturers that do not want to sell their products to competitive
manufacturers for distribution.
New Products
The Company intends to expand the products offered by its Ontario
subsidiary to include a line of retro art decorative ceiling tiles for
commercial and residential customers. The decorative ceiling tiles are designed
to fit into standard suspension ceiling frameworks and are embossed with designs
that emulate ceilings found in many turn of the century buildings. This provides
commercial and residential customers with the ability to add Victorian style
ceilings to their decor. The Company believes that its decorative ceiling tiles
will be attractive to commercial users, such as restaurants looking to recreate
the look of the late 1800's. The anticipated launch date for the Company's
decorative ceiling tiles is in the second quarter of 1999.
Retail Operation
The Company's retail operation, Ontario Paint & Wallpaper, has been in
continuous operation since 1913 and the store has become a landmark in
metropolitan Toronto. The retail store sells Benjamin Moore paints and related
sundry products, including wallcoverings to customers ranging from individual
homeowners to large industrial accounts. The store offers a full line of
wallcoverings, include all brands distributed by the Company. The majority of
Ontario Paint & Wallpaper's paint sales are made to local movie studios for set
designs and to commercial customers for apartment and office buildings. Sales to
commercial customers have been growing steadily over the past two years. The
retail store is the largest single source distributor of Benjamin Moore Paints
in Canada.
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The retail store offers special services to attract and maintain
commercial customers. The store maintains detailed records of paint purchases by
commercial customers. Commercial customers that have purchased paint in the past
can order additional paint simply by telephoning the store and indicating which
area of their building requires paint. The store manager then retrieves the
stored information about the building, selects the correct paint colors for the
commercial customer and then delivers the paint to the customer. In addition,
the Company has a portable paint scanner which provides retail store employees
with the ability to visit a building and scan the building's paints and return
to the store where the scanned information is transferred to a paint mixer which
then mixes matching paint colors.
The paint store was also the setting for a monthly home decorating
television show which is broadcast from the store. The television show was
hosted by City T.V., and provided practical advice on home painting and repairs.
The television show was taped from the store in front of a live audience. In
June 1997, the retail store also began presenting bi-monthly seminars for
homeowners providing elementary to advanced instruction on various painting
techniques. The seminars are conducted in conjunction with a local TV
personality. The program has been quite successful with all classes being
oversold.
Marketing and Distribution (Company Brands)
The Company distributes its brand name wallcoverings and fabrics in the
United States and Canada through regional and national distributors. The Company
appoints a single distributor to a particular geographical area and their
territories generally do not overlap. The Company does not maintain formal
distribution agreements with its distributors, as is the custom in the industry.
It is understood and common practice in the industry that neither the
distributor nor the manufacturer is obligated to maintain a relationship other
than on a collection by collection basis. It is the Company's policy that each
of its distributors is obligated to purchase every collection the Company
markets or forfeit its right to be a Company distributor.
In addition the Company sells directly to selected large national and
regional retail chains and specialty stores that specialize in the sale of
wallcoverings and designer fabrics.
The Company markets and promotes its products through the distribution
and sale of sample books. The Company prepares a sample book for each of its
Company brand collections of wallcoverings and fabrics designs. The majority of
the sample books prepared by the Company contain partial sheets of wallpaper,
coordinated borders and fabrics. Recently, the Company has added coordinated
floor coverings to its sample books. In addition, sample books contain
photographs of model room settings demonstrating how the Company's
wallcoverings, coordinated designer fabrics and floor coverings look in
simulated home environments. By offering coordinated wallcoverings and fabric
collections in its sample books, the Company is able to have its entire product
line shown to a wider variety of end users. The Company also produces sample
books which contain only designer fabric samples which it distributes to fabric
wholesalers. In 1996, the Company distributed over 80,000 Company brand
wallcovering sample books and 12,000 Company brand designer fabric sample books.
The number of sample books that the Company prepares for any given
collection is determined based upon orders from the Company's distributors. The
distributors inform the Company how many books they will require for each
collection and the Company produces the sample books. The Company does not
produce sample books unless a distributor has requested them. The sample books
are sold to distributors and the distributors, in turn, place the sample books
with retail and interior design customers who ultimately sell the Company's
products to consumers. In addition to purchasing the Company's sample books,
each distributor is also required to purchase inventory for each pattern in each
collection.
It takes between 10 to 12 months from the time that the Company
approves designs for a collection
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to the shipping of sample books for that collection. Recently, the Company's
Rosedale subsidiary began producing preview copies of its sample books using its
in house computer aided design ("CAD") system. This allows Rosedale to preview
its collections to distributors and to make changes to its collections based
upon feedback from distributors before the final printing of sample books. This
has resulted in a large cost saving to the Company. Rosedale believes that this
innovation will also allow it to more specifically tailor its collections and
sample books to consumer trends in the markets on a more timely basis.
Canadian Distribution
The Company sells approximately 45% of its wallcoverings and fabrics in
Canada through its Ontario subsidiary. The balance of its sales are through
regional distributors and national chains such as Color Your World and Sears
Canada. Regional distributors include Crown Wallcoverings, the largest
distributor to the Canadian interior design market and Images Wallcoverings.
Images Wallcoverings Ltd. is a distributor located on the west coast of Canada.
United States Distribution
Approximately 53% of the Company's wallcovering sales are made in the
United States. Distribution of the Company's wallcoverings in the United States
is done through sales to national and regional distributors as well as sales to
large retail wallpaper chains. Regional distributors in the United States
include Walltrends, Hunter & Co., Key Wallcoverings, G&W Distributors, Fashion
Wallcoverings, Olney Wallcoverings, Eisenhardt Wallcoverings and Aztec. National
distributors include The Blonder Company, which distributes the Company's
Cambridge Studios brand, and Seabrook Wallcoverings, which distributes the
Company's Hamilton House line of wallcoverings.
The Company also sells directly to retail chains in the United States
which include Wallpapers to Go, Sherwin Williams, Gardener Wallcoverings,
Horners and Tretiaks.
In 1993, Rosedale embarked on the development of a separate
distribution network of wholesalers throughout North America for the purpose of
distributing its decorative fabrics. The Company designer fabrics are sold by
approximately ten independent salespersons who also sell products produced by
other fabric companies. The other fabrics sold by these salespersons generally
do not compete directly with the Company's designer fabrics in either look or
price points. The salespersons are compensated on a commission only basis. The
Company does not have contracts with any of these salespersons.
Wallcovering Market
Over two billion rolls of wallcoverings were sold worldwide in 1994,
with over 161 million rolls sold in Canada and the United States and over 500
million rolls of residential wallcoverings sold in Europe during the same
period. Sales of wallcoverings tend to have a direct relationship to the level
of home renovations and the economy in general, but have a lesser relationship
to new housing starts.
The Company competes primarily within the residential wallcovering
segment of the home decorative industry, which is a sector of the building
supplies industry which caters to the do-it-yourself market. Currently the
wallcovering segment is fragmented, comprised of, many small and medium sized
companies with no single large company dominating the market. Management
believes that several of the companies within this segment may consider
consolidation and may be acquisition targets for the Company in the future,
although there can be no assurances that the Company will be able to identify
such acquisition target and consummate an acquisition on terms that are
acceptable to the Company.
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The Company believes that homes built prior to 1980 account for
approximately 86% of the U.S. housing market. As a result, many of these homes
may warrant renovations. With the bulk of the United States population entering
the post-40 age group, the U.S. Census Bureau estimates that by the year 2000
home ownership will increase to 70% from 66% in 1996. Based upon 1997 economic
data the U.S. Census Bureau predicts that domestic housing will continue to rise
by at least 1 million homes per year through the year 2000.
The trend at the distribution level of the industry has been towards a
market characterized by fewer distributors with higher distribution volumes. The
Company has developed strong relationships with independent regional
distributors. The Company is also well positioned to take advantage of growth in
mass merchandising through its relationship with its national distributors and
large retail chains. In addition, the Company hopes to penetrate alternative
fabric markets such as apparel and soft goods industries.
Patents and Trademarks
The Company trademarks the names of each of its collections and brand
names. In addition, the Company copyrights designs created for its brand
wallcovering and fabrics.
Government Regulation
The Company is subject to various Canadian regulations relating to
health and safety standards applicable warehouse operations. The Company must
comply with Canadian federal regulations administered by the Workman's
Compensation Board, relating to worker safety issues in its warehouse facility.
Although the cost of compliance with such regulations is not material, changes
to existing regulations may have a material adverse effect on the Company's
business and result of operations. The Company is also subject to U.S. Federal
Regulations relating to imports of goods and the North American Free Trade
Agreement on its products that it exports to the United States. Although the
cost of compliance with such regulations is not material, changes to existing
regulations may have a material adverse effect on the Company's business and
result of operations.
Employees
As of December 31, 1998, the Company employed 63 (61 on a full time
basis) persons, which includes 8 senior executives, 18 sales staff persons (15
full time, 2 part time), 9 designers, 17 support staff persons and 13 warehouse
workers. The Company has no unionized employees and believes that its
relationship with its employees is satisfactory.
Item 2. PROPERTIES AND FACILITIES
The Company leases facilities in Concord, Ontario for each of its
subsidiaries. The Company leases an approximately 78,000 square foot facility
for its Ontario subsidiary. The lease was amended July 13, 1995 and expires on
October 31, 2004 with an annual base rent of Cdn. $260,027. The building houses
Ontario's executive offices, warehouse and showroom. The Company leases a 47,000
square foot facility for its Rosedale subsidiary. The lease for the Rosedale
facility runs through October 31, 2004 and has a base annual rent of
Cdn.$176,640. The Rosedale subsidiary houses its design facilities, executive
offices, warehouse and showroom. Management believes that this space is adequate
for its design and warehouse needs in the foreseeable future. Management also
believes that there is ample room for expansion in the future.
The Company also leases space for its retail paint store, located in
downtown Toronto, from a company owned by Alan Fine, Chief Executive Officer of
the Company, and Sid Ackerman, the Company's
<PAGE>
President. The lease calls for rental payments in the amount of Cdn.
$24,000 per annum, plus general sales taxes, payable in equal monthly
instalments of Cdn. $2,000. The lease is for a one year term, automatically
renewable from year to year unless terminated in writing by either the landlord
or the tenant on 30 days written notice.
Item 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings with Revenue Canada. The
Revenue Canada proceeding involves the Company's challenge to a Revenue Canada
decision to disallow a business loss deduction taken by Rosedale for losses it
incurred when attempting to create a startup company in California. Rosedale
started the California company in 1992 to make window blinds as an adjunct to
its wallcovering and fabric business. The California company's growth did not
meet the Company's expectations and subsequently was sold in 1994. Rosedale
claimed losses incurred during the operation of the California business as a
business loss deduction on its 1994 tax return. Revenue Canada allowed the
deduction as a capital loss only. Rosedale has filed a formal notice of
objection to Revenue Canada's classification of the deduction. In the event that
Revenue Canada's decision is upheld, Rosedale would be required to pay $664,000
plus interest to satisfy its tax obligation. The Company believes that it has a
meritorious defense and is working to try to settle the matter. The Company is
not aware of any other material legal proceedings pending or threatened against
the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The high and low bid price of the Company's common stock for each
quarter since its initial public offering which commenced on June 18, 1998,
through the close of its fiscal year on December 31, 1998 are as follows:
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Start Date End Date High Low
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6/19/98 6/31/99 $7.50 $7.00
7/1/98 9/30/98 $8.91 $6.88
10/1/98 12/31/97 $7.00 $4.50
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The Company has not paid dividends to date.
(b) The Company made an initial public offering of its common stock, no
par value ("Common Stock") and common stock purchase warrants ("Warrants") (the
"Common Stock and Warrants are collectively referred to as the "Securities")
pursuant to a registration statement declared effective by the Commission on
June 18, 1998, File No. 333-44747("Registration Statement"). Each Warrant
permits the holder, upon exercise, to receive one share of the Company's common
stock, no par value.
The following are the Company's expenses incurred in connection with the
issuance and distribution
<PAGE>
of the Securities in the offering from the effective date of the Registration
Statement to the ending date of the reporting period of this 10-KSB:
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Expense Amount
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Underwriter's Discounts and Commissions $648,312
Finders Fees 0
Expenses paid to or for the Underwriters 211,611
Other expenses(1) 467,457
Total Expenses $1,326,930
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(1) Estimate
None of the foregoing expenses were paid, directly or indirectly, to
any director or officer of the Company or their associates, to any person who
owns 10 percent or more of any class of equity securities of the Company, or to
any affiliate of the Company.
The net offering proceeds to the Company after deducting for the
foregoing expenses are $5,156,195.
The following are the application of the net proceeds by the Company's
from the sale of the Securities in the offering from the effective date of the
Registration Statement to the ending date of the reporting period of this
10-KSB:
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<CAPTION>
Item Amount
<S> <C>
Working Capital ........................................... $ 238,995
New Product Development ................................... 0
Temporary Investments(1) .................................. 3,306,200
Sales and Marketing ....................................... 0
Hire Additional Personnel ................................. 0
Repayment of Trade Payables ............................... 1,611,000
Total Application of Net Proceeds ......................... $3,799,062
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(1) money market investments
To date, there have been no material changes to the application of the
net proceeds as described in the Company's Registration Statement in the section
"Use of Proceeds."
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
General
The statements contained in this report that are not historical are
forward looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, including statements
<PAGE>
regarding the Company's expectations, intentions, beliefs or strategies
regarding the future. All forward looking statements include the Company's
statements regarding liquidity, anticipated cash needs and availability and
anticipated expense levels. All forward looking statements included in this
report are based on information available to the Company on the date hereof, and
the Company assumes no obligation to update any such forward looking statement.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements.
The wallcoverings, decorative fabrics and paint markets are highly
competitive and consists of foreign and domestic manufacturers and distributors
most of whom are larger and have greater resources than the Company. The
Company's future success as a designer and distributor of high quality
wallcoverings and designer fabrics will be influenced by several factors
including the ability of the Company to efficiently meet the quality and design
requirements of its customers, management's ability to evaluate the public's
quality and design requirements and to achieve market acceptance of its
wallcoverings and designer fabrics collections. Further factors impacting the
Company's operations are increases in expenses associated with continued sales
growth, the ability of the Company to control costs, to develop products with
satisfactory profit margins and the ability to develop and manage the
introduction of new product lines and competition.
Results of Operations
Fiscal year ended December 31, 1998 compared to the fiscal year
December 31, 1997
Revenues for the fiscal year ended December 31, 1998 were $18,970,793,
a 8.6% reduction over prior year revenues of $20,757,423. This decrease was due
to the weakening of the Canadian dollar versus the U.S. dollar. Using a
consistent exchange rate, revenues decreased by 1.66%. This decrease can be
attributed to general weakening in the market, fallout of the Asian flu and the
dramatic devaluation of the Russian Ruble.
Gross Profit for the company for the fiscal year ended December 31,
1998 was 39.8% of sales, an increase as compared to the same period one-year
ago, which was 35.7%. This increase in gross profit margin can be attributed to
a change in sales mix due to a decrease in sales to the export market and the
strengthening of the U.S. dollar, of which 50% of our sales arise. As the
majority of our purchases are made in Canadian dollars, a stronger U.S. dollar
will help our gross margin, whereas a strong U.S. dollar has a negative impact
on the conversion of the financial statements.
Selling expenses for the company decreased by 8.01% to $2,135,594 for
the fiscal year ended December 31, 1998 as compared to $2,321,585 for the fiscal
year ended December 31, 1997. This decrease is attributable to a decrease in
sales travel and commissions, and promotion expense.
General and administrative expenses for the Company decreased by
11.13%, to $2,114,943 for the fiscal year ended December 31, 1998 from
$2,379,749. The Company has successfully attempted to rationalize these expenses
on an across the board basis.
Rosedale develops wallpaper and fabric sample books, which are created
for each collection and sold through distributors. The majority of expenditures
for the creation of sample books are incurred in the quarter before the
introduction of a collection. Some expenditures are incurred as early as six to
eight months in advance. Revenues generated from the sales of sample books are
netted from the costs incurred in the same period and the net amount is shown on
the income statement. Because expenditures are made in the quarter before the
launch of a collection, there is not always a matching of revenues and expenses
e.g. costs for a January launch would be recorded in the following year. The
Company ensures that there are firm
<PAGE>
orders in place from customers before significant expenditures are incurred to
produce the sample books. Therefore, there is little speculative risk in their
production. Book development costs for the fiscal year ended December 31, 1998
was $279,454 compared to $189,566 for the same period last year.
Design studio expenses for the Company decreased by 8.29% to $766,235
for the fiscal year ended December 31, 1998 versus $826,796 for the fiscal year
ended December 31, 1997. This reduction is attributable to lower staff
requirements as a result of the implementation of computer-aided design ("CAD")
design computer systems for the studio.
Operating income for the fiscal year ended December 31, 1998 increased
48.16% to $1,655,037 from $1,117,039 for the fiscal year ended December 31,
1997. This relates to the increase in gross margins and a conscious effort to
control expenses.
Interest expense for the Company for the fiscal year ended December 31,
1998 increased 39.60% to $292,341 from $209,403 for the year ended December 31,
1997. This increase in interest expense is attributable to higher interest rates
and interest accrued on shareholders' loans.
Net income for the fiscal year ended December 31, 1998 increased 31.35%
over the fiscal year ended December 31, 1997. The improvement is attributable to
a better mix of sales, better gross margins and a tighter control of costs.
Earnings per share for the fiscal year ended December 31, 1998 were
$0.71 compared to $0.53 for the fiscal year ended December 31, 1997. Earnings
per share were calculated for both periods based on the weighted average number
of shares issued in each year. The weighted average number of shares for 1998
was 1,478,563 and 1,500,000 for 1997.
The earnings per share on a comparative basis using the number of
common shares outstanding as of December 31, 1998, would be $0.38 in 1998 and
$0.29 in 1997.
Fiscal year ended December 31, 1997 compared to fiscal year ended
January 31, 1996
Revenues for the fiscal year ended December 31, 1997 were $20,757,423,
a 9.67% increase over the prior year's revenues of $18,927,369. This increase
was due to greater acceptance of product lines in the market, increased market
share from the independent retail stores, increase in residential real estate
sales and expansion of the export market coupled with the improving economic
climate in North America.
Gross profit for the Company for the fiscal year ended December 31,
1997 was 35.69% of sales, an improvement as compared to the fiscal year ended
December 31, 1996 which was 35.00%. This positive change can be attributed to
higher prices, more efficient buying practices and a higher mix of sales to the
independents and an increase in sales to independent retail stores.
Selling expenses for the Company decreased by 4.76% in the fiscal year
ended December 31, 1997 as compared to the fiscal year ended December 31, 1996.
This decrease is attributable primarily to a reduction in freight costs and
warehouse wages.
General and administrative expenses for the Company increased by 8.42%
in the fiscal year ended December 31, 1997 as compared to the fiscal year ended
December 31, 1996. In 1996, management payroll was reduced as part of a cost
reduction plan.
<PAGE>
Rosedale develops wallpaper and fabric books which are created for each
collection and sold through distributors. The majority of expenditures for the
creation of these books are incurred in the quarter before the launch of the
collection. Some expenditure is incurred as early as six to eight months in
advance. Revenues generated from the sale of books are netted from the costs
incurred in the same period and the net amount is shown on the income statement.
Because expenditures are made in the quarter before the launch, there is not
always a matching of revenues and expenses e.g. costs for a January launch would
be recorded the last quarter of the fiscal year, whilst the revenue would be
recorded in the following year. The Company ensures that there are firm orders
on hand from customers before significant expenditures are incurred to produce
the books. Therefore, there are no speculative risks in their production. Book
development costs for the fiscal year ended December 31, 1997 was $189,566
compared to a recovery of ($278,079) for the same period last year. This is
attributable to delays in the launching of certain collections during 1997.
Design studio expenses for the Company decreased $72,576 to $826,796
for the fiscal year ended December 31, 1997 versus the same period for the prior
year. This reduction is attributable lower staff requirements as a result of the
implementation of the CAD/CAM design computer system for the studio. Prior to
the implementation of the CAD system, all coloring of new designs and color
changes to existing designs as well as the creation of non sophisticated designs
were done manually. This process required approximately ten designers (four full
time and six free lance). With the CAD system, the whole process will be
computerized requiring only three designers (two full time and one freelance).
Income from operations increased $396,267 to $1,117,029 for the fiscal
year ended December 31, 1997 versus the prior year. This increase in income from
operations is directly a result of continued sales growth and improved margins
coupled with strict cost control. In addition, for fiscal 1997, the Company
revised its estimate of the useful lives for cylinders and related design costs
extending the amortization period to five years from three years on a straight-
line basis.
This change was necessary to more accurately reflect the estimated
useful lives of the cylinders and related design costs. As a result, the current
year's amortization charge was reduced by approximately $480,000.
Interest expense for the Company for the fiscal year ended December 31,
1997 decreased 10.84% to $209,403 from $234,865 for the fiscal year ended
December 31, 1996. This decrease in interest expense is directly attributable to
lower interest rates and the offset of interest earned on the mortgages.
Net income for the fiscal year ended December 31, 1997 was $799,828 as
compared to $423,571 for the fiscal year ended December 31, 1996, an increase of
$376,257 or 88.83%. Of this increase, $174,202, or 46.30%, pertains to a
cumulative effect of a change in accounting principle for book development and
design costs. In 1997, the company changed the accounting principle for
recognition of book development and design costs from a full write-off to a
deferral over three years. The subsidy represents the discount between the costs
of the sample books and the price at which they are sold to major retailers. The
company considers that it is more appropriate to recognize the production of
sample books of wallpaper as an asset, as there is enduring value which should
be recognized over the life of the collection. The balance of the increase in
net income of 53.70% is attributable mainly to the following factors:
o A change in the useful life for cylinders and related design costs from
three years to five years;
o Deferral of expenses relating to book development, and design costs for
launches of collections in the following year;
o Higher prices for product lines;
o Better mix of sales
o Stricter cost control
<PAGE>
Liquidity and Capital Resources
The Company had a positive net change in cash of $2,974,759 for the
fiscal year ended December 31, 1998. The principal sources of cash were Net
Income of $1,050,553, a decrease in Accounts Receivable of $693,551. These items
were offset by cash used to reduce Accounts Payable and increase Inventories.
Cash flows used in investing activities for the fiscal year ended
December 31, 1998 were $1,013,451. This reflected capital addition for
cylinders, designs and engravings for new collections. The company received net
proceeds from it's initial public offering effective June 18, 1998 in the amount
of $5,156,195. The company believes that the proceeds of the offering, coupled
with the income from operations, will fulfill the company's working capital
needs for at least the next eighteen months. It is the company's intention to
utilize a good portion of these funds to develop new product lines of wallpaper
and fabric plus continue the development of floor coverings and ceiling tiles.
Year 2000
The Company's review of its own operating systems does not indicate any
Year 2000 problems. However, the Company is highly dependent on third party
vendors. Failures and interruptions, if any, resulting from the inability of
certain computing systems of third party vendors, including the Company's
clearing broker to recognize the Year 2000 could have material adverse effect on
the Company's results of operations. There can be no assurance that the Year
2000 issue can be resolved by substantial costs, particularly costs resulting
from increased charges by its third party service providers, as a result of such
third party service providers correcting Year 2000 issues, such costs are not
sufficiently certain to estimate at this time. Item 7. FINANCIAL STATEMENTS
The Financial Statements are included with this report commencing on
page F-1.
Item 8. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth certain information concerning the
Directors and Executive Officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Alan Fine 52 Chief Executive Officer and Chairman of the Board
Sidney Ackerman 52 President and Director
Norman G. Maxwell 49 Chief Financial Officer, Operations Manager and
Director
Ken Page 36 Director
Gregory Sichenzia 36 Director
</TABLE>
<PAGE>
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by each of them.
Alan Fine has served as the Chief Executive Officer and Chairman of the
Board of the Company since its inception in May 1997. In 1982, Mr. Fine founded
Rosedale Wallcoverings & Fabrics Inc. and has served as the President of
Rosedale Wallcovering & Fabrics, Inc. since 1987. Mr. Fine has also served as
the Secretary for Ontario Paint & Wallpaper Ltd since 1978. From 1972 to 1977
Mr. Fine was the Manager of Wallpaper Distribution for Ontario Paint & Wallpaper
Ltd.
Sidney Ackerman has served as the President of the Company since its
inception in May 1997. In 1971, Mr. Ackerman was responsible for the development
of Ontario Wallcoverings which became the wallpaper distribution arm of Ontario
Paint & Wallpaper Ltd. In June 1978, Mr. Ackerman was elected Director and
Treasurer of Ontario Paint & Wallpaper Ltd. Since 1994, Mr. Ackerman has served
as the President of Ontario Paint & Wallpaper Ltd.
Norman G. Maxwell has been Chief Financial Officer and Operations Manager
of the Company since its inception in May 1997 and has served as a director of
the Company since May 1997. Prior thereto, since 1992, Mr. Maxwell has served as
the Vice President of Finance with Ontario. From 1989 to 1992, Mr. Maxwell
served as the Comptroller of Ontario. Mr. Maxwell has been in the wallcovering
industry for over 20 years and has been a Certified Management Accountant since
1977.
Ken Page has been a Director of the Company since June 1998. Since 1992 Mr.
Page has been a partner of the law firm of Page Hill in Toronto, Ontario,
Canada. Mr. Page graduated from the University of Western Ontario with an LLB in
1986 and was admitted to the bar in Ontario 1988.
Gregory Sichenzia has been a Director of the Company since August 1998. Mr.
Sichenzia is a partner of the law firm of Sichenzia, Ross & Friedman LLP in New
York, New York and has been since May 1998. He had been a partner of Singer
Zamansky LLP in New York, New York, since November 1996. Prior thereto and since
August 1994, he had been an associate attorney at Schneck Waeltman Hashmall &
Mischel LLP in New York City.
Committees of the Board of Directors
The Board of Directors has a Compensation Committee and an Audit Committee.
The Compensation Committee consists of Gregory Sichenzia, Ken Page and Sid
Ackerman. Mr. Sichenzia and Mr. Page are independent directors who are not
salaried officers of the Company. The purpose of the Compensation Committee is
to review the Company's compensation of its executives, to make determinations
relative thereto and to submit recommendations to the Board of Directors with
respect thereto. The Compensation Committee also selects the persons to whom
options to purchase shares of the Company's Common Stock under the 1998 Stock
Option Plan will be granted and to make various other determinations with
respect to such Plan.
<PAGE>
The Audit Committee consists of Gregory Sichenzia, Ken Page and Alan
Fine. The purpose of the Audit Committee is to provide general oversight of
audit, legal compliance and potential conflict of interest matters.
Compensation of Directors
The Company has not paid compensation to any director for acting in
such capacity. The Company is currently reviewing its policy on compensation of
outside directors and may pay outside directors in the future.
The Company intends to file with the Securities and Exchange Commission
within 120 days of the end of the fiscal year covered by this report an
information statement (the "Information Statement"), pursuant to Regulation 14C
pertaining to the Annual Meeting of Stockholders to be held in May 1999.
Information regarding directors and executive officers of the Company will
appear under the caption "Election of Directors" in the Information Statement
and is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company during fiscal year 1998, the Company is not aware of
any director, officer or beneficial owner of more than ten percent of the
Company's Common Stock that, during fiscal year 1998, failed to file on a timely
basis reports required by Section 16(a) of the Securities Exchange Act of 1934.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company during each of the last three fiscal years to
the Company's Chief Executive Officer and to each of the Company's executive
officers who earned in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Awards Payouts
Securities All
Restricted Underlying Other
Other Stock Options/ LTIP Compen-
Compen- Award(s) SARs Payouts sation
Position Year (1) Salary sation Bonus ($) (#)(1)(2) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alan Fine(1) Chief 1998 $ 160,000 ---- $7,602 ---- ---- ---- ----
Executive 1997 $ 173,360 $7,020 ---- ---- ---- ---- ----
Officer 1996 $ 41,068 $8,582 $121,003 ---- ---- ---- ----
Sidney President 1998 $ 160,000 --- $8,995 ---- ---- ---- ----
Ackerman(1) 1997 $ 173,360 $9,595 --- ---- ---- ---- ----
1996 $ 41,068 $8,621 $121,003 ---- ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Reflects total compensation received from both the Company's Ontario and
Rosedale subsidiaries.
STOCK OPTIONS GRANTS AND EXERCISES
No stock options were granted to the named executive officers during
the last completed fiscal year.
<PAGE>
The following table shows the value at December 31, 1998 of
unexercised options held by the named executive officers:
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of securities Value of unexercised in-the-
underlying unexercised money options at fiscal year-
options at fiscal year-end end ($)
(#)
Name Shares acquired on Value Realized
exercise (#) ($) Exercisable/unexercisable Exercisable/unexercisable
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alan Fine, Chief 0 0 0/0 0/0
Executive Officer
Sidney Ackerman, 0 0 0/0 0/0
President
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Employment Agreements
On the Effective Date of the Company's Registration Statement, Alan
Fine and Sidney Ackerman both entered into five year employment agreements with
the Company. Alan Fine is retained as Chief Executive Officer of the Company at
an annual salary of $160,000. Sidney Ackerman is retained as President of the
Company at an annual salary of $160,000.
The employment agreements with Alan Fine and Sidney Ackerman provide
that upon the death of any of the two employees that three years full salary
will be paid to the employee's estate in a lump sum payment. The agreements also
provide for reimbursement of reasonable business expenses.
Alan Fine and Sidney Ackerman are entitled to bonuses of up to $10,000
each based on achieving sales, profitability and management goals as
predetermined by the Board of Directors or compensation committee and other
subjective criteria as determined by the Board of Directors or Compensation
Committee.
Alan Fine and Sidney Ackerman shall each receive $20,000 per year
additional compensation, including car allowance, insurance and retirement
savings with matched contributions by the Company and such other perquisites.
Upon the resignation, or exercise of retirement option upon reaching
the age of 60, the Company shall pay the employee a lump sum resignation
allowance equal to three years salary plus equivalent in benefits. Based upon
any wrongful termination of either Alan Fine or Sidney Ackerman, the Company
shall pay the employee a lump sum resignation allowance of 5 years salary and
equivalent in benefits.
In the event that there is a change in control of the Company, through
an acquisition where any person acquires more than 50% of the shares of the
Company, an amalgamation, consolidation or merger with another corporation
resulting in at least 50% of the voting shares of the surviving corporation
being controlled by a new acquirer or the sale directly or otherwise of all of
the assets of the Company to a third party in a non-distress situation, then the
Company shall pay to Alan Fine and Sidney Ackerman a lump sum payment equal to
the sum of one and one-half times their respective annual salaries paid or
payable in respect of the most recently completed fiscal year.
Stock Option Plan
The Company has adopted a Stock Option Plan (the "1998 Plan"), pursuant
to which 750,000 shares of Common Stock are reserved for issuance.
<PAGE>
The 1998 Plan is administered by the Compensation Committee or the
board of directors, who determine, among other things, those individuals who
shall receive options, the time period during which the options may be partially
or fully exercised, the number of shares of Common Stock issuable upon the
exercise of the options and the option exercise price.
The 1998 Plan is for a period for ten years. Options may be granted to
officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to the Company. Options granted under the
1998 Plan may be exercisable for up to ten years, may require vesting, and shall
be at an exercise price all as determined by the board. Options will be
non-transferable except to an option holder's personal holding company or
registered retirement savings plan and are exercisable only by the participant
during his or her lifetime.
If a participant ceases affiliation with the Company by reason of
death, permanent disability or retirement at or after age 70, the option remains
exercisable for three months from such occurrence but not beyond the option's
expiration date. Other termination gives the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1998 Plan, at the discretion of the
compensation committee or the board, may be exercised either with cash, Common
Stock having a fair market equal to the cash exercise price, the participant's
personal recourse note, or with an assignment to the Company of sufficient
proceeds from the sale of the Common Stock acquired upon exercise of the Options
with an authorization to the broker or selling agent to pay that amount to the
Company, or any combination of the above.
The exercise price of an option may not be less than the fair market
value per share of Common Stock on the date that the option is granted in order
to receive certain tax benefits under the Income Tax Act of Canada (the "ITA").
The exercise price of all future options will be at least 85% of the fair market
value of the Common Stock on the date of grant of the options. A benefit equal
to the amount by which the fair market value of the shares at the time the
employee acquires them exceeds the total of the amount paid for the shares or
the amount paid for the right to acquire the shares shall be deemed to be
received by the employee in the year the shares are acquired pursuant to
paragraph 7(1) of the ITA. Where the exercise price of the option is equal to
the fair market value of the shares at the time the option is granted, paragraph
110(1)(d) of the ITA allows a deduction from income equal to one quarter of the
benefit as calculated above. If the exercise price of the option is less than
the fair market value at the time it is granted, no deduction under paragraph
110(1)(d) is permitted. Options granted to any non-employees, whether directors
or consultants or otherwise will confer a tax benefit in contemplation of the
person becoming a shareholder pursuant to subsection 15(1) of the ITA.
Options under the 1998 Plan must be issued within ten years from the
effective date of the 1998 Plan.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become available again for
issuance under the 1998 Plan.
The 1998 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1998 Plan may not be
increased without the consent of the shareholders of the Company.
Information regarding executive compensation will appear under the
caption "Executive Compensation" in the Information Statement and is
incorporated herein by reference.
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth certain information, as of the date
hereof, and as adjusted to give effect to the sale of 1,265,000 shares of Common
Stock and 1,265,000 Warrants, by the Company with respect to the beneficial
ownership of the Common Stock by each beneficial owner of more than 5% of the
outstanding shares thereof, by each director, each nominee to become a director
and each executive named in the Summary Compensation Table and by all executive
officers, directors and nominees to become directors of the Company as a group.
<TABLE>
<CAPTION>
Shares of
Common Approximate
Stock Percentage of
Beneficially Common Stock
Name Owned Outstanding
<S> <C> <C> <C>
Sidney Ackerman(2) ................................. 375,000 14.4%
Alan Fine(3) ....................................... 562,500 21.6%
Rosalyn Fine(4) .................................... 187,500 7.2%
The Ackerman Family Trust(5) ....................... 375,000 14.4%
All Executive Officers and Directors
as a Group (two persons) ........................... 937,500 36.1%
</TABLE>
(1) Unless otherwise indicated, the address is c/o Rosedale Decorative
Products Ltd., 731 Millway Avenue, Concord, Ontario, Canada L4K 3S8.
(2) Does not include 375,000 shares of Common Stock held by the Ackerman
Family Trust. Includes 106,500 shares of Common Stock owned by 1274152 Ontario
Inc. of which Sidney Ackerman is a 25% owner.
(3) Includes 268,500 shares of Common Stock owned by 454590 Ontario Limited
of which Alan Fine and the Fine Family Trust are shareholders and includes
159,750 shares of Common Stock owned by 1274152 Ontario Inc. of which Alan Fine
is a 12.5% owner.
(4) Includes 53,250 shares of Common Stock owned by 1274152 Ontario, Inc.
of which Rosalyn Fine is a 12.5% owner. Rosalyn Fine is the former wife of Alan
Fine and the sister of Sidney Ackerman.
(5) The Ackerman Family Trust owns 375,000 shares of Common Stock,
including 106,500 shares of Common Stock owned by 1274152 Ontario, Inc. of which
The Ackerman Family Trust is a 25% owner, held in trust for the benefit of
Sidney Ackerman's wife and two minor children. Sheldon Shapiro and Fred Stoppell
are trustees of The Ackerman Family Trust. Under the terms of the trust
instrument, the trustees have the power to vote the shares.
Voting Agreement
Effective March 31, 1998, Sidney Ackerman, Alan Fine, The Ackerman
Family Trust, 1274152 Ontario Inc. and 454590 Ontario Limited (the
"Shareholders"), entered into a Common Stock voting agreement. Pursuant to the
terms of the voting agreement, each of the Shareholders agrees to vote all of
their Shares unanimously in respect of any matter to be voted on at any meeting
of the shareholders of the Company. In the event the Shareholders cannot express
unanimity or any of them abstains from voting then the Shareholders agree to
vote all of their Shares against such matter or withhold all of their votes in
respect of such matter as applicable and to so instruct their proxies. The
provisions of the voting agreement shall apply to any shares in the capital
stock of the Company to which voting rights attach which may be issued
<PAGE>
to the Shareholders at any time during the term of the voting agreement and any
shares in the capital stock of the Company which are issued in replacement of
any shares or after acquired shares. The voting agreement does not apply to any
shares that are sold or transferred to a Shareholder and does not apply to any
shares that are sold or transferred to a third party in an arm's-length
transaction. The voting agreement terminates upon Sidney Ackerman or Alan Fine
being no longer employed by the Company or any of its subsidiaries or the date
upon which any Shareholder divests itself of all shares in an arm's-length
transaction for fair market consideration, whichever is earlier.
Information regarding ownership of certain beneficial owners and
management will appear under the caption "Ownership of Securities" in the
Information Statement and is incorporated herein by reference.
Item 12. CERTAIN TRANSACTIONS
In 1995, Alan Fine, Chief Executive Officer of the Company and Sidney
Ackerman, President of the Company each loaned funds to the Company's Ontario
and Rosedale subsidiaries. As at December 31, 1998, the outstanding amounts of
loans made by Alan Fine to Ontario and Rosedale were $234,841 and $460,108,
respectively, and the outstanding amount of the loans made by Sidney Ackerman to
Ontario and Rosedale were $164,229 and $315,809, respectively. These loans are
secured by a general security agreement on the personal property of Rosedale and
Ontario and bear interest at a rate equal to the prime rate of interest charged
by the National Bank of Canada plus 1.5% per annum and are payable on demand.
Alan Fine, Chief Executive Officer of the Company, and Sidney Ackerman,
President of the Company, own all of the issued and outstanding capital stock of
966578 Ontario Inc. and 976168 Ontario Inc. The Company leases space for its
retail store, located in downtown Toronto, from 966578 Ontario Inc. The lease
calls for rental payments in the amount of $16,100 per annum, plus general sales
taxes, payable in equal monthly instalments of $1,342. The lease is for a one
year term, automatically renewable from year to year unless terminated in
writing by either the landlord or the tenant on 30 days written notice.
In 1995, two related companies, 966578 Ontario Inc. and 976168 Ontario
Inc. were loaned funds by the Company. As of December 31, 1997, the Company had
outstanding loan receivables from 976168 Ontario Inc. in the amount of $1,933.
The loans bear interest at a rate equal to the prime rate of interest as charged
by the National Bank of Canada plus 1.5% and are payable on demand.
The Company has second mortgages from two related companies, 1216748
Ontario Inc. and 1217576 Ontario Inc., both of which are 50% owned by Sidney
Ackerman, President and Alan Fine, Chief Executive Officer. The principal amount
of the loans from 1216748 Ontario Inc. and 1217576 Ontario Inc. are $168,768 and
$153,073, respectively. The mortgages are secured by land and buildings and bear
interest at 9% per annum and are payable on demand.
The Company has available credit facilities up to a maximum of
$6,635,000 which bear interest at rates varying between the bank's prime rate
and prime plus .25%. The credit facilities are secured by general assignments of
book debts, pledge of inventory under Section 427 of the Bank Act of Canada,
general security agreements providing a first floating charge over all assets,
guarantees and postponement of claims to a maximum of $1,630,000 from the
Company and its subsidiaries, guarantees from affiliated companies up to
$555,000, assignment of life insurance of $1,304,000 on the lives of two key
officers and assignment of fire insurance.
Information regarding Certain Transaction will appear under the caption
"Certain Transaction" in the Information Statement and is incorporated herein by
reference.
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Registrant(1)
3.2 By-laws of Registrant(1)
4.1 Form of Underwriters' Warrant(3)
4.2 Form of Warrant Agreement(1)
4.3 Specimen Common Stock Certificate(3)
4.4 Specimen Redeemable Common Stock Purchase
Warrant Certificate(4)
10.2 1998 Stock Option Plan(3)
10.4 Form of Employment Agreement with Sidney Ackerman(3)
10.5 Form of Employment Agreement with Alan Fine(3)
21 List of Subsidiaries of Registrant*
27 Financial Data Schedule*
----------------
* Filed herewith
Incorporated by reference from registrant's Registration Statement on
Form SB-2, filed on January 22, 1998.
Incorporated by reference from registrant's Registration Statement on
Form SB-2, Amendment No. 1, filed on April 23, 1998.
Incorporated by reference from registrant's Registration Statement on
Form SB-2, Amendment No. 2, filed on May 28, 1998.
Incorporated by reference from registrant's Registration Statement on
Form SB-2, Amendment No. 3, filed on June 11, 1998.
(b) Reports on Form 8-K.
None.
<PAGE>
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.
Rosedale Decorative Products LTD.
By: /s/Alan Fine
Alan Fine, Chairman and Chief
Executive Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Position Date
<S> <C> <C>
/s/ ALAN FINE Chairman, Chief Executive Officer March 31, 1999
Alan Fine
/s/ SIDNEY ACKERMAN President Director March 31, 1998
Sidney Ackerman
/s/ NORMAN G. MAXWELL Director, Chief Financial Officer, March 31, 1999
Norman G. Maxwell Principal Accounting Officer
/s/ Ken PAGE Director March 31, 1998
Ken Page
/s/ GREGORY SICHENZIA Director March 31, 1998
Gregory Sichenzia
</TABLE>
ROSEDALE DECORATIVE PRODUCTS LTD.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Report of Independent Auditors
<S> <C>
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 .. 2 - 3
Consolidated Statement of Income for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996 ................................ 4
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996 ................................ 5 - 6
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996 ....... 7
Notes to Consolidated Financial Statements ................................. 8- 22
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Rosedale Decorative Products Ltd.
We have audited the accompanying consolidated balance sheets of Rosedale
Decorative Products Ltd. (incorporated in Canada) as of December 31, 1998 and
1997 and the related consolidated statements of income, cash flows and changes
in stockholders' equity for the years ended December 31, 1998, 1997 and 1996.
These consolidated financial statements are the responsibility of the management
of Rosedale Decorative Products Ltd. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rosedale
Decorative Products Inc. as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996, in conformity with generally accepted accounting principles in the United
States of America.
Toronto, Ontario
March 1, 1999 Chartered Accountants
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Balance Sheets
As of December 31, 1998 and December 31, 1997
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1998 1997
$ $
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash .......................................... 3,417,414 442,655
Accounts receivable (note 3) .................. 3,696,050 4,683,912
Inventory (note 4) ............................ 7,229,444 7,154,928
Prepaid expenses and sundry assets ............ 288,764 180,097
Income taxes recoverable ...................... 38,738 --
14,670,410 12,461,592
LOANS RECEIVABLE FROM AFFILIATED COMPANIES (note 5) 1,933 36,884
DEFERRED PRODUCT COSTS (note 6) ................... 851,202 641,028
DEFERRED POLICY COSTS (note 7) .................... 268,506 182,873
MORTGAGES RECEIVABLE (note 8) ..................... 321,841 402,684
PROPERTY, PLANT AND EQUIPMENT (note 9) ............ 2,160,433 1,930,869
18,274,325 15,655,930
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Balance Sheets
As of December 31, 1998 and December 31, 1997
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1998 1997
$ $
LIABILITIES
CURRENT LIABILITIES
<S> <C> <C> <C>
Bank indebtedness (note 10) ................................. 3,327,022 3,970,943
Accounts payable and accrued expenses (note 11) ............. 4,581,034 6,741,431
Income taxes payable ........................................ -- 172,538
Current portion of long-term debt (note 12) ................. 77,076 82,616
7,985,132 10,967,528
LONG-TERM DEBT (note 12) ........................................ 950,956 996,981
DUE TO STOCKHOLDERS AND DIRECTORS (note 13) ..................... 1,174,987 1,539,792
DEFERRED INCOME TAXES ........................................... 156,786 190,562
10,267,861 13,694,863
STOCKHOLDERS' EQUITY
COMMON STOCK (note 14) .......................................... 5,013,883 2
ADDITIONAL PAID-IN CAPITAL (note 14) ............................ 142,314 --
CUMULATIVE TRANSLATION ADJUSTMENTS .............................. (388,341) (226,990)
RETAINED EARNINGS ............................................... 3,238,608 2,188,055
8,006,464 1,961,067
---------- ------------
18,274,325 15,655,930
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Income
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
<S> <C> <C> <C>
SALES ....................................... 18,970,792 20,757,423 18,927,369
COST OF SALES ............................... 11,420,943 13,350,033 12,301,621
GROSS PROFIT ................................ 7,549,849 7,407,390 6,625,748
OPERATING EXPENSES
General and administrative .............. 2,114,943 2,379,749 2,194,964
Selling ................................. 2,135,594 2,321,585 2,437,576
Design studio ........................... 766,235 826,796 899,372
Book development costs .................. 279,454 189,566 (278,079)
Amortization ............................ 598,586 572,655 651,143
TOTAL OPERATING EXPENSES .................... 5,894,812 6,290,351 5,904,976
OPERATING INCOME ............................ 1,655,037 1,117,039 720,772
Interest expense ........................ 292,341 209,403 234,865
INCOME BEFORE INCOME TAXES .................. 1,362,696 907,636 485,907
Income taxes (note 15) .................. 312,143 282,010 62,336
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE .......... 1,050,553 625,626 423,571
Cumulative effect of change in accounting
Principle (note 1c) ..................... -- 174,202 --
NET INCOME .................................. 1,050,553 799,828 423,571
Net income per common share (note 14) ....... 0.71 0.53 0.28
Weighted average number of common shares
outstanding (note 14) ................... 1,478,563 1,500,000 1,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Cash Flows for the
years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
Cash flows from operating activities:
<S> <C> <C> <C>
Net income .......................................................... 1,050,553 799,828 423,571
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Amortization ........................................................ 598,586 572,655 651,143
Increase in deferred product costs .................................. (260,562) (658,762) --
(Increase) decrease in accounts receivable .......................... 693,551 (964,145) (487,558)
(Increase) decrease in inventory .................................... (570,438) (1,222,626) 676,507
Increase in prepaid expenses and sundry assets ...................... (124,276) (51,588) (51,405)
Increase (decrease) in accounts payable and
accrued expenses ................................................ (1,758,420) 1,549,646 (1,299,429)
Increase (decrease) in income taxes payable/
recoverable ..................................................... (205,553) (20,144) 30,642
Increase (decrease) in deferred income taxes ........................ (21,615) 168,015 29,335
Total adjustments ................................................... (1,648,727) (626,949) (450,765)
Net cash provided by /(used in) operating
activities ...................................................... (598,174) 172,879 (27,194)
Cash flows from investing activities:
Increase in deferred policy costs ................................... (100,759) (63,854) (25,227)
Purchases of property, plant and equipment .......................... (968,113) (945,933) (871,703)
(Increase) decrease in mortgages receivable ......................... 55,421 (415,044) --
Net cash used in investing activities ............................... (1,013,451) (1,424,831) (896,930)
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Cash Flows for the
years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
Cash flows from financing activities:
<S> <C> <C> <C>
Issuance of common stock ......................... 5,156,195 -- --
Proceeds from (repayment of) bank indebtedness ... (388,743) 540,267 410,106
(Repayment of) proceeds from loans with affiliated
companies .................................... 33,429 25,789 (37,034)
Proceeds from long-term debt ..................... 21,426 134,616 510,414
Proceeds from (repayment of) stockholders &
directors loans .............................. (269,222) 132,861 510,298
Net cash provided by financing activities ........ 4,553,085 833,533 1,393,784
Effect of foreign currency exchange rate changes ...... 33,299 (218,749) (5,363)
Net increase (decrease) in cash and cash equivalents . 2,974,759 (637,168) 464,297
Cash and cash equivalents, beginning of year .......... 442,655 1,079,823 615,526
Cash and cash equivalents, end of year ................ 3,417,414 442,655 1,079,823
Income taxes paid ..................................... 238,575 135,302 59,553
Interest paid ......................................... 330,384 299,421 358,756
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
Common
Stock Cumulative
Number of Retained Translation
Shares Amount Earnings Adjustments
$ $ $ $
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 1,500,000 2 1,388,227 (149,337)
Foreign currency translation .. -- -- -- (77,653)
Net income for the year .... -- -- 799,828 --
Balance as of December 31, 1997 1,500,000 2 2,188,055 (226,990)
Issuance of common stock ...... 1,265,000 5,165,195 -- --
Foreign currency translation .. -- -- -- (161,351)
Net income for the year ..... -- -- 1,050,553 --
Balance as of December 31, 1998 2,765,000 5,156,197 3,238,608 (388,341)
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The consolidated financial statements include the accounts of Rosedale
Decorative Products Ltd. ("the Company") and its wholly owned subsidiaries,
521305 Ontario Inc. ("521305") and 1010037 Ontario Inc. ("1010037"), the parent
companies of the operating subsidiaries Ontario Paint and Wallpaper Limited
("Ontario") and Rosedale Wallcoverings and Fabrics Inc. ('Rosedale).
On June 15, 1998, the company acquired all the issued and outstanding
common shares of 521305 and 1010037 from their shareholders in exchange for
1,500,000 shares of the company. Since these companies were under common control
by a related group, this transaction has been recorded using the pooling of
interest method whereby the assets, liabilities and operations have been
combined as if the Company had owned the wholly-owned subsidiaries since
incorporation. The company was incorporated on May 14, 1997 by its shareholders
for the purpose of consolidating their 100% ownership interests in anticipation
of an initial public offering.
All material inter-company accounts and transactions have been eliminated.
b) Principal Activities
The company, which was incorporated in Canada on May 14, 1997 is
principally engaged in the designing, manufacturing and marketing of wallpapers
and decorative fabrics in Canada, U.S. and Europe through its operating
subsidiaries Ontario Paint and Wallpaper Limited and Rosedale Wallcoverings and
Fabrics Inc. These subsidiaries were incorporated in Canada on December 31, 1971
and April 7, 1981 respectively.
c) Deferred Product costs
Expenditures relating to the design and distribution of wallpaper and
fabric sample books consisting of book development and design costs relating to
collections that have not been launched are deferred and amortized over a
three-year period on a straight-line basis. Proceeds from the sale of sample
books are offset against the book development costs when received.
The deferral of a portion of book development and design costs in 1997
represented a change in accounting principle from a full write-off to a deferral
over three years.
d) Cash and Cash Equivalents (Bank Indebtedness)
Cash and cash equivalents (bank indebtedness) includes cash on hand,
amounts due from and to banks, and any other highly liquid investments purchased
with a maturity of three months or less. The carrying amounts approximate fair
values because of the short maturity of those instruments.
e) Other Financial Instruments
The carrying amount of the companies' accounts receivable and payable
approximates fair value because of the short maturity of these instruments.
8
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
f) Long-term Financial Instruments
The fair value of each of the companies' long-term financial assets and
debt instruments is based on the amount of future cash flows associated with
each instrument discounted using an estimate of what the companies' current
borrowing rate for similar instruments of comparable maturity would be.
g) Inventory
Inventory is valued at the lower of cost and fair market value. Cost is
determined on the first-in, first-out basis.
h) Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are amortized on the
basis of their estimated useful lives at the undernoted rates and methods:
<TABLE>
<CAPTION>
<S> <C> <C>
Leasehold improvements 10% Straight-line
Cylinders and related design costs 5 years Straight-line
Equipment furniture and fixtures 20% Declining balance
Computer equipment 30% and 20% Declining balance
Automobile 30% Declining balance
</TABLE>
Amortization for assets acquired during the year is recorded at one-half of
the indicated rates, which approximates when they were put into use.
i) Income taxes
The company account for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, which requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Deferred
income taxes are provided using the liability method. Under the liability
method, deferred income taxes are recognized for all significant temporary
differences between the tax and financial statement bases of assets and
liabilities.
j) Foreign Currency Translation
The company maintain its books and records in Canadian dollars. Foreign
currency transactions are translated using the temporal method. Under this
method, all monetary items are translated into Canadian funds at the rate of
exchange prevailing at balance sheet date. Non-monetary items are translated at
historical rates. Income and expenses are translated at the rate in effect on
the transaction dates. Transaction gains and losses are included in the
determination of earnings for the year.
9
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
j) Foreign Currency Translation (cont'd)
The translation of the financial statements from Canadian dollars ("CDN $")
into United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in effect at
the balance sheet date and income and expense accounts are translated using an
average exchange rate prevailing during each reporting period. No representation
is made that the Canadian dollar amounts could have been, or could be, converted
into United Sates dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation are included in
the cumulative translation adjustments in stockholders' equity.
k) Sales
Sales represent the invoiced value of goods supplied to customers. Sales
are recognized upon the passage of title to the customers.
l) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
m) Accounting Changes
On January 1, 1996, the company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 requires that long-lived assets to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the company's result of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduced the use of a fair value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. However, SFAS No. 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995. The companies
have adopted the disclosure provisions of SFAS No. 123.
10
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
2. COMPREHENSIVE INCOME
The company has adopted Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" as of December 1, 1998 which requires new
standards for reporting and display of comprehensive income and its components
in the financial statements. However, it does not affect net income or total
stockholders' equity. The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
<S> <C> <C> <C>
NET INCOME ........................... 1,050,553 799,828 423,571
OTHER COMPREHENSIVE LOSS
Foreign currency translation .... (161,351) (77,653) (49,710)
COMPREHENSIVE INCOME ................. 889,202 722,175 373,861
</TABLE>
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Accounts receivable 3,842,820 4,788,725
Less: Allowance for doubtful accounts 146,770 104,813
Accounts receivable, net 3,696,050 4,683,912
</TABLE>
4. INVENTORY
<TABLE>
<CAPTION>
1998 1997
$ $
Inventory comprised the following:
<S> <C> <C>
Raw materials 185,956 41,678
Finished goods 7,043,488 7,113,250
7,229,444 7,154,928
</TABLE>
11
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
5. LOANS RECEIVABLE FROM AFFILIATED COMPANIES
The loans receivable from affiliated companies which are related through
common ownership bear interest at prime plus 1.5%, have no specific repayment
terms, and are not expected to be repaid prior to January 1, 2000.
6. DEFERRED PRODUCT COSTS
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Book development costs 1,285,831 848,996
Deferred software costs 58,338 62,915
Cost 1,344,169 911,911
Less: Accumulated amortization
Book development costs 467,454 258,299
Deferred software costs 25,513 12,584
492,967 270,883
Net Deferred Product Costs 851,202 641,028
</TABLE>
7. DEFERRED POLICY COSTS
Deferred policy costs represents the prepaid portion of charges on the life
insurance policies referred to in note 21.
8. MORTGAGES RECEIVABLE
Second mortgages from companies related through common ownership, secured
by land and buildings, bear interest at 9% and are payable on demand. No
repayments are expected prior to January 1, 2000.
1998 1997
$ $
1216748 Ontario Inc. 168,768 209,073
1217576 Ontario Inc. 153,073 193,611
321,841 402,684
The fair value of the mortgages receivable is estimated to be $360,000.
12
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
9. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Leasehold improvements 29,230 31,331
Automobile 18,711 20,057
Equipment and furniture 283,502 255,335
Furniture and fixtures 240,517 301,585
Computer and equipment 348,874 335,796
Cylinders and related design costs 3,716,883 3,057,727
Cost 4,637,717 4,001,831
Less: Accumulated amortization
Leasehold improvements 12,671 10,448
Automobile 16,380 16,485
Equipment and furniture 203,399 184,572
Furniture and fixtures 185,861 196,837
Computer and equipment 245,381 228,903
Cylinders and related design costs 1,813,592 1,433,717
2,477,284 2,070,962
Net 2,160,433 1,930,869
</TABLE>
10. BANK INDEBTEDNESS
The company has available credit facilities up to a maximum of $6,635,000
($10,160,000 Canadian), which bear interest at rates varying between the bank's
prime rate and prime plus .25%. The indebtedness is secured by general
assignments of book debts, pledge of inventory under Section 427 of the Bank Act
of Canada, general security agreements providing a first floating charge over
all assets, guarantees and postponement of claims to a maximum of $1,630,000
from the company, guarantees from affiliated companies up to $555,000,
assignment of life insurance of $1,304,000 on the lives of two key officers/
shareholders and assignment of fire insurance.
13
1
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
<TABLE>
<CAPTION>
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
1998 1997
$ $
Accounts payable and accrued expenses is comprised of the following:
<S> <C> <C>
Trade payables 4,230,024 6,358,585
Accrued expenses 351,010 382,846
4,581,034 6,741,431
12. LONG-TERM DEBT
1998 1997
$ $
a) Settlement Payable
Settlement of a claim initiated by a third party payable $7,242
monthly. The fair value of the settlement payable is
estimated to be $74,000 77,076 165,231
b) Insurance Loan
Amount in excess of cash surrender values of life insurance
policies (note 21) which is payable on demand but is
expected to become due for payment in the year 2004. The
loan bears interest at prime plus 1.5% and is secured by
letters of guarantee from a major Canadian Chartered Bank
and a second collateral mortgage on the assets of the
company 950,956 914,366
1,028,032 1,079,597
Less: Current portion (77,076) (82,616)
Long-term portion 950,956 996,981
</TABLE>
13. DUE TO STOCKHOLDERS AND DIRECTORS
Stockholders' and directors advances are secured by general security
agreements, bears interest at the National Bank of Canada prime lending rate
plus 1.5%, are without specific terms of repayment, and are not expected to be
repaid prior to January 1, 2000.
14
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
14. COMMON STOCK
a) Authorized
An unlimited number of common and preference shares
The preference shares are issuable in series upon approval by
the directors with the appropriate designation, rights, privileges and
conditions attaching to each share of such series.
<TABLE>
<CAPTION>
Issued
<S> <C> <C>
1998 1997
$ $
2,765,000 Common shares (1997 - 1,500,000) 5,013,883 2
1,265,000 Warrants 142,314 -
5,156,197 2
</TABLE>
b) During the year, the company issued 1,265,000 common shares and
1,265,000 warrants as follows:
<TABLE>
<CAPTION>
<S> <C>
Proceeds received from issuance $6,483,125
Issuance costs (net of income taxes) (1,326,930)
Net proceeds $ 5,156,195
</TABLE>
Net proceeds include the deferred income tax recoveries.
c) Weighted Average Number of Common Shares
On June 15, 1998, the company issued 1,500,000 to the shareholders of
521305 and 1010037 prior to the initial public offering.
On June 18, 1998, the company issued 1,100,000 common shares to the public.
On July 29, 1998, the Company issued 165,000 common shares to the public.
The weighted average number of shares was based on the number of days the
shares were outstanding during the year. For the purpose of determining the net
income per common share for 1997 and 1996, the number of shares were determined
on a pro-forma basis assuming that 1,500,000 shares were issued throughout those
years (see note 1a)
d) The company has adopted a Stock Option Plan (the 1998 Plan),
pursuant to which 750,000 shares of Common Stock are reserved for issuance.
15
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
14. COMMON STOCK (cont'd)
The 1998 Plan is for a period for ten years. Options may be granted to
officers, directors, consultants, key employees, advisors and similar parties
who provide their skills and expertise to the Company. Options granted under the
1998 Plan may be exercisable for up to ten years, may require vesting, and shall
be at an exercise price all as determined by the board. Options will be
non-transferable except to an option holders personal holding company or
registered retirement savings plan and are exercisable only by the participant
during his or her lifetime.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for three months from such occurrence but not beyond the options
expiration date. Other termination give the participant three months to
exercise, except for termination for cause which results in immediate
termination of the option.
Options granted under the 1998 Plan, at the directors of the compensation
committee or the board, may be exercised either with cash, Common Stock having a
fair market equal to the cash exercise price, the participants personal recourse
note, or with an assignment to the Company of sufficient proceeds from the sale
of the Common Stock acquired upon exercise of the Options with an authorisation
to the broker or selling agent to pay that amount to the Company, or any
combination of the above.
Options under the 1998 Plan must be issued within ten years from the
effective date of the 1998 Plan.
Any unexercised options that expire or that terminate upon an employees
ceasing to be employed by the Company become available again for issuance under
the 1998 Plan.
The 1998 Plan may be terminated or amended at any time by the board of
directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the 1998 Plan may not be
increased without the consent of the stockholders of the Company. During the
year, no options were granted.
e) Purchase Warrants
During the year, Purchase Warrants ("Warrants") were issued pursuant to a
Warrant Agreement between the company and J.P. Turner and Company. Each Warrant
entitles its holders to purchase, during the four year period commencing on June
18, 1999, one share of common stock at an exercise price of $6.00 per share,
subject to adjustment in accordance with the anti-dilution and other provision
referred to below.
The Warrants may be redeemed by the company at any time commencing one year
from June 18, 1998 (or earlier with the consent of the representative) and prior
to their expiration, at a redemption price of $0.10 per Warrant, on not less
than 30 days' prior written notice to the holders of such Warrants, provided
that the closing bid price of the common stock if traded on the Nasdaq SmallCap
Market, or the last sale price of the common stock, if listed on the Nasdaq
National Market or on a national exchange, is at least 150% ($9.00 per share,
subject to adjustment) of the exercise price of the Warrants for a period of 10
consecutive business days ending on the third day prior to the date the notice
of redemption is given. Holders of Warrants shall have exercise rights until the
close of the business day preceding the date fixed for redemption.
16
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
14. COMMON STOCK (cont'd)
e) Purchase Warrants (cont'd)
The exercise price and the number of shares of common stock purchasable
upon the exercise of the Warrants are subject to adjustment upon the occurrence
of certain events, including stock dividends, stock splits, combinations or
classification of the common stock. The warrants do not confer upon holders any
voting or any other rights of shareholders of the company.
No Warrant will be exercisable unless at the time of exercise the company
has filed with the Commission a current prospectus covering the issuance of
common stock issuable upon the exercise of the Warrant and the issuance of
shares has been registered or qualified or is deemed to be exempt from
registration or qualification under the securities laws of the state of
residence of the holder of the Warrant. The company has undertaken to use its
best efforts to maintain a current prospectus relating to the issuance of shares
of common stock upon the exercise of the Warrants until the expiration of the
Warrants, subject to the terms of the Warrant Agreement. While it is the
company's intention to maintain a current prospectus, there is no assurance that
it will be able to do so.
15. INCOME TAXES
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
a) Current - 113,995
Deferred 312,143 168,015
312,143 282,010
b) Current income taxes consists of:
Amounts calculated at basic Canadian Federal and Provincial
Rates 545,076 371,806
Increase (decrease) resulting from:
Timing differences (312,143) (168,015)
Adjustments to prior year taxes - 40,497
Non-deductible expenses 81,896 90,400
Losses utilized (314,829) (220,693)
- 113,995
</TABLE>
17
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
15. INCOME TAXES (cont'd)
c) Deferred income taxes represent the tax charges derived from temporary
differences between amortization of property, plant and equipment and amounts
deducted from taxable income. As a consequence of the issuance of common stock
during the year, issuance costs were incurred which are deductible for tax
purposes for a period up to five years. The resulting deferred income taxes
recoverable at December 31, 1998 has been applied to the issue expenses (note
14).
d) Rosedale has operating losses of approximately $534,000 which is
expected to he used to reduce future taxable income. The potential tax benefit
relating to the losses have been recognized in the accounts to the extent that
they reduce deferred taxes. The deductibility of these losses if available
expires as follows:
2001 $ 127,000
2002 286,000
2004 21,000
2005 100,000
$ 534,000
Rosedale has been reassessed by Revenue Canada and the Province of Ontario
for fiscal years ended December 31, 1993 and December 31, 1994 in the amount of
approximately $717,000 [see note 18 (a)]. Should the assessments be upheld, the
benefits of these losses may not be realized.
16. RELATED PARTY TRANSACTIONS
Amounts due from or paid to companies which are related through common
ownership.
<TABLE>
<CAPTION>
1998 1997
$ $
<S> <C> <C>
Loan - 966578 Ontario Inc. ......................... -- 10,345
Loan - 976168 Ontario Inc. ......................... 1,933 24,467
Mortgage receivable - 1216748 Ontario Inc. ......... 168,768 209,073
Mortgage receivable - 1217576 Ontario Inc. ......... 153,073 193,611
Rent paid - 966578 Ontario Inc. .................... 16,116 17,648
</TABLE>
18
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
17. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect a company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
18. SEGMENTED INFORMATION
Rosedale is engaged primarily in the design, manufacturing, marketing, and
distribution and Ontario is engaged primarily in the marketing and distribution
of wallpaper and designer fabrics.
a) The breakdown of sales by geographic area is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
<S> <C> <C> <C>
United States of America 9,749,412 9,880,533 10,399,691
Canada 8,065,013 9,185,160 7,598,257
Other 1,156,367 1,691,730 929,421
18,970,792 20,757,423 18,927,369
</TABLE>
The companies' accounting records do not readily provide information on net
income by geographic area. Management is of the opinion that the proportion of
net income based principally on sales, presented below, would fairly present the
results of operations by geographic area.
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
<S> <C> <C> <C>
United States of America 535,782 279,780 256,387
Canada 451,738 295,020 141,303
Other 63,033 50,826 25,881
1,050,553 625,626 423,571
</TABLE>
19
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
18. SEGMENTED INFORMATION (cont'd)
b) The breakdown of identifiable assets by geographic area is as
follows:
<TABLE>
<CAPTION>
Period ended December 31, 1998
<S> <C>
United States of America $ 1,744,862
Canada 15,430,713
Other 1,098,750
$ 18,274,325
Period ended December 31, 1997
United States of America $ 1,149,550
Canada 13,094,489
Other 1,411,891
$ 15,655,930
c) Sales to major customers are as follows:
1998 1997
Sales $ 6,957,178 $ 2,890,783
% of total sales 37% 14%
Amounts included in accounts receivable $ 811,291 $ 298,595
d) Purchases from major suppliers are as follows:
1998 1997
Purchases $ 6,610,748 $ 8,070,027
% of total purchases 57% 52%
Amounts included in accounts payable $ 2,339,508 $ 3,101,539
</TABLE>
20
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
19. CONTINGENCIES
Rosedale has been re-assessed by Revenue Canada and the Province of Ontario
for fiscal years ended December 31, 1993 and December 31, 1994 for additional
corporate income taxes estimated to be $717,000. The company has objected to
these re-assessments and has no obligation to pay the portion relating to
Revenue Canada in the amount of $449,000 until the objections have been
processed.
The company has retained a firm of tax specialists to represent them in
presenting their case to Revenue Canada and currently the Notices of Objections
are being considered by the Chief of Appeals.
Since the company considers the re-assessments to be incorrect, no
liability has been set up in the accounts. Should all or part of the
re-assessments be upheld, the additional income taxes would be taken into
account in the year of occurrence.
20. COMMITMENTS
Minimum payments under operating leases for premises amount to
approximately $293,000 per annum, exclusive of insurance and other occupancy
charges. The leases expire on October 31, 2004. The future minimum lease
payments over the next four years are as follows:
<TABLE>
<CAPTION>
Payable during the following periods:
<S> <C>
Within one year ............................................... $293,287
Over one year but not exceeding two years ..................... 293,287
Over two years but not exceeding three years .................. 293,287
Over three years but not exceeding four years ................. 293,287
Over four years but not exceeding five years .................. 293,287
Thereafter .................................................... 244,406
$ 1,710,841
</TABLE>
21. LIFE INSURANCE POLICIES
The companies are the beneficiaries of life insurance policies with The
Prudential of America Life Insurance Company (Canada) ("PruCan") taken out on
the lives of three shareholders/key officers for a total insured value of $22
million. In consideration for this benefit, the companies agreed to fund the
premiums payable on the policies. Funding is being provided by advances from the
Laurentian Bank of Canada ("Laurentian").
The Laurentian has a legal right of set-off of the cash surrender values of
the life insurance policies against the debt owing to it by the companies.
Accordingly the related assets and liabilities have been offset in the financial
statements.
21
<PAGE>
ROSEDALE DECORATIVE PRODUCTS LTD.
Notes to Consolidated Financial Statements
(Amounts expressed in US dollars)
21. LIFE INSURANCE POLICIES (cont'd)
The amounts offset were as follows:
Cash surrender value of life insurance policies $ 1,817,683
Advances $ (1,817,683)
The amount in excess of the cash surrender value of the life insurance
policies is included in long-term debt (see note 12).
The advances from Laurentian are payable on demand but are expected to
become due for payment in the year 2004. The companies are liable for the
interest on the advances. Security is provided by first charges on the insurance
policies, letters of credit from a major Canadian chartered bank and general
security agreements creating a second charge over all corporate assets.
Subsequent to the year end, the policy in the name of a shareholder was
collapsed and the proceeds used to pay down the debt owing to the Laurentian
Bank. In addition, the policies on the lives of the other two shareholders who
are also key officers was reduced to a total insured value of $6,500.00.
22. FOREIGN EXCHANGE CONTRACTS
As at December 31, 1998, the Company had outstanding foreign exchange
contracts to sell U.S. dollars to the National Bank of Canada to hedge against
fluctuations in foreign currency. The purpose of the Company's foreign exchange
hedging activities is to protect the Company from the risk that the eventual
dollar net cash inflows resulting from the sale and purchase of products in
foreign currencies will not be adversely affected by changes in exchange rates.
It is the Company's policy to use derivative financial instruments to reduce
foreign risks. Fluctuations in the value of these hedging instruments are offset
by fluctuations in the value of the underlying exposures being hedged. As the
contracts are settled, the related gains or losses, if any, will be reported in
the statements of financial position and income. There is a potential risk of
non-performance by the National Bank of Canada, the financial institution that
the Company has the Foreign Forward Exchange Contracts with. However, given the
National Bank's prominence and financial condition, the Company believes that
this risk is insignificant. The cash requirements arise as the contracts are
exercised to the value of $15,900,000 (in varying amounts from January 1999
through June 2000). The following table presents the aggregate notional
principal amounts, carrying values and fair values of the Company's foreign
exchange contracts outstanding at December 31, 1998. Deferred gains and losses
on forward exchange contracts are recognized in earnings when the future
purchases and sales being hedged are recognized. The Company does not hold or
issue financial instruments for trading purposes. The estimated fair values of
the derivatives used to hedge the Company's risks will fluctuate over time.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Forward Notional Notional
Exchange Principal Carrying Fair Principal Carrying Fair
Contracts Amounts Value Values Amounts Values Values
<S> <C> <C> <C> <C> <C>
1998 -- - -- $ 6,970,000 - ($ 363,600)
1999 $13,800,000 - ($ 982,978) -- - --
2000 $ 2,100,000 - ($ 69,683) -- - --
</TABLE>
22
EXHIBIT 21 - List of Subsidiaries
Rosedale Wallcoverings & Fabrics Inc.
Ontario Paint & Wallpaper Limited
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-mos 12-mos
<FISCAL-YEAR-END> dec-31-1998 dec-31-1997
<PERIOD-END> dec-31-1998 dec-31-1997
<CASH> 3,417,414 442,655
<SECURITIES> 0 0
<RECEIVABLES> 3,842,820 4,788,725
<ALLOWANCES> 146,770 104,813
<INVENTORY> 7,229,444 7,154,928
<CURRENT-ASSETS> 14,670,410 12,461,592
<PP&E> 4,637,717 4,001,831
<DEPRECIATION> 2,477,284 2,070,962
<TOTAL-ASSETS> 18,274,325 15,655,930
<CURRENT-LIABILITIES> 7,985,132 10,967,528
<BONDS> 0 0
0 0
0 0
<COMMON> 5,156,197 2
<OTHER-SE> 2,850,267 1,961,065
<TOTAL-LIABILITY-AND-EQUITY> 18,274,325 15,655,930
<SALES> 18,970,793 20,757,423
<TOTAL-REVENUES> 18,970,793 20,757,423
<CGS> 11,420,944 13,350,033
<TOTAL-COSTS> 5,894,811 6,290,351
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 292,341 209,403
<INCOME-PRETAX> 1,362,697 907,636
<INCOME-TAX> 312,143 282,010
<INCOME-CONTINUING> 1,050,553 825,626
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 174,202
<NET-INCOME> 1,050,553 799,828
<EPS-PRIMARY> .71 .53
<EPS-DILUTED> .26 .21
</TABLE>
