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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 29, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
DECORATOR INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 1-7753 25-1001433
-------------------------------- ---------- --------------------
(State or other jurisdiction of Commission (I.R.S. Employer
incorporation or organization) file number Identification No.)
10011 Pines Blvd., Pembroke Pines, Florida 33024
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 436-8909
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
-------------------- -----------------------------------------
Common Stock, Par Value $.20 Per Share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
Aggregate market value of common stock held by non-affiliates of the registrant
as of the registrant's most recently completed second fiscal quarter, based on
the closing price of registrant's common stock of $6.95 at June 29, 2007:
$16,359,688
Number of shares of common stock outstanding at March 25, 2008: 2,927,296
DOCUMENTS INCORPORATED BY REFERENCE
Part III- Portions of the Proxy Statement for the 2008 Annual Meeting of
Shareholders
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CAUTIONARY STATEMENT: THE COMPANY'S REPORTS ON FORM 10-K AND FORM 10-Q, ITS
CURRENT REPORTS ON FORM 8-K, AND ANY OTHER WRITTEN OR ORAL STATEMENTS MADE BY OR
ON BEHALF OF THE COMPANY CONTAIN OR MAY CONTAIN STATEMENTS RELATING TO FUTURE
EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR
BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND
UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE
ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS WILL BE AFFECTED BY THE
LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL
ACCOMMODATIONS AND MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST
RATE FLUCTUATIONS, COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE
COMPANY'S MARKETS, THE COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND
EXPENSES, AND OTHER FACTORS. ANY FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK
ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR
REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
NOTE: In this report, unless the context otherwise requires, Registrant or
Company means Decorator Industries, Inc. and its subsidiaries, herein sometimes
also called "Decorator Industries". Reference to a particular year or the
captions "For the Year" and "At Year End" refer to the fiscal periods as
follows:
2007 - 52 weeks ended December 29, 2007
2006 - 52 weeks ended December 30, 2006
2005 - 52 weeks ended December 31, 2005
2004 - 52 weeks ended January 1, 2005
2003 - 53 weeks ended January 3, 2004
PART I
ITEM 1. BUSINESS.
The Company designs, manufactures and sells a broad range of interior
furnishings, principally draperies, curtains, valance boards, shades, blinds,
bedspreads, comforters, pillows, cushions, and camper tents. These products are
sold to original equipment manufacturers of recreational vehicles and
manufactured housing and to the hospitality industry (motels/hotels) either
through distributors or directly to the customers.
The Company has one industry segment and one class of products. The
business in which the Company is engaged is very competitive, and the Company
competes with manufacturers located throughout the country. However, no reliable
information is available to enable the Company to determine its relative
position among its competitors. The principal methods of competition are price,
design and service.
During 2007, one customer, Fleetwood Enterprises, Inc., accounted for
21.8% of the Company's total sales. In the event of the loss of this customer,
there would be a material adverse effect on the Company. However, that event is
unlikely because in January 2004 the Company executed an agreement to be the
exclusive supplier of Fleetwood's drapery, bedspread and other decor
requirements in the manufactured housing and recreational vehicle industries for
a period of six years. Most of the Company's sales to Fleetwood are governed by
this supply agreement. The Company believes that it has good relations with
Fleetwood.
On June 1, 2007, the Company acquired Superior Drapery ("Superior") of
Hackensack, New Jersey. Superior is a supplier to the hospitality market, with
much of its sales concentrated in the northeastern United States. The Company
expects the Superior acquisition to enhance its position as a supplier to the
hospitality market.
1
<page>
On November 30, 2007, the Company acquired Doris Lee Draperies ("Doris
Lee") of Huntsville, Alabama. Doris Lee was a supplier to the manufactured
housing market. The Company expects the Doris Lee acquisition to enhance its
position as a supplier to the manufactured housing market.
The Company's backlog of orders at any given time is not material in
amount and is not significant in the business. No material portion of the
Company's sales or income is derived from customers in foreign countries.
The chief raw materials used by the Company are largely fabrics made
from both natural and man-made fibers. The raw materials are obtained primarily
from converters and mills. The Company is not dependent upon one or a very few
suppliers. Most of its suppliers are large firms with whom, in the opinion of
management, the Company enjoys good relationships. The Company has never
experienced any significant shortage in its supply of raw materials.
The Company has no significant patents, licenses, franchises,
concessions, trademarks or copyrights. Expenditures for research and development
during 2007 and 2006 were not significant.
Compliance with federal, state and local environmental protection
provisions is not expected to have a material effect upon the capital
expenditures, earnings or competitive position of the Company.
The Company employs approximately 600 sales, production, warehouse and
administrative employees and also uses the services of independent sales
representatives.
ITEM 1A. RISK FACTORS.
Not required.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
2
ITEM 2. PROPERTIES.
The following table summarizes certain information concerning the
Company's properties:
Approx.
Location Principal Use Square Feet Owned/Leased
-------- ------------- ----------- ------------
Haleyville, Alabama Offices, manufacturing and warehouse 54,000 Owned
Red Bay, Alabama Offices, manufacturing and warehouse 50,700 Owned
Phoenix, Arizona Offices, manufacturing and warehouse 35,000 Owned
Pembroke Pines, Florida Offices 3,148 Leased
Douglas, Georgia Offices, manufacturing and warehouse 28,000 Owned
Elkhart, Indiana Offices, manufacturing and warehouse 51,000 Owned
Goshen, Indiana Offices, manufacturing and warehouse 55,700 Owned
Bossier, Louisiana Offices, manufacturing and warehouse 20,000 Owned
Hackensack, New Jersey Offices 1,550 Leased
Salisbury, North Carolina Offices, manufacturing and warehouse 22,800 Leased
Berwick, Pennsylvania Offices, manufacturing and warehouse 12,500 Leased
Bloomsburg, Pennsylvania Offices, manufacturing and warehouse 56,500 Owned
Abbotsford, Wisconsin Offices, manufacturing and warehouse 32,000 Owned
Total Owned 382,900
Total Leased 39,998
The Company considers that its offices, plants, machinery and equipment
are well maintained, adequately insured and suitable for their purposes and that
its plants are adequate for the presently anticipated needs of the business. The
Goshen, IN, Elkhart, IN, and Bloomsburg, PA facilities are subject to mortgages
as mentioned in Note 6 to the financial statements.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
3
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's Common Stock is listed and traded on the American Stock
Exchange, AMEX symbol DII.
Common Stock price information is set forth in the table below.
2007 Sales Prices 2006 Sales Prices
--------------------- ---------------------
High Low High Low
------ ------ ------ ------
First Quarter $ 7.55 $ 6.20 $ 8.85 $ 7.90
Second Quarter 7.38 6.45 8.93 8.30
Third Quarter 6.87 5.35 8.79 8.38
Fourth Quarter 6.40 4.00 8.97 7.20
As of March 25, 2008, the Company had 225 shareholders of record of its
Common Stock.
Total cash dividend payments were $0.12 per share in 2007 and 2006. The
Company expects to maintain the dividend rate of $0.12 per share in 2008.
At December 29, 2007, the Company had outstanding options under two
shareholder approved option plans. Under the 1995 Incentive Stock Option Plan
("1995 Plan"), the Company has granted options to its key employees for up to
520,832 shares of Common Stock (as adjusted for stock splits). Under the 2006
Incentive Stock Option Plan ("2006 Plan") the Company can grant options to its
key employees for up to 250,000 shares of the Common Stock. The Company granted
115,000 options from the 2006 Plan in 2007.
The following is a summary of the options outstanding under the 1995
Plan and the 2006 Plan at December 29, 2007:
Number of shares available
Number of shares optioned Weighted average exercise price for future options
------------------------- ------------------------------- ------------------
1995 Plan 203,950 $6.78 0
2006 Plan 115,000 $4.14 135,000
------- ----- -------
318,950 $5.83 135,000
The Company also provides a stock grant in lieu of cash compensation to
its non-employee directors as compensation for their services as directors. In
2007 and 2006, the Company awarded five non-employee directors a total of 13,544
and 9,700 shares, respectively. All non-employee directors receive their shares
in a Directors Trust, for which the Chairman of the Company is the Trustee.
The Company made no Common Stock repurchases during fiscal 2007.
However, on January 11, 2008 the Company purchased 100,000 shares of its Common
Stock from a shareholder in a negotiated transaction at the price of $3.85 per
share. The Company financed this transaction through borrowing on its revolving
line of credit. This transaction was completed as a single authorization by the
Company's board of directors and was not part of an announced Company buyback
program.
4
ITEM 6. SELECTED FINANCIAL DATA.
2007 2006 2005 2004 2003
------------ ------------ ------------ ------------ ------------
FOR THE YEAR
- ------------
Net Sales $ 46,080,584 $ 52,237,720 $ 50,525,343 $ 50,449,214 $ 41,803,224
Net (Loss)/Income $ (807,509) $ 405,393 $ 1,364,814 $ 1,394,698 $ 1,561,778
------------ ------------ ------------ ------------ ------------
AT YEAR END
- -----------
Total Assets $ 24,263,904 $ 24,998,571 $ 24,294,365 $ 23,962,077 $ 21,088,322
Long Term Obligations $ 1,409,000 $ 1,741,444 $ 1,536,754 $ 1,752,568 $ 1,926,832
Long-term Debt/Total Capitalization 7.91% 9.08% 8.25% 9.98% 11.65%
Working Capital $ 3,913,379 $ 5,382,358 $ 6,092,349 $ 4,167,876 $ 8,007,862
Current Ratio 1.70:1 2.08:1 2.20:1 1.73:1 3.05:1
Stockholders' Equity $ 16,411,651 $ 17,428,542 $ 17,088,012 $ 15,799,668 $ 14,614,621
------------ ------------ ------------ ------------ ------------
PER SHARE
- ---------
Basic Earnings $ (0.27) $ 0.14 $ 0.47 $ 0.50 $ 0.56
Diluted Earnings $ (0.27) $ 0.13 $ 0.46 $ 0.47 $ 0.55
Book Value $ 5.43 $ 5.81 $ 5.84 $ 5.58 $ 5.22
Cash Dividends Declared $ 0.12 $ 0.12 $ 0.12 $ 0.12 $ 0.12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company provides interior furnishings to original equipment
manufacturers of manufactured housing and recreational vehicles and to the
hospitality market. This interior furnishing market is highly competitive. The
Company faces risk as the demand for its products is affected by the industry
demand in the three markets that the Company serves. Any significant decline in
the demand for manufactured housing, recreational vehicles, or hospitality
accommodations can adversely affect the Company's results of operations or
financial condition.
A large amount of the Company's sales are to a relatively few
customers. In 2007, the Company's top 10 customers accounted for approximately
54.5% of net sales, as opposed to 58.8% in 2006. The loss of a large customer
can have a significant impact on the Company's results of operations. In 2004,
with the completion of a supply agreement with Fleetwood Enterprises, the
Company is under contract to be the exclusive supplier of Fleetwood's interior
furnishings through January 2010. Fleetwood represented 21.8% of the Company's
net sales in 2007. Fleetwood operates in both the recreational vehicle and
manufactured housing industries.
The Company faces the risk that its furnishings could be provided by
companies with cheaper labor sources, such as from Asian sources. However, the
lack of sufficient lead times from its customers, as well as the customized
nature of many of the Company's products, presents a substantial barrier to
entry for overseas firms.
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.(CONTINUED)
The recreational vehicle market experienced a decrease in 2007. Total
industry shipments of motor homes and travel trailers have decreased from
390,500 in 2006, to 353,400 in 2007. Travel trailer shipments by the RV industry
decreased 10.9% in 2007 when compared to 2006, and industry shipment of motor
homes decreased by 0.9% in 2007. The decrease in the Company's sales to the RV
industry was directly related to decreased production of travel trailers by its
customers.
The manufactured housing market has been declining since its peak of
372,800 shipments in 1998. Industry shipments in 2007 were 95,769; compared to
117,500 shipments in 2006, a decrease of 18.5%. Shipments in 2007 were the
lowest levels experienced by the industry since 1961. The softness in the
manufactured housing market accounted for the decline in the Company's sales to
this market. The effect of the acquisition of Doris Lee Draperies on November
30, 2007 partially offset the effects of reduced sales to its existing
manufactured housing customers.
The Company's sales to the hospitality industry increased about 6.6%
during 2007 when compared to the previous year. Hospitality sales are affected
by demand for hospitality accommodations and the growth of the industry. This
was the highest volume of annual sales experienced by the Company to this
market. The acquisition of Superior Drapery on June 1, 2007 more than offset a
slight decrease in existing hospitality market sales.
Sales By Market:
The following table represents net sales to each of the three different
markets that the Company serves for each of the two fiscal years ended December
29, 2007:
(dollars in thousands)
2007 2006
---------------------- ----------------------
Net % of Net % of
Sales total Sales total
----------- -------- ----------- --------
Recreational Vehicle $ 25,165 55% $ 30,756 59%
Manufactured Housing 8,100 17% 9,464 18%
Hospitality 12,816 28% 12,018 23%
----------- -------- ----------- --------
Total Net Sales $ 46,081 100% $ 52,238 100%
=========== ===========
Critical Accounting Policies:
The methods, estimates and judgments the Company uses in applying its
accounting policies have a significant impact on the results it reports in the
financial statements. Some of the accounting policies require it to make
difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. The most critical accounting
estimates include the valuation of accounts receivable and inventory.
The Company reviews its accounts receivable portfolio frequently,
assessing any past due accounts for collectability. Physical inventories are
conducted at each of the Company's manufacturing facilities at least quarterly,
and inventories are assessed for any slow moving or obsolete items, which
constitutes the main judgment necessary in valuing the inventory. Reserves for
both receivables and inventory are reviewed quarterly and adjusted as required.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.(CONTINUED)
Other assumptions the Company faces are the assessment of goodwill,
intangible asset, and long-lived assets for impairment, the calculation of the
provision for income taxes and valuation of deferred tax assets and liabilities.
The Company believes that its assumptions in relation to its critical accounting
policies have been reasonably accurate, and does not foresee any future material
changes in its estimates or assumptions.
Liquidity and Financial Resources:
1) Working capital at December 29, 2007 was $3,913,379 compared
to $5,382,358 at December 30, 2006.
2) The current ratio was 1.70:1 at year-end 2007 compared to
2.08:1 at year-end 2006.
3) The liquid ratio was 0.77:1 at year-end 2007 compared to
0.95:1 at year-end 2006.
4) The long-term debt ratio was 7.91% at December 29, 2007
compared to 9.08% a year earlier.
Net accounts receivable decreased $302,095 (8.1%) at December 29, 2007,
when compared to December 30, 2006. Accounts receivable decreased due to a
reduction of sales volume in the fourth quarter of 2007 when compared to the
fourth quarter of 2006. Days Sales Outstanding (DSO) decreased from 31.0 days at
the end of fiscal 2006 to 30.6 days at the end of fiscal 2007.
In January 2004, the Company began assigning certain account
receivables under a "Receivables Servicing and Credit Approved Receivables
Purchasing Agreement" with CIT Group/Commercial Services Inc. Only receivables
from sales to the hospitality industry may be assigned to CIT. Under the
agreement CIT provides credit checking, credit approval, and collection
responsibilities for the assigned receivables. If CIT approves an order from a
hospitality customer and the resulting receivables are not paid or disputed by
the customer within ninety days of sale, CIT will pay the receivable to the
Company and assume ownership of the receivable. CIT begins collection efforts
for the assigned receivables (both approved and not approved) when they are due
(hospitality sales are made on Net 30 terms). Approved receivables were
approximately $795,000 at December 29, 2007. Hospitality customers are
instructed to make payments directly to CIT and CIT then wires collected funds
to the Company. The Company pays CIT a percentage of all assigned receivables.
Management believes this cost will be mostly offset by reductions in Bad Debt
expense and collection costs. The Company entered into this arrangement to take
advantage of CIT's extensive credit checking and collection capabilities.
Management believes this arrangement has improved liquidity.
Net inventories decreased $469,607 (8.3%) at December 29, 2007, when
compared to December 30, 2006. The decrease in net inventories was due to lower
business sales activity as well as an increase in reserves for slow moving
items.
On June 1, 2007, the Company acquired certain assets of Superior
Drapery ("Superior") for $812,527 after adjustments. The assets included
inventory, accounts receivable and office furniture and equipment. Additional
payments for the business may be made over the next five years depending on the
sales and profitability of the business. Additional payments of $9,394 and
$7,627 were due for the third and fourth quarters of 2007, respectively.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.(CONTINUED)
On November 30, 2007, the Company acquired certain assets of Doris Lee
Draperies ("Doris Lee") for $809,083. The assets included inventory, accounts
receivable and office furniture and equipment. Additional payments for the
business may be made over the next five years depending on the sales of the
business.
Capital expenditures for 2007 were $275,342 compared to $3,091,473 in
2006. Expenditures for 2006 included $1,991,748 to purchase and construct
buildings for the Company's hospitality operations in Abbotsford, Wisconsin and
Red Bay, Alabama. All of the capital expenditures, including the real estate,
were financed by working capital. At this time, capital spending for 2008 is
expected to be approximately $500,000.
In May 2006, the Company entered into a new line-of-credit agreement
with Wachovia Bank. This agreement replaced the previous agreement that the
Company had with Washington Mutual Bank. The agreement with Wachovia provides
for a revolving line of credit of up to $5,000,000, and expires in June 2009.
The interest rate is LIBOR plus 150 basis points and the Company is required to
maintain certain financial covenants. The fourth quarter loss caused the Company
to violate a financial covenant in its loan agreement with Wachovia Bank. The
loan agreement states that the ratio of Senior Funded Debt to EBITDA may not
exceed 2.75 to 1.00. At year-end this ratio was 7.65 to 1.00. The Company was in
compliance with all other conditions of the loan agreement. Wachovia has
provided a waiver for this violation through the end of the third quarter of
2008. The waiver agreement changes the interest rate from LIBOR plus 150 basis
points to LIBOR plus 275 basis points until the Company is in compliance with
the covenant. The Company expects to be in compliance with the covenant by the
end of the fourth quarter of 2008. The Company believes that it has a good
relationship with the Bank and that the loan agreement provides more than
adequate coverage of working capital needs for 2008. At December 29, 2007, the
Company had $674,000 in outstanding borrowings on its line-of-credit. The
Company expects to use its line of credit throughout 2008.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.(CONTINUED)
Results of Operations:
The following table shows a comparison of the results of operations between
fiscal 2007 and fiscal 2006:
Fiscal % Fiscal % $ Increase
2007 of Sales 2006 of Sales (Decrease) % Change
------------ -------- ------------ -------- ----------- --------
Net Sales $ 46,080,584 100% $ 52,237,720 100% $(6,157,136) -11.8%
Cost of Products Sold 38,798,908 84.2% 42,926,510 82.2% (4,127,602) -9.6%
------------ -------- ------------ -------- -----------
Gross Profit 7,281,676 15.8% 9,311,210 17.8% (2,029,534) -21.8%
Selling and Administrative Expenses 8,575,289 18.6% 8,688,386 16.6% (113,097) -1.3%
------------ -------- ------------ -------- -----------
Operating (Loss)/Income (1,293,613) -2.8% 622,824 1.2% (1,916,437) -307.7%
Other Income (Expense)
Interest, Investment and
Other Income 94,320 0.2% 112,649 0.2% (18,329) -16.3%
Interest Expense (92,216) -0.2% (90,080) -0.2% (2,136) 2.4%
------------ -------- ------------ -------- -----------
(Loss)/Earnings Before Income Taxes (1,291,509) -2.8% 645,393 1.2% (1,936,902) -300.1%
Provision for Income Taxes (484,000) -1.0% 240,000 0.4% (724,000) -301.7%
------------ -------- ------------ -------- -----------
NET (LOSS)/INCOME $ (807,509) -1.8% $ 405,393 0.8% $(1,212,902) -299.2%
============ ======== ============ ======== ===========
Net sales for fiscal 2007 were $46,080,584 compared to $52,237,720 in
fiscal 2006. The net sales decrease was 11.8%. Sales to the recreational vehicle
market decreased 18.2%, primarily due to decreased shipments of motor homes and
travel trailers by the Company's customers. Sales to the manufactured housing
industry decreased 14.4% due to decreased shipments by the Company's customers.
Sales to the hospitality market increased 6.6%, entirely due to the Superior
Drapery acquisition.
Cost of products sold as a percentage of sales was 84.2% in 2007 versus
82.2% in 2006. This is due primarily to a change in sales mix as well as fixed
overhead expenses being spread over a lower sales volume. In addition, labor
costs increased as a percentage of net sales, largely due to shorter lead times
and smaller production lot sizes, conditions which may be expected to continue
in the current market environment. The customized nature of the Company's
products made to each of its customers' unique specifications, does not enable a
detailed discussion of the effects of changes in prices, costs, volumes, and
product mix on the costs of goods sold percentage. Management does monitor
overall material cost, labor cost, and factory overheads for each of its
manufacturing locations. Management reviews significant variations or changing
trends with general managers. When necessary, appropriate actions are taken to
address issues.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.(CONTINUED)
Selling and administrative expenses decreased to $8,575,289 in 2007
from $8,688,386 in 2006. As a percentage of sales, selling and administrative
expenses increased from 16.6% in fiscal 2006 to 18.6% in fiscal 2007. The
increase in this percentage is largely due to fixed expenses being spread over a
lower sales volume. The Company had reduced levels of wages, salaries, and
commissions in 2007 relating to the lower levels of profitability. However, the
2007 acquisition of Superior, as well as consulting fees of approximately
$87,000 for Sarbanes-Oxley Section 404 compliance offset much of these savings.
Interest, investment and other income decreased 16.3% to $94,320 in
2007, while interest expense increased 2.4% to $92,216. The lower amounts from
other income is largely due to lower cash discounts available on accounts
payable from reduced purchasing activity. Interest expense increased only
marginally as total outstanding debt and effective interest rates did not change
significantly during 2007.
Net loss was $807,509 in 2007 compared to net income of $405,393 in
2006. The decrease is primarily due to decreased sales volume as well as the
increased percentage of cost of products sold to net sales. Diluted earnings per
share decreased from earnings of $0.13 in fiscal 2006 to a loss of $0.27 in
fiscal 2007.
EBITDA
EBITDA represents income before income taxes, interest expense,
depreciation and amortization and is an approximation of cash flow from
operations before tax. The Company uses EBITDA as an internal measure of
performance and believes it is a useful and commonly used measure of financial
performance in addition to income before taxes and other profitability measures
under U.S. Generally Accepted Accounting Principles ("GAAP").
EBITDA is not a measure of performance under GAAP. EBITDA should not be
construed as an alternative to operating income and income before taxes as an
indicator of the Company's operations in accordance with GAAP. Nor is EBITDA an
alternative to cash flow from operating activities in accordance with GAAP. The
Company's definition of EBITDA can differ from that of other companies.
The following table reconciles Net Income, the most comparable measure under
GAAP, to EBITDA for each of the three fiscal years ended December 29, 2007:
2007 2006 2005
----------- ----------- -----------
Net (Loss)/Income $ (807,509) $ 405,393 $ 1,364,814
Add:
Income Tax (484,000) 240,000 770,000
Interest Expense 92,216 90,080 74,831
Depreciation and
Amortization 1,461,810 1,449,129 1,436,911
(Gain) Loss on Disposal
of Assets (13,944) 15,606 165,315
----------- ----------- -----------
EBITDA $ 248,573 $ 2,200,208 $ 3,811,871
=========== =========== ===========
10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements, financial statements schedule, and reports of
independent certified public accountants listed in Item 15(a) of this report are
filed under this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
The Company's management has evaluated, with the participation of its
principal executive officer and its principal financial officer, the
effectiveness of the Company's disclosure controls and procedures as of December
29, 2007, as required by Exchange Act Rule 13a-15(b). Based on that evaluation,
the Company's principal executive officer and principal financial officer have
concluded that those disclosure controls and procedures were effective as of
that date.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company.
Internal control over financial reporting is a process to provide reasonable
assurance regarding the reliability of financial reporting for external purposes
in accordance with accounting principles generally accepted in the United States
of America. Internal control over financial reporting includes maintaining
records that in reasonable detail accurately and fairly reflect transactions;
providing reasonable assurance that transactions are recorded as necessary for
preparation of financial statements; providing reasonable assurance that
receipts and expenditures of Company assets are made in accordance with
management authorization; and providing reasonable assurance that unauthorized
acquisition, use or disposition of Company assets that could have a material
effect on the financial statements would be prevented or detected on a timely
basis. Because of its inherent limitations, internal control over financial
reporting cannot provide absolute assurance that a misstatement of the financial
statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of the
Company's internal control over financial reporting based on the framework in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
concluded that the Company's internal control over financial reporting was
effective as of December 29, 2007, and is effective. The evaluation disclosed
no changes in the Company's internal control over financial reporting during the
quarter ended December 29, 2007 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
ITEM 9B. OTHER INFORMATION.
None.
11
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after December 29, 2007. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after December 29, 2007. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after December 29, 2007. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after December 29, 2007. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after December 29, 2007. Such information is incorporated herein by reference.
12
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
----------------------------------------------------------
Financial Statements and Schedules
----------------------------------
(1) Independent Auditors' Report
(2) Balance Sheets - December 29, 2007 and December 30, 2006
(3) Statements of Earnings for the three fiscal years ended
December 29, 2007
(4) Statements of Stockholders' Equity for the three fiscal years
ended December 29, 2007
(5) Statements of Cash Flows for the three fiscal years ended
December 29, 2007
(6) Notes to the Financial Statements
(7) Independent Auditors' Report on Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required or are
inapplicable or the information is included in the financial statements
or notes thereto.
Exhibits
3A Articles of Incorporation as amended to date, filed as Exhibit
3A to Form 10-K for the fiscal year ended December 28, 1985
and incorporated herein by reference.
3B.1 By-laws as amended to date, filed as Exhibit 3B.1 to Form 10-Q
for the Quarter ended July 2, 1988 and incorporated herein by
reference.
10E Lease dated February 9, 1984 between registrant, as lessee,
and Leon and Eleanor Bradshaw covering property at 500 North
Long Street, Salisbury, North Carolina, filed as Exhibit
10(b)(4)(iv) to Registration Statement No. 2-92853 and
incorporated herein by reference.
10M.1 Medical and Dental Reimbursement Plan, as amended to date,
filed as Exhibit 10M.1 to Form 10-K for the fiscal year ended
January 3, 1987 and incorporated herein by reference.*
10T Employment Agreement dated August 2, 1994 between the
registrant and William Bassett, filed as Exhibit 10T to Form
10-Q for the quarter ended July 2, 1994 and incorporated
herein by reference.*
10T.1 Amendment dated July 29, 2003 to Employment Agreement between
the registrant and William Bassett, filed as Exhibit 10T.1 to
Form 10-Q for the quarter ended June 28, 2003 and incorporated
herein by reference.*
13
10T.2 Amendment dated May 25, 2004 to Employment Agreement between
the registrant and William Bassett, filed as Exhibit 10T.2 to
Form 10-Q for the quarter ended July 3, 2004 and incorporated
herein by reference.*
10U.3 1995 Incentive Stock Option Plan, as amended, filed as Exhibit
10U.3 to Form 10-Q for the quarter ended July 3, 2004 and
incorporated herein by reference.*
10W.1 Amended and Restated Stock Plan for Non-Employee Directors
and related Grantor Trust Agreement, as amended, effective
July 1, 2004, filed as Exhibit 10W.1 to Form 10-Q for the
quarter ended July 3, 2004 and incorporated herein by
reference.*
10Z Asset Purchase Agreement dated as of January 23, 2004,
between registrant and Fleetwood Homes of Georgia, Inc.
relating to drapery manufacturing plant in Douglas, Georgia,
filed as Exhibit 10Z to Form 8-K dated February 4, 2004 and
incorporated herein by reference.
10AA Revolving Promissory Note and Term Promissory Note, and
related Loan Agreement and Addendum, filed as Exhibit 10AA to
Form 10-Q for the quarter ended July 1, 2006 and incorporated
herein by reference.
10AA.1 Waiver dated March 25, 2008 regarding Loan Agreement, filed
herewith.
10BB 2006 Incentive Stock Option Plan, filed as Exhibit 10BB to
Form 10-Q for the quarter ended July 1, 2006 and incorporated
herein by reference.*
11S Computation of diluted earnings per share, filed herewith.
14 Code of Conduct and Ethics, filed as Exhibit 14 to Form 10-Q
for the fiscal quarter ended September 29, 2007 and
incorporated herein by reference.
23E Consent of Independent Auditors, filed herewith.
31.1 Certification of Principal Executive Officer, filed herewith.
31.2 Certification of Principal Financial Officer, filed herewith.
32 Certificate required by 18 U.S.C.ss.1350, filed herewith.
- ------------
* Management contract or compensatory plan.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DECORATOR INDUSTRIES, INC.
(Registrant)
By: /s/ Michael K. Solomon
-----------------------------
Michael K. Solomon
Vice President
Dated: March 25, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Name Title Signature Date
- ---- ----- --------- ----
William A. Johnson President and Chief /s/ William A. Johnson March 25, 2008
Executive Officer ----------------------------
Michael K. Solomon Vice President, Treasurer, /s/ Michael K. Solomon March 25, 2008
Secretary, Principal ----------------------------
Financial and Accounting
Officer
William A. Bassett Chairman and Director /s/ William A. Bassett March 25, 2008
----------------------------
Joseph N. Ellis Director /s/ Joseph N. Ellis March 25, 2008
----------------------------
Ellen Downey Director /s/ Ellen Downey March 25, 2008
----------------------------
Thomas Dusthimer Director /s/ Thomas Dusthimer March 25, 2008
----------------------------
William Dixon Director /s/ William Dixon March 25, 2008
----------------------------
Terrence Murphy Director /s/ Terrence Murphy March 25, 2008
----------------------------
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
DECORATOR INDUSTRIES, INC.
We have audited the accompanying balance sheets of Decorator
Industries, Inc. (a Pennsylvania corporation) as of December 29, 2007 and
December 30, 2006 and the related statements of earnings, stockholders' equity
and cash flows for each of the three fiscal years in the period ended December
29, 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the auditing standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Decorator
Industries, Inc. as of December 29, 2007 and December 30, 2006, and the results
of its operations and its cash flows for each of the three fiscal years in the
period ended December 29, 2007 in conformity with accounting principles
generally accepted in the United States of America.
LOUIS PLUNG & COMPANY, LLP
Certified Public Accountants
Pittsburgh, Pennsylvania
March 25, 2008
F-1
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
December 29, December 30,
2007 2006
----------- -----------
ASSETS
------
CURRENT ASSETS:
Cash and Cash Equivalents $ 17,544 $ 11,379
Accounts Receivable, less allowance for
doubtful accounts ($136,745 and $201,355) 3,423,072 3,725,167
Inventories 5,181,645 5,651,252
Income Taxes Receivable 575,594 633,130
Other Current Assets 292,777 351,015
----------- -----------
TOTAL CURRENT ASSETS 9,490,632 10,371,943
----------- -----------
Property and Equipment
Land, Buildings & Improvements 9,193,421 9,191,174
Machinery, Equipment, Furniture & Fixtures and Software 7,985,675 7,630,186
----------- -----------
Total Property and Equipment 17,179,096 16,821,360
Less: Accumulated Depreciation and Amortization 7,895,607 7,118,193
----------- -----------
Net Property and Equipment 9,283,489 9,703,167
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 3,629,943 2,731,717
Identifiable intangible asset, less accumulated Amortization
of $2,555,713 and $1,907,713 1,339,278 1,987,278
Other Assets 520,562 204,466
----------- -----------
TOTAL ASSETS $24,263,904 $24,998,571
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES:
Accounts Payable $ 2,315,836 $ 1,900,471
Current Maturities of Long-term Debt 599,444 206,815
Checks Issued but Not Yet Presented 241,815 588,245
Accrued Expenses:
Compensation 432,932 804,929
Other 1,987,226 1,489,125
----------- -----------
TOTAL CURRENT LIABILITIES 5,577,253 4,989,585
----------- -----------
Long-Term Debt 1,409,000 1,741,444
Deferred Income Taxes 866,000 839,000
----------- -----------
TOTAL LIABILITIES 7,852,253 7,570,029
----------- -----------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares, 10,000,000;
Issued shares, 4,636,375 and 4,628,053 927,275 925,611
Paid-in Capital 1,880,861 1,797,810
Retained Earnings 21,530,436 22,698,567
----------- -----------
24,338,572 25,421,988
Less: Treasury stock, at cost: 1,613,844 and 1,627,388 shares 7,926,921 7,993,446
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 16,411,651 17,428,542
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,263,904 $24,998,571
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
For the Fiscal Year
--------------------------------------------
2007 2006 2005
------------ ------------ ------------
Net Sales $ 46,080,584 $ 52,237,720 $ 50,525,343
Cost of Products Sold 38,798,908 42,926,510 40,258,115
------------ ------------ ------------
Gross Profit 7,281,676 9,311,210 10,267,228
Selling and Administrative Expenses 8,575,289 8,688,386 8,148,485
------------ ------------ ------------
Operating (Loss)/Income (1,293,613) 622,824 2,118,743
Other Income (Expense)
Interest, Investment and
Other Income 94,320 112,649 90,902
Interest Expense (92,216) (90,080) (74,831)
------------ ------------ ------------
(Loss)/Earnings Before Income Taxes (1,291,509) 645,393 2,134,814
Provision for Income Taxes (484,000) 240,000 770,000
------------ ------------ ------------
NET (LOSS)/INCOME $ (807,509) $ 405,393 $ 1,364,814
============ ============ ============
EARNINGS PER SHARE
BASIC $ (0.27) $ 0.14 $ 0.47
============ ============ ============
DILUTED $ (0.27) $ 0.13 $ 0.46
============ ============ ============
Weighted Average Number of Shares Outstanding
Basic 3,005,988 2,982,735 2,882,196
Diluted 3,005,988 3,036,488 2,998,598
The accompanying notes are an integral part of the financial statements.
F-3
DECORATOR INDUSTRIES, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
----------- ----------- ----------- ----------- -----------
BALANCE AT
JANUARY 1, 2005 $ 897,946 $ 1,423,275 $21,633,044 $(8,154,597) $15,799,668
Transactions for 2005
Net Income 1,364,814 1,364,814
Issuance of stock for
Exercise of options 16,952 165,254 17,791 199,997
Issuance of stock for
Directors compensation 28,314 41,686 70,000
Dividends paid (346,467) (346,467)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 31, 2005 $ 914,898 $ 1,616,843 $22,651,391 $(8,095,120) $17,088,012
Transactions for 2006
Net Income 405,393 405,393
Issuance of stock for
Exercise of options 10,713 99,710 54,030 164,453
Issuance of stock for
Directors compensation 33,356 47,644 81,000
Stock-Based Compensation 47,901 47,901
Dividends paid (358,217) (358,217)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 30, 2006 $ 925,611 $ 1,797,810 $22,698,567 $(7,993,446) $17,428,542
Transactions for 2007
Net Loss (807,509) (807,509)
Issuance of stock for
Directors compensation 24,475 66,525 91,000
Issuance of stock purchased
by Directors Trust 1,664 32,789 34,453
Stock-Based Compensation 25,787 25,787
Dividends paid (360,622) (360,622)
----------- ----------- ----------- ----------- -----------
BALANCE AT
DECEMBER 29, 2007 $ 927,275 $ 1,880,861 $21,530,436 $(7,926,921) $16,411,651
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-4
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
For the Fiscal Year
-----------------------------------------
2007 2006 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss)/Income $ (807,509) $ 405,393 $ 1,364,814
Adjustments to Reconcile Net (Loss)/Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 1,461,810 1,449,129 1,436,911
Provision for Losses on Accounts Receivable 152,903 196,416 30,000
Deferred Taxes 55,000 232,000 (64,000)
Stock-Based Compensation 25,787 47,901 --
(Gain)/Loss on Disposal of Assets (13,944) 15,606 165,315
Increase (Decrease) from Changes in:
Accounts Receivable 149,192 651,832 (1,138,741)
Inventories 850,288 149,301 (686,902)
Prepaid Expenses 87,774 (650,542) 233,740
Other Assets (316,096) 114,133 (138,017)
Accounts Payable 415,365 (1,175,324) 536,543
Accrued Expenses 22,266 497,550 (152,904)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,082,836 1,933,395 1,586,759
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Cash Paid for Acquisitions (1,300,372) -- (1,067,472)
Capital Expenditures (275,382) (3,091,473) (579,629)
Proceeds from Property Dispositions 20,497 3,894 71,373
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,555,257) (3,087,579) (1,575,728)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (206,815) (207,295) (174,723)
Dividend Payments (360,622) (358,217) (346,467)
Change in Checks Issued but Not Yet Presented (346,430) 588,245 --
Proceeds from Exercise of Stock Options -- 164,453 199,997
Net Borrowings under Line-of-Credit Agreements 267,000 407,000 --
Issuance of Stock for Directors' Trust 91,000 81,000 70,000
Proceeds from Directors' Trust Stock Purchase 34,453 -- --
----------- ----------- -----------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (521,414) 675,186 (251,193)
Net Increase/(Decrease) in Cash and Cash Equivalents 6,165 (478,998) (240,162)
Cash and Cash Equivalents at Beginning of Year 11,379 490,377 730,539
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,544 $ 11,379 $ 490,377
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 79,717 $ 80,996 $ 105,755
Income Taxes $ 50,061 $ 551,368 $ 612,172
The accompanying notes are an integral part of the financial statements.
F-5
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Nature of Operations
--------------------
The Company designs, manufactures and sells a broad range of interior
furnishings, principally draperies, curtains, shades, blinds,
bedspreads, valance boards, comforters, pillows, cushions, and camper
tents. These products are sold to original equipment manufacturers of
recreational vehicles and manufactured housing and to the hospitality
industry (motels/hotels) either through distributors or directly to the
customers.
The Company has one industry segment and one class of products. The
business in which the Company is engaged is very competitive, and the
Company competes with manufacturers located throughout the country.
However, no reliable information is available to enable the Company to
determine its relative position among its competitors. The principal
methods of competition are price, design and service.
Fiscal Year
-----------
The Company's fiscal year is a 52-53 week period ending the Saturday
nearest to December 31, which results in approximately every sixth year
containing 53 weeks. Fiscal year 2007 was a 52-week period ended
December 29, 2007, Fiscal year 2006 was a 52-week period ending
December 30, 2006, and Fiscal year 2005 was a 52-week period ending
December 31, 2005.
Revenue Recognition
-------------------
The Company recognizes revenue when the sale is made, which is upon
shipment of the goods to the Company's customers.
Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Depreciation
-------------------------
Buildings and equipment are stated at cost, and depreciated on
straight-line methods over estimated useful lives. Leasehold
improvements are capitalized and amortized over the assets' estimated
useful lives or remaining terms of leases, if shorter. Equipment is
depreciated over 3-10 years, buildings over 20-40 years and leasehold
improvements over 5-10 years.
Goodwill and Other Intangible Assets
------------------------------------
The excess of investment costs over the fair value of net assets
related to the acquisitions of Haleyville Manufacturing (1973), Liberia
Manufacturing (1985) and Specialty Windows (1997) was being amortized
over a period of 40 years. No goodwill has been amortized since 2001
pursuant to Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets"
F-6
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Starting in 2002 the Company was required to evaluate the remaining
goodwill for possible impairment. The Company had $3,629,943 of
goodwill at December 29, 2007 and $2,731,717 of goodwill at December
30, 2006. The increase in 2007 consisted of $480,675 from the Superior
Drapery acquisition and $417,551 from the Doris Lee Draperies
acquisition. The Company tests its goodwill annually for impairment, or
more frequently if events or changes in circumstances indicate possible
impairment. Management evaluated the goodwill as of December 29, 2007
and determined that no impairment exists.
The Company has an identifiable intangible asset of $1,339,278 arising
from the January 2004 purchase of its Douglas, Georgia facility from
Fleetwood Enterprises, Inc. and the related supply agreement. This is
due to $3,894,991 of acquisition expenses less $2,555,713 of
accumulated amortization for this intangible asset. This intangible
asset will be amortized over the life of the agreement with Fleetwood.
The agreement to expand its relationship and become Fleetwood's
exclusive supplier of selected interior furnishing products was the
primary factor in compelling the Company to make the acquisition. The
asset is currently being amortized over six years. The remaining
benefits of the agreement with Fleetwood exceed the remaining
capitalized cost of the intangible asset.
Impairment of Long Lived Assets
-------------------------------
The Company reviews long-lived assets held and used, excluding
intangible assets (see "Goodwill and Other Intangible Assets"), for
impairment when circumstances indicate that the carrying amount of
assets may not be recoverable. In accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the
Company assesses the recoverability of long-lived assets by determining
whether the depreciation or amortization of an asset over its remaining
life can be recovered based upon management's best estimate of the
undiscounted future operating cash flows (excluding interest charges)
attributed to the long-lived asset and related liabilities. If the sum
of such undiscounted cash flows is less than the carrying value of the
asset, there is an indicator of impairment. The amount of impairment,
if any, represents the excess of the carrying value of the asset over
fair value. Fair value is determined by quoted market price, if
available, or an estimate of projected future operating cash flows,
discounted using a rate that reflects the related operating segment's
average cost of funds. Long-lived assets, including intangible assets,
to be disposed of are reported at the lower of carrying amount or fair
value less costs to sell.
Cash and Cash Equivalents
-------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months
or less at the time of purchase to be cash equivalents.
All cash balances at December 29, 2007 and December 30, 2006 were in
general deposit and/or checking accounts.
F-7
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Income Taxes
------------
The Company accounts for income taxes in accordance with the Statement
of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," which requires the recognition of deferred tax liabilities and
assets at currently enacted tax rates for the expected future tax
consequences of events that have been included in the financial
statements or tax returns.
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109", ("FIN 48"). FIN 48 clarifies
the accounting for uncertainty in tax positions and requires that a
company recognize in its financial statements the impact of a tax
position, only if it is more likely than not of being sustained upon
examination, based on the technical merits of the position. The Company
adopted the provisions of FIN 48 at the beginning of the current fiscal
year. As a result of the implementation of FIN 48, the Company
recognized no material adjustments to the liability for unrecognized
income tax benefits.
The Company's policy regarding the classification of interest and
penalties recognized in accordance with FIN 48 is to classify them as
income tax expense in its financial statements, if applicable.
Freight Costs
-------------
Freight costs associated with acquiring inventories are charged to cost
of goods sold when incurred. Freight costs for delivering products to
customers are included in revenues from sales at the time the goods are
shipped.
Advertising Expenses
--------------------
The Company incurs "advertising expenses" in the form of participation
in industry trade shows and in the case of the hospitality industry in
the preparation and printing of sample books. Advertising expenses were
$226,342 in fiscal 2007, $213,721 in fiscal 2006, and $119,078 in
fiscal 2005. The increasing expenses were incurred to enhance the
Company's visibility as a resource to the lodging industry.
Credit Risk
-----------
The Company sells to three distinct markets, original equipment
manufacturers ("OEM's") of manufactured housing, OEM's of recreational
vehicles, and to the hospitality industry. To the extent that economic
conditions might severely impact these markets, the Company could
suffer an abnormal credit loss.
The Company sells primarily on thirty day terms. The Company's
customers are spread over a wide geographic area. As such the Company
believes that it does not have an abnormal concentration of credit risk
within any one geographic area.
In January 2004, the Company began assigning certain account
receivables under a "Receivables Servicing and Credit Approved
Receivables Purchasing Agreement" with CIT Group/Commercial Services
Inc. Only receivables from sales to the hospitality industry may be
assigned to CIT. Under the agreement CIT provides credit checking,
credit approval, and collection responsibilities for the assigned
receivables. If CIT approves an order from a hospitality customer and
the resulting receivables are not paid or disputed by the customer
within
F-8
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
ninety days of sale, CIT will pay the receivable to the Company and
assume ownership of the receivable. CIT begins collection efforts for
the assigned receivables (both approved and not approved) when they are
due (hospitality sales are made on Net 30 terms). Approved receivables
were approximately $795,000 at December 29, 2007. Hospitality customers
are instructed to make payments directly to CIT and CIT then wires
collected funds to the Company. The Company pays CIT a percentage of
all assigned receivables. Management believes this cost will be mostly
offset by reductions in Bad Debt expense and collection costs. The
Company entered into this arrangement to take advantage of CIT's
extensive credit checking and collection capabilities. Management
believes this arrangement has improved liquidity.
Estimates
---------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Actual results may differ from these
estimates and assumptions.
Fair Value of Financial Instruments
-----------------------------------
Marketable securities are carried at fair value. Losses of $4,442 and
$1,299 are included in income for the years ended December 29, 2007 and
December 30, 2006, respectively. All other financial instruments are
carried at amounts believed to approximate fair value.
Earnings Per Share
------------------
Basic earnings per share is computed by dividing net income by
weighted-average number of shares outstanding. Diluted earnings per
share includes the dilutive effect of stock options. No dilution was
recorded for fiscal 2007 because the effect of the stock options on net
loss was antidilutive. See Note 10 "Earnings Per Share" for computation
of EPS.
Stock Based Compensation
------------------------
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004)
"Share Based Payment" ("SFAS No. 123(R))". This standard revised the
original SFAS No. 123 by requiring the expensing of stock options. The
Company began recording the expense of stock options in its financial
statements effective January 1, 2006. For fiscal years 2005 and prior,
the Company used the original provisions of SFAS No. 123. The Company
assumes no tax benefit under SFAS 123(R), as all of its stock options
qualify as incentive stock options, and do not qualify for a tax
deduction unless there is a disqualifying disposition.
In accordance with the previous provisions of SFAS No. 123, the Company
followed the intrinsic value based method of accounting as prescribed
by APB 25, "Accounting for Stock Issued to Employees", for its
stock-based compensation. Accordingly, no compensation cost was
recognized prior to December 31, 2005.
F-9
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
At December 29, 2007, the Company had options outstanding under two
fixed stock option plans. If the Company had elected to recognize
compensation expense in prior years for options granted based on their
fair values at the grant dates, consistent with SFAS No. 123(R), net
income and earnings per share would have been reported as follows:
2006 2005 2004
----------- ----------- -----------
Net (Loss)/Income, as reported $ (807,509) $ 405,393 $ 1,364,814
Deduct: value of stock-based employee
compensation earned but not recorded
in the Statements of Earnings $ -- $ -- $ (74,548)
----------- ----------- -----------
Pro forma Net (Loss)/Income $ (807,509) $ 405,393 $ 1,290,266
Earnings per share:
Basic: as reported $ (0.27) $ 0.14 $ 0.47
Basic: pro forma $ (0.27) $ 0.14 $ 0.45
Diluted: as reported $ (0.27) $ 0.13 $ 0.46
Diluted: pro forma $ (0.27) $ 0.13 $ 0.43
The Company expensed $25,787 and $47,901 in 2007 and 2006,
respectively, under existing option grants.
The option grants for each year were calculated using the following
assumptions:
Year of Valuation Dividend Expected Risk-free Expected
Grant Method Yield Volatility Interest rate Life
- -------------- ---------------------- ------------- ------------- --------------- ------------
1998 Black-Scholes 2.6% 47.7% 5.6% 5.0 years
1999 Black-Scholes 2.5% 42.8% 5.8% 5.0 years
2002 Black-Scholes 2.3% 41.2% 3.6% 10.0 years
2004 Black-Scholes 1.5% 40.1% 2.8% 5.0 years
2005 Black-Scholes 1.3% 41.0% 4.1% 5.0 years
2007 Black-Scholes 2.9% 33.7% 3.6% 6.5 years
F-10
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Awards granted in 1998, 1999, 2002, and 2007 assumed compensation cost
was recognized on a straight-line basis over the requisite service
period for the entire award. Awards granted in 2004 and 2005 assumed
compensation cost was recognized on a straight line basis over the
requisite service period for each seperately vesting portion of the
award. The 2004 and 2005 awards vested 20% at the end of each year for
five years, and the recognition of compensation cost related to these
awards considered them to be in-substance, multiple awards.
In accordance with the Securities and Exchange Commission's "Staff
Accounting Bulleting 110" (SAB 110) issued in December 2007, the
Company estimated the useful life of its 2007 option grant at 6.5
years. SAB 110 permits a simplified method for estimating the expected
life of employee stock options when there is insufficient historical
data to provide a reasonable estimate of expected option life.
Segment Information
-------------------
The Company has one business segment, the interior furnishings
business, and follows the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information".
Recent Accounting Developments
------------------------------
The following Statements of Financial Accounting Standards (SFAS) were
issued by the Financial Accounting Standards Board (FASB):
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities--Including an amendment
of FASB Statement No. 115". SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. SFAS 159
will not have an effect on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007),
"Business Combinations". SFAS No. 141 (Revised 2007) updated the
original SFAS No. 141 by providing greater guidance to companies
involved in acquisitions concerning identifying the acquiring company
and applying the principles of the statement. SFAS No. 141 (Revised
2007) will not have an effect on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements--an amendment of ARB No.
51." This standard will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 will not have an effect on the
Company's financial statements.
F-11
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) INVENTORIES
-----------
Inventories consisted of the following classifications:
2007 2006
---------- ----------
Raw materials & supplies $4,275,090 $4,737,878
In process & finished goods 906,555 913,374
---------- ----------
$5,181,645 $5,651,252
========== ==========
(3) LEASES
------
The Company leases certain buildings and equipment used in its
operations. Building leases generally provide that the Company bears
the cost of maintenance and repairs and other operating expenses. Rent
expense was $373,709 in 2007, $385,750 in 2006, and $386,862 in 2005.
Commitments under these leases extend through August 2012 and are as
follows:
2008 $290,974
2009 $175,894
2010 $ 89,630
2011 $ 61,368
2012 $ 28,815
(4) COMMITMENTS
-----------
The Company has commitments under employment, consulting and
non-compete agreements entered into with four individuals. The minimum
commitments under these agreements are payable as follows:
2008 $490,621
2009 $471,799
2010 $460,334
2011 $460,334
2012 $398,334
The commitments are fixed as to cash compensation, but include the
costs of fringe benefits guaranteed under the terms of the contracts.
One of the commitments includes a long term care policy for the
individual. Should premiums for this long term care policy increase,
the Company's liability for this commitment will increase accordingly.
(5) SIGNIFICANT CUSTOMER
---------------------
Sales to Fleetwood Enterprises accounted for 21.8%, 26.6% and 22.5% of
Company sales in 2007, 2006 and 2005, respectively. Fleetwood operates
in the manufactured housing and recreational vehicle industries.
F-12
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) LONG TERM-DEBT AND CREDIT ARRANGEMENTS
--------------------------------------
Long-term debt consists of the following:
2007 2006
------------ ------------
Note payable in monthly payments of $2,088 through
August 2007 at 4% interest. This note was secured
by the first mortgage on the Bloomsburg, PA
building. This note was paid in full during 2007. $ -- $ 14,148
Note payable in monthly payments of $3,556
principal plus accrued interest at 4.39% monthly
through June 2008. This note is secured by the
Company's Elkhart, IN building. 444,444 487,111
Bond payable in monthly installments through
November 2008. The interest rate is variable and
is 3.47% at December 29, 2007. This bond is secured
by the Company's Bloomsburg, PA property. 50,000 100,000
Bond payable in quarterly installments through
March 2014. The interest rate is variable and
is 3.55% at December 29, 2007. This bond is
secured by the Company's Goshen, IN property. 840,000 940,000
Borrowings on revolving line of credit. The
interest rate is variable and is 6.13% at December
29, 2007 with interest payable monthly. Principal
is due at the maturity date of June 30, 2009. 674,000 407,000
------------ ------------
2,008,444 1,948,259
Less amount due within one year 599,444 206,815
------------ ------------
$ 1,409,000 $ 1,741,444
============ ============
F-13
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) LONG TERM-DEBT AND CREDIT ARRANGEMENTS (CONTINUED)
-------------------------------------------------
The principal payments on long-term debt for the
five years subsequent to December 29, 2007 are as
follows:
2008 $ 599,444
2009 $ 794,000
2010 $ 125,000
2011 $ 140,000
2012 $ 150,000
Thereafter $ 200,000
In May 2006, the Company entered into a line-of-credit agreement with
Wachovia Bank. The agreement with Wachovia provides for a revolving
line of credit of up to $5,000,000, and expires in June 2009. The
interest rate is LIBOR plus 150 basis points and the Company is
required to maintain certain financial covenants. The fourth quarter
loss caused the Company to violate a financial covenant in its loan
agreement with Wachovia Bank. The loan agreement states that the ratio
of Senior Funded Debt to EBITDA may not exceed 2.75 to 1.00. At
year-end this ratio was 7.65 to 1.00. The Company was in compliance
with all other conditions of the loan agreement. Wachovia has provided
a waiver for this violation through the end of the third quarter of
2008. The waiver agreement changes the interest rate from LIBOR plus
150 basis points to LIBOR plus 275 basis points until the Company is in
compliance with the covenant. The Company expects to be in compliance
with the covenant by the end of the fourth quarter of 2008. The Company
believes that it has a good relationship with the Bank and that the
loan agreement provides more than adequate coverage of working capital
needs for 2008. At December 29, 2007, the Company had $674,000 in
outstanding borrowings on its line-of-credit. The Company expects to
use its line of credit throughout 2008.
(7) EMPLOYEE BENEFIT PLANS
----------------------
On September 1, 1998 the Company began a 401(k) Retirement Savings Plan
available to all eligible employees. To be eligible for the plan, the
employee must be at least 21 years of age and have completed 1 year of
employment. Eligible employees may contribute up to 75% of their
earnings with a maximum of $15,500 for 2007 ($20,500 for employees over
50 years of age) based on the Internal Revenue Service annual
contribution limit. For fiscal 2007 and 2006, the Company matched 25%
of the first 6% of the employee's contributions up to 1.5% of each
employee's earnings. Prior to January 1, 2006, the Company matched 25%
of the first 4% of the employee's contributions up to 1% of each
employee's earnings. Effective January 1, 2008, the Company began
matching employee contributions at 100% of the first 3% of the
employee's contributions, and 50% of the next 2% of the employee's
contributions, up to a maximum contribution of 4% of each employee's
earnings. Contributions are invested at the direction of the employee
to one or more funds. Company contributions prior to January 1, 2008
began to vest after two years, with 100% vesting after five years.
Company contributions after January 1, 2008 vest immediately. Company
contributions to the plan were $60,068 in 2007, $66,765 in 2006, and
$49,213 in 2005.
F-14
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS
-------------
Under the 1995 Incentive Stock Option Plan, (the "1995 Plan"), the
Company has granted options to its key employees for up to 520,832 (as
adjusted for stock splits) shares of Common Stock. Under this plan, the
exercise price of the option equals the fair market price of the
Company's stock on the date of the grant and an option's maximum term
is 10 years. Pursuant to the Plan, options for 17,500 shares and 69,700
shares were granted in 2005 and 2004, respectively. The Plan expired
during fiscal 2005, and all options available under the Plan have been
issued. Options granted under the Plan continue to be valid until their
respective expiration dates.
Under the 2006 Incentive Stock Option Plan, (the "2006 Plan"), the
Company may issue up to 250,000 shares of Common Stock. Under this
plan, the exercise price of the option equals the fair market price of
the Company's stock on the date of the grant and an option's maximum
term is 10 years. A total of 115,000 options were granted in 2007 under
the 2006 Plan as of December 29, 2007.
A summary of the status of the Company's outstanding stock options as
of December 29, 2007, December 30, 2006, and December 31, 2005, and
changes during the years ending on those dates is presented below:
2007 2006 2005
------------------------- ------------------------- --------------------------
Exercise Exercise Exercise
Shares (1) Price (2) Shares (1) Price (2) Shares (1) Price (2)
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of year 243,762 $ 6.74 362,728 $6.19 506,632 $5.78
Granted 115,000 4.14 -- -- 17,500 9.00
Exercised -- -- (109,966) 4.91 (148,904) 4.89
Forfeited/Cancelled (39,812) 6.53 (9,000) 7.08 (12,500) 8.87
----------- ----------- -----------
Outstanding at year-end 318,950 $ 5.83 243,762 $6.74 362,728 $6.19
Options exercisable at year-end 173,370 197,442 293,468
Weighted average fair value of
options granted during the year $ 1.19 -- $3.35 --
The following information applies to fixed stock
options outstanding at December 29, 2007:
Number outstanding (1) 318,950
Range of exercise prices $4.14 to $9.30
Weighted-average exercise price $5.83
Weighted-average remaining contractual life 6.76 years
------------
(1) As adjusted for the five-for-four stock split in July 1998.
(2) Based on the weighted-average exercise price.
F-15
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES
------------
A summary of income taxes is as follows:
2007 2006 2005
--------- --------- ---------
Current:
Federal $(470,000) $ 500 $ 679,000
State (69,000) 7,500 155,000
Deferred 55,000 232,000 (64,000)
--------- --------- ---------
Total $(484,000) $ 240,000 $ 770,000
========= ========= =========
Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to net deferred
income tax liability relate to the following:
Depreciation $ 600,000 $ 600,000
Amortization 466,000 405,000
Inventories, due to additonal cost
recorded for income tax purposes (16,000) (21,000)
Accounts receivable, due to allowance
for doubtful accounts (53,000) (79,000)
Directors' Trust (200,000) (165,000)
Accrued liabilities, due to expenses not yet
deductible for income tax purposes (10,000) (8,000)
--------- ---------
$ 787,000 $ 732,000
========= =========
The net deferred income tax liability is presented in the balance
sheets as follows:
2007 2006
--------- ---------
Current Asset $ 79,000 $ 107,000
Long-term Liability 866,000 839,000
F-16
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
------------------------
The effective income tax rate varied from the statutory Federal tax
rate as follows:
2007 2006 2005
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 4.9 4.8 4.1
Other (1.4) (1.6) (2.0)
---- ----- -----
Effective income tax rate 37.5% 37.2% 36.1%
==== ==== =====
(10) EARNINGS PER SHARE
------------------
In accordance with SFAS No. 128, the following is a reconciliation of
the numerators and denominators of the basic and diluted EPS
computations.
2007 2006 2005
---------- ----------- -----------
Numerator:
Net (loss)/income $ (807,509) $ 405,393 $ 1,364,814
========== =========== ===========
Denominator
Weighted-average number of
Common Shares outstanding 3,005,988 2,982,735 2,882,196
Dilutive effect of stock
options on net income 0 53,753 116,402
---------- ----------- -----------
3,005,988 3,036,488 2,998,598
========== =========== ===========
Diluted (loss)/earnings per share $ (0.27) $ 0.13 $ 0.46
========== =========== ===========
No dilutive effects are shown for fiscal 2007 since the effect of stock
options on the net loss is antidilutive.
F-17
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(11) BUSINESS ACQUISITIONS
---------------------
On January 23, 2004, the Company entered into an agreement, effective
January 26, 2004, to purchase the land, building, machinery, equipment,
inventory and other assets of Fleetwood Enterprises Inc.'s
("Fleetwood") drapery operation in Douglas, Georgia for a purchase
price of $4 million in cash, plus an additional amount for inventory of
$1,067,472. Payment for the inventory was paid to Fleetwood on January
24, 2005 along with accrued interest at 4%.
In connection with the acquisition, the Company and Fleetwood entered
into an agreement for the Company to be the exclusive supplier of
Fleetwood's drapery, bedspread, and other decor requirements for a
period of six years. While Fleetwood has advised the Company that it is
satisfied with the Company's performance, it did not extend the
contract at this time beyond its current expiration of January 26,
2010. Currently, Fleetwood is limiting contracts to shorter duration
with two or three years being an exception.
The acquired business was engaged in the manufacture of curtains,
valances, bedspreads and other decor items. Fleetwood used the acquired
business to supply most of its manufactured housing and some of its
recreational vehicle requirements for these items. Sales to other
customers were negligible.
The Company has assigned the excess costs of this acquisition over the
value of the asset acquired to an identifiable intangible asset. This
intangible will be amortized over the life of the agreement with
Fleetwood. The agreement to expand its relationship and become
Fleetwood's exclusive supplier of the above mentioned products was the
primary factor in compelling the Company to make the acquisition. The
asset is currently being amortized over six years. The remaining
benefits of the agreement with Fleetwood exceed the remaining
capitalized cost of the intangible asset.
Fleetwood was the Company's largest customer in 2007 and 2006,
representing 21.8% and 26.6% of total sales, respectively.
On June 1, 2007, the Company acquired certain assets of Superior
Drapery ("Superior"). The assets included inventory, accounts
receivable and office furniture and equipment. The total price paid at
closings was $812,527 after adjustments. Additional payments for the
business may be made over the next five years depending on the sales
and profitability of the business. The additional payments will be no
more than $1,250,000. Additional payments of $9,394 and $7,626 were due
for the third and fourth quarters of 2007, respectively. Superior is a
supplier of window treatments and bed coverings sold mostly to motels
located in the northeastern United States.
On November 30, 2007, the Company acquired certain assets of Doris Lee
Draperies ("Doris Lee"). The assets included inventory, accounts
receivable, machinery, and office furniture and equipment. The total
price paid at closing was $809,083 after adjustments. Additional
payments for the business may be made over the next five years
depending on the sales of the business. The additional payments will be
no more than $1,000,000. Doris Lee was a supplier of window treatments
and bed coverings to the manufactured housing industry.
F-18
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
and Stockholders of
DECORATOR INDUSTRIES, INC.
The audit referred to in our opinion dated March 25, 2008 on the
financial statements as of December 29, 2007 and for each of the three fiscal
years then ended includes the related supplemental financial schedule as listed
in Item 15 (a), which, when considered in relation to the basic financial
statements, presents fairly in all material respects the information shown
therein.
LOUIS PLUNG & COMPANY, LLP
Certified Public Accountants
Pittsburgh, Pennsylvania
March 25, 2008
F-19
DECORATOR INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
Additions
(1) (2)
Charged to Charged to
Balance at Costs Other Balance at
Beginning And Accounts Deductions End
Description of Period Expenses Described Described of Period
- ----------- --------- -------- --------- --------- ---------
DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
ALLOWANCE FOR
DOUBTFUL ACCOUNTS
2007 $ 201,355 152,903 0 217,513 (A) $ 136,745
2006 $ 131,690 196,416 0 126,751 (A) $ 201,355
2005 $ 144,077 30,000 0 42,387 (A) $ 131,690
(A) Write-off bad debts
ALLOWANCE FOR SALES
RETURNS
2007 $ 71,849 18,151 0 0 $ 90,000
2006 $ 53,663 18,186 0 0 $ 71,849
2005 $ 30,000 23,663 0 0 $ 53,663
F-20