UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7753
DECORATOR INDUSTRIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1001433
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10011 Pines Blvd., Suite #201, Pembroke Pines, Florida 33024
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 436-8909
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 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.
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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class Outstanding at November 11, 2008
------------------- --------------------------------
Common Stock, Par Value $.20 Per Share 2,937,767 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
DECORATOR INDUSTRIES, INC.
BALANCE SHEETS
ASSETS SEPTEMBER 27, DECEMBER 29,
2008 2007
------------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and Cash Equivalents $ 33,771 $ 17,544
Accounts Receivable, less allowance for
doubtful accounts ($231,771 and $136,745) 4,241,115 3,423,072
Inventories 4,786,948 5,181,645
Income Taxes Receivable -- 575,594
Other Current Assets 499,606 292,777
Assets Held For Sale 2,620,057 --
------------ ------------
TOTAL CURRENT ASSETS 12,181,497 9,490,632
------------ ------------
Property and Equipment
Land, Buildings & Improvements 6,209,604 9,193,421
Machinery, Equipment, Furniture & Fixtures and Software 8,082,969 7,985,675
------------ ------------
Total Property and Equipment 14,292,573 17,179,096
Less: Accumulated Depreciation and Amortization 8,067,411 7,895,607
------------ ------------
Net Property and Equipment 6,225,162 9,283,489
------------ ------------
Goodwill, less accumulated Amortization of $1,348,569 3,783,867 3,629,943
Identifiable intangible asset, less accumulated Amortization
of $2,555,713 -- 1,339,278
Deferred Income Taxes 331,000 --
Other Assets 389,283 520,562
------------ ------------
TOTAL ASSETS $ 22,910,809 $ 24,263,904
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 2,108,846 $ 2,315,836
Current Maturities of Long-term Debt 2,768,500 599,444
Checks Issued But Not Yet Presented 544,143 241,815
Accrued Expenses:
Compensation 589,326 432,932
Other 2,252,866 1,987,226
------------ ------------
TOTAL CURRENT LIABILITIES 8,263,681 5,577,253
------------ ------------
Long-Term Debt 645,000 1,409,000
Deferred Income Taxes -- 866,000
------------ ------------
TOTAL LIABILITIES 8,908,681 7,852,253
------------ ------------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares, 10,000,000;
Issued shares, 4,651,611 and 4,636,375 930,322 927,275
Paid-in Capital 1,973,125 1,880,861
Retained Earnings 19,411,604 21,530,436
------------ ------------
22,315,051 24,338,572
Less: Treasury stock, at cost: 1,713,844 and 1,613,844 shares 8,312,923 7,926,921
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 14,002,128 16,411,651
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 22,910,809 $ 24,263,904
============ ============
The accompanying notes are an integral part of the financial statements.
1
DECORATOR INDUSTRIES, INC.
STATEMENTS OF EARNINGS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
---------------------------------------------- -----------------------------------------------
SEPTEMBER 27, SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 29,
2008 2007 2008 2007
---------------------- ---------------------- -------------------- ----------------------
Net Sales $ 9,334,653 100.0% $ 11,240,119 100.0% $ 32,401,620 100.0% $ 36,158,771 100.0%
Cost of Products Sold 7,785,917 83.4% 9,242,306 82.2% 27,159,748 83.8% 29,980,616 82.9%
------------ ------------ ------------ ------------
Gross Profit 1,548,736 16.6% 1,997,813 17.8% 5,241,872 16.2% 6,178,155 17.1%
Selling and Administrative
Expenses 2,184,202 23.4% 2,176,488 19.4% 8,344,805 25.8% 6,398,066 17.7%
------------ ------------ ------------ ------------
Operating Loss (635,466) -6.8% (178,675) -1.6% (3,102,933) -9.6% (219,911) -0.6%
Other Income (Expense)
Interest, Investment and
Other Income 12,504 0.1% 24,336 0.2% 47,114 0.2% 79,827 0.2%
Interest Expense (36,328) -0.4% (26,053) -0.2% (99,518) -0.3% (68,637) -0.2%
------------ ------------ ------------ ------------
Loss Before Income Taxes (659,290) -7.1% (180,392) -1.6% (3,155,337) -9.7% (208,721) -0.6%
Provision for Income Taxes (252,000) -2.7% (66,000) -0.6% (1,212,000) -3.7% (66,000) -0.2%
------------ ------------ ------------ ------------
NET LOSS $ (407,290) -4.4% $ (114,392) -1.0% $ (1,943,337) -6.0% $ (142,721) -0.4%
============ ============ ============ ============
EARNINGS PER SHARE
BASIC $ (0.14) $ (0.04) $ (0.66) $ (0.05)
============ ============ ============ ============
DILUTED $ (0.14) $ (0.04) $ (0.66) $ (0.05)
============ ============ ============ ============
Weighted Average Number of
Shares Outstanding
Basic 2,933,683 3,007,223 2,932,846 3,004,220
Diluted 2,933,683 3,007,223 2,932,846 3,004,220
The accompanying notes are an integral part of the financial statements.
2
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THIRTY-NINE WEEKS ENDED
-------------------------------
SEPTEMBER 27, SEPTEMBER 29,
2008 2007
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,943,337) $ (142,721)
Adjustments to Reconcile Net Loss to Net Cash
(Used in)/Provided by Operating Activities
Depreciation and Amortization 900,742 1,102,780
Provision for Losses on Accounts Receivable 177,647 79,087
Deferred Taxes (614,000) 10,000
Stock-Based Compensation 30,561 20,689
Gain on Disposal of Assets (3,301) (13,544)
Noncash charges for asset impairment 1,270,077 --
Increase/(Decrease) from Changes in:
Accounts Receivable (995,090) (265,160)
Inventories 394,697 (177,385)
Prepaid Expenses 447,765 366,152
Other Assets (744,520) (223,920)
Accounts Payable (206,990) 891,247
Accrued Expenses 280,558 (238,067)
------------- -------------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (1,005,191) 1,409,158
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for acquisitions (12,448) (717,661)
Capital Expenditures (181,171) (250,472)
Proceeds from Property Dispositions 4,400 20,097
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (189,219) (948,036)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (556,944) (158,648)
Dividend Payments (175,495) (270,331)
Change in Checks Issued but Not Yet Presented 302,328 (89,058)
Net Borrowings under Line-of-Credit Agreement 1,962,000 16,000
Issuance of Stock for Directors Trust 64,750 60,750
Purchase of Common Stock for Treasury (386,002) --
------------- -------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 1,210,637 (441,287)
Net Increase in Cash and Cash Equivalents 16,227 19,835
Cash and Cash Equivalents at Beginning of Year 17,544 11,379
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 33,771 $ 31,214
============= =============
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 91,235 $ 62,640
Income Taxes $ 6,403 $ 50,061
Increase in Acquisition Cost/Goodwill $ 153,924 $ 717,661
Working Capital, other than Cash (141,476) --
------------- -------------
Net Cash Paid for Acquisition/Goodwill $ 12,448 $ 717,661
============= =============
The accompanying notes are an integral part of the financial statements.
3
DECORATOR INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007
(UNAUDITED)
NOTE 1. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Company's financial position as of September 27, 2008, the changes
therein for the thirty-nine week period then ended and the results of
operations for the thirty-nine week periods ended September 27, 2008
and September 29, 2007.
NOTE 2. The financial statements included in the Form 10-Q are presented in
accordance with the requirements of the form and do not include all of
the disclosures required by accounting principles generally accepted in
the United States of America. For additional information, reference is
made to the Company's annual report on Form 10-K for the year ended
December 29, 2007. The results of operations for the thirty-nine week
periods ended September 27, 2008 and September 29, 2007 are not
necessarily indicative of operating results for the full year.
NOTE 3. INVENTORIES
Inventories at September 27, 2008 and December 29, 2007 consisted of
the following:
SEPTEMBER 27, DECEMBER 29,
2008 2007
------------ ------------
Raw Material and Supplies $ 3,907,515 $ 4,275,090
In Process and Finished Goods 879,433 906,555
------------ ------------
Total Inventory $ 4,786,948 $ 5,181,645
============ ============
NOTE 4. 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 is
shown for all periods since the effect of the stock options on the net
loss is antidilutive. In accordance with SFAS No. 128, the following is
a reconciliation of the numerators and denominators of the basic and
diluted EPS computations:
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
----------------------------- -------------------------------
SEPTEMBER 27, SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 29,
2008 2007 2008 2007
------------- ------------- -------------- --------------
NUMERATOR:
Net loss $ (407,290) $ (114,392) $ (1,943,337) $ (142,721)
============= ============= ============== ==============
Denominator:
Weighted-average number of
common shares outstanding 2,933,683 3,007,223 2,932,846 3,004,220
Dilutive effect of
stock options on net income 0 0 0 0
------------- ------------- -------------- -------------
2,933,683 3,007,223 2,932,846 3,004,220
============= ============= ============== =============
Diluted earnings per share: $ (0.14) $ (0.04) $ (0.66) $ (0.05)
============= ============= ============== =============
4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
CAUTIONARY STATEMENT: THIS QUARTERLY REPORT ON FORM 10-Q 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 AND FUTURE LIQUIDITY WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR
RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS AND
MAY BE AFFECTED BY CHANGES IN GENERAL ECONOMIC CONDITIONS, INTEREST RATE
FLUCTUATIONS, THE AVAILABILITY OF CONSUMER CREDIT, THE AVAILABILITY OF
FLOOR-PLAN CREDIT FOR RECREATIONAL VEHICLE AND MANUFACTURED HOUSING RETAIL
DEALERS, THE AVAILABILITY OF FINANCING FOR MANUFACTURERS, FUEL PRICES,
COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE COMPANY'S MARKETS, THE
COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND EXPENSES, AND OTHER
FACTORS. 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.
FINANCIAL CONDITION
The Company's financial ratios changed as illustrated below. The financial
condition remains strong, and the funded debt to total capitalization ratio
remained low at 19.6%
SEPTEMBER 27, DECEMBER 29,
2008 2007
------------- ------------
Current Ratio 1.47:1 1.70:1
Quick Ratio 0.89:1 0.77:1
Funded Debt to Total Capital 19.6% 10.9%
Working Capital $3,917,816 $3,913,379
The Quick Ratio and Working Capital position improved from year-end due to the
reclassification of some real estate to Assets Held for Sale.
In May 2006, the Company entered into a new 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 2007 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. The Company
believes it is 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 does not expect to be in compliance
with the covenant by the end of the fourth quarter of 2008, unless it is able to
sell its idled properties. At September 27, 2008, the Company had $2,636,000 in
outstanding borrowings on its line-of-credit. The Company expects to use its
line of credit throughout 2008.
Wachovia advised the Company in July 2008 that the Bank would like to enter into
a forbearance agreement during the remaining term of their commitment. To date,
Wachovia has not delivered a forebearance agreement. Management believes that if
the terms of the forbearance agreement are onerous or if Wachovia decides to
accelerate repayment of the credit line that it has alternative sources of
financing to replace the line with Wachovia.
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
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). 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 is 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.
Days Sales Outstanding (DSO) in accounts receivable were 40.6 days at September
27, 2008 compared to 30.6 and 30.9 days at December 29, 2007 and September 29,
2007, respectively. Net accounts receivable were $4,241,115 at September 27,
2008, compared to $3,423,072 and $3,911,240 at December 29, 2007 and September
29, 2007, respectively. Inventories were $4,786,948 at September 27, 2008, as
compared to $5,181,645 and $6,048,250 at December 29, 2007 and September 29,
2007, respectively. The increase in DSO is due to a greater focus on hospitality
sales, which historically have longer collection times than the other two
markets that the Company serves. The decrease in inventory is due to the
reduction of excess inventories from last year. Accounts payable were $2,108,846
at September 27, 2008, as compared to $2,315,836 and $2,791,718 at December 29,
2007 and September 29, 2007, respectively. The reduction in accounts payable is
due to lower sales activity.
Capital expenditures were $181,171 for the nine months ended September 27, 2008,
compared to $250,472 for the same period of the prior year.
The Company idled three facilities during the Third Quarter of 2008. These
facilities have been placed for sale, and the Company has reclassified
$2,620,057 as Assets Held for Sale relating to this action. None of these
facilities has any debt associated with it, and upon completion of the sales,
the proceeds should provide enough funds to pay down the outstanding borrowings
on the Company's line of credit. Management cannot predict when the sales will
occur, but anticipates it will be in the current operating cycle. The savings
from the idled facilities will begin to be seen in the fourth quarter and fully
realized in 2009.
The Company's recent performance has caused the Board of Directors to suspend
the quarterly dividend. The Board will consider reinstatement of the dividend
when the Company's performance returns to a consistent level of profitability.
This action will help improve liquidity.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
SALES BY MARKET
The following table represents net sales to each of the three different markets
that the Company serves for the thirteen and thirty-nine week periods ended
September 27, 2008 and September 29, 2007:
(dollars in thousands)
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
---------------------------------- ----------------------------------
SEPTEMBER 27, SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 29,
2008 2007 2008 2007
--------------- ---------------- --------------- ----------------
Net % of Net % of Net % of Net % of
Sales total Sales total Sales total Sales total
-------- ----- -------- ----- -------- ----- -------- -----
Recreational Vehicle $ 2,347 25% $ 6,074 54% $ 11,670 36% $ 20,457 57%
Manufactured Housing 2,106 23% 2,043 18% 7,068 22% 6,205 17%
Hospitality 4,882 52% 3,123 28% 13,664 42% 9,497 26%
-------- ----- ------- ----- -------- ----- -------- -----
Total Net Sales $ 9,335 100% $ 11,240 100% $ 32,402 100% $ 36,159 100%
======== ======== ======== ========
RESULTS OF OPERATIONS
The Company recorded a charge of $1,430,000 during the Second Quarter 2008. This
charge included the impairment of the Company's Identifiable Intangible Asset.
This asset arose from the Company's contract with Fleetwood Enterprises, signed
in January 2004. The impairment charge of $1,015,278 was in addition to the
regular quarterly amortization of $162,000 that the Company had been recognizing
since the inception of the contract. Management's analysis determined that the
revenues and profit margins provided by the contract had fallen sharply and
impaired the asset. In addition to the impairment of the Intangible Asset, the
Company recognized other impairment charges of $254,799 from obsolete software
and the closure of three of its manufacturing facilities. The plant closures
also include expenses of $159,923 for severance pay and rent.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 27, 2008, (THIRD QUARTER 2008) COMPARED TO
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 29, 2007, (THIRD QUARTER 2007)
The following table shows a comparison of the results of operations between
Third Quarter 2008 and Third Quarter 2007:
THIRD QUARTER % THIRD QUARTER % $ INCREASE
2008 OF SALES 2007 OF SALES (DECREASE) % CHANGE
------------- -------- ------------- ---------- ------------- --------
Net Sales $ 9,334,653 100% $ 11,240,119 100% $ (1,905,466) -17.0%
Cost of Products Sold 7,785,917 83.4% 9,242,306 82.2% (1,456,389) -15.8%
------------- --------- ------------- ---------- -------------
Gross Profit 1,548,736 16.6% 1,997,813 17.8% (449,077) -22.5%
Selling and Administrative Expenses 2,184,202 23.4% 2,176,488 19.4% 7,714 0.4%
------------- -------- ------------- ---------- -------------
Operating Loss (635,466) -6.8% (178,675) -1.6% (456,791) 255.7%
Other Income/(Expense)
Interest, Investment and
Other Income 12,504 0.1% 24,336 0.2% (11,832) -48.6%
Interest Expense (36,328) -0.4% (26,053) -0.2% (10,275) 39.4%
------------- -------- ------------- ---------- -------------
Earnings Before Income Taxes (659,290) -7.1% (180,392) -1.6% (478,898) 265.5%
Provision for Income Taxes (252,000) -2.7% (66,000) -0.6% (186,000) 281.8%
------------- -------- ------------- ---------- -------------
NET LOSS $ (407,290) -4.4% $ (114,392) -1.0% $ (292,898) 256.0%
============= ======== ============= ========== =============
Net sales for the Third Quarter 2008 were $9,334,653, compared to $11,240,119
for the same period in the previous year, a 17.0% decrease. Sales to the
Company's recreational vehicle customers decreased 61.4% in the Third Quarter
2008 when compared to the same period of the prior year. The recreational
vehicle industry reported a 42.0% decrease in shipments during the Third Quarter
2008 compared to the same period of the prior year. Sales to the Company's
manufactured housing customers increased 3.1% in the Third Quarter 2008 when
compared to the same period of the prior year. The current year's sales
increased due to the acquisition of Doris Lee Draperies in the fourth quarter of
2007, as the manufactured housing industry showed a 15.5% decrease in shipments
from the prior year. Sales to the Company's existing manufactured housing
customers declined by 25.3% in the Third Quarter 2008 compared to the same
period of the prior year. Sales to the Company's hospitality customers increased
56.3% in the Third Quarter 2008 when compared to the same period of the prior
year, due to increased marketing efforts and sales activity in the Company's
hospitality business.
Cost of products sold increased to 83.4% of net sales in the Third Quarter 2008
compared to 82.2% of net sales a year ago. The major reasons for the increase in
this percentage were an increase in labor costs as a percent of sales due to
lower production levels, a higher percentage for factory overhead due to fixed
expenses being spread over a lower sales volume, and charges for inventory
obsolescence due to falling demand in the recreational vehicle market.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
Selling and administrative expenses were $2,184,202 in the Third Quarter 2008
versus $2,176,488 in the Third Quarter 2007. Increases in expenses related to
the Company's hospitality business have been offset by reduced expenses in the
recreational vehicle and manufactured housing businesses. The percentage of
selling and administrative expenses to net sales increased from 19.4% in the
Third Quarter 2007 to 23.4% in the Third Quarter 2008. The percentage increase
from the prior year is due to fixed expenses being spread over a lower sales
volume.
Interest expense increased to $36,328 in the Third Quarter 2008 from $26,053 in
the Third Quarter 2007, due to increased borrowings and higher interest rates on
the Company's line of credit during the Third Quarter 2008.
Net loss was $407,290 in the Third Quarter 2008 compared to $114,392 in the
Third Quarter 2007. The increased loss is attributable to the loss of revenue.
Diluted earnings per share decreased from $0.04 loss per share during the Third
Quarter 2007 to $0.14 loss per share during the Third Quarter 2008.
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 27, 2008, (FIRST NINE MONTHS 2008)
COMPARED TO THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 29, 2007, (FIRST NINE MONTHS
2007)
The following table shows a comparison of the results of operations between
First Nine Months 2008 and First Nine Months 2007:
FIRST FIRST
NINE MONTHS % NINE MONTHS % $ INCREASE
2008 OF SALES 2007 OF SALES (DECREASE) % CHANGE
------------- -------- ------------- -------- ------------ --------
Net Sales $ 32,401,620 100% $ 36,158,771 100% $ (3,757,151) -10.4%
Cost of Products Sold 27,159,748 83.8% 29,980,616 82.9% (2,820,868) -9.4%
------------- -------- ------------- -------- ------------
Gross Profit 5,241,872 16.2% 6,178,155 17.1% (936,283) -15.2%
Selling and Administrative Expenses 8,344,805 25.8% 6,398,066 17.7% 1,946,739 30.4%
------------- -------- ------------- -------- ------------
Operating Loss (3,102,933) -9.6% (219,911) -0.6% (2,883,022) 1311.0%
Other Income/(Expense)
Interest, Investment and
Other Income 47,114 0.2% 79,827 0.2% (32,713) -41.0%
Interest Expense (99,518) -0.3% (68,637) -0.2% (30,881) 45.0%
------------- --------- ------------- -------- ------------
Earnings Before Income Taxes (3,155,337) -9.7% (208,721) -0.6% (2,946,616) 1411.7%
Provision for Income Taxes (1,212,000) -3.7% (66,000) -0.2% (1,146,000) 1736.4%
------------- -------- ------------- -------- ------------
NET LOSS $ (1,943,337) -6.0% $ (142,721) -0.4% $ (1,800,616) 1261.6%
============= ======== ============= ======== ============
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
Net sales for the First Nine Months 2008 were $32,401,620, compared to
$36,158,771 for the same period in the previous year, a 10.4% decrease. Sales to
the Company's recreational vehicle customers decreased 43.0% in the First Nine
Months 2008 when compared to the same period of the prior year. The recreational
vehicle industry reported a 24.6% decrease in shipments during the first nine
months of 2008 compared to the same period of the prior year. Sales to the
Company's manufactured housing customers increased 13.9% in the First Nine
Months 2008 when compared to the same period of the prior year. The current
year's sales increased due to the acquisition of Doris Lee Draperies in the
fourth quarter of 2007, as the manufactured housing industry showed a 10.2%
decrease in shipments from the prior year. Sales to the Company's existing
manufactured housing customers decreased 19.2% during the First Nine Months 2008
when compared to the same period of the prior year. Sales to the Company's
hospitality customers increased 43.9% in the First Nine Months 2008 when
compared to the same period of the prior year, due to increased sales activity
in the Company's ongoing hospitality business, as well as the effect of the
Superior Drapery acquisition which only reflected four months of operations for
the First Nine Months 2007.
Cost of products sold increased to 83.8% of net sales in the First Nine Months
2008 compared to 82.9% of net sales a year ago. The major reasons for the
increase in this percentage were an increase in labor costs as a percent of
sales due to lower production levels, and a higher percentage for factory
overhead due to fixed expenses being spread over a lower sales volume.
Selling and administrative expenses were $8,344,805 in the First Nine Months
2008 versus $6,398,066 in the First Nine Months 2007. The major reason for this
increase was the charge of $1,430,000 to writeoff the Company's intangible asset
and the closing of underperforming facilities. Also included in the First Nine
Months 2008 expenses is an unusually high charge to the bad debt reserve of
$177,647. Most of the bad debt charge has been established for customers in the
recreational vehicle industry. Without these charges, selling and administrative
expenses would have been $6,737,158. The major reasons for this increase were
the increased commissions for hospitality market sales, the Superior Drapery
business acquired in June 2007 and the Doris Lee Draperies business acquired in
December 2007. The percentage of selling and administrative expenses to net
sales increased from 17.7% for the First Nine Months 2007 to 25.8% for the First
Nine Months 2008. Without the $1,430,000 and $177,647 charges, selling and
administrative expenses for the First Nine Months 2008 would have been 20.8%.
Interest expense increased to $99,518 in the First Nine Months 2008 from $68,637
in the First Nine Months 2007, due to greater outstanding borrowings and higher
interest rates during the First Nine Months 2008 on the Company's revolving line
of credit compared to the same period of the prior year.
Net loss was $1,943,337 in the First Nine Months 2008 compared to $142,721 net
loss in the First Nine Months 2007. The major reasons for the increased loss was
the loss of revenue, the $1,430,000 asset impairment charge and the $177,647 bad
debt expense. In addition, profitability was adversely affected by the
assimilation costs of the customers acquired in the Doris Lee Draperies
acquisition. These costs included the higher labor, freight, and other costs
associated with moving production from the Doris Lee facility to the Company's
own facilities. Diluted loss per share increased from $0.05 during the First
Nine Months 2007 to $0.66 during the First Nine Months 2008.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (continued)
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 the thirteen and thirty-nine week periods ended September
27, 2008 and September 29, 2007:
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
---------------------------- -------------------------------
SEPTEMBER 27, SEPTEMBER 29, SEPTEMBER 27, SEPTEMBER 29,
2008 2007 2008 2007
------------- ------------- --------------- -------------
Net Loss $ (407,290) $ (114,392) $ (1,943,337) $ (142,721)
Add:
Interest 36,328 26,053 99,518 68,637
Taxes (252,000) (66,000) (1,212,000) (66,000)
Depreciation & Amortization 187,501 362,223 900,742 1,102,780
Gain on Disposal of Assets 699 (417) (3,301) (13,544)
Noncash charge for Asset Impairment -- -- 1,270,077 --
------------- ------------- --------------- --------------
EBITDA $ (434,762) $ 207,467 $ (888,301) $ 949,152
============= ============= =============== ==============
11
Item 4. Controls and Procedures.
(a) The Company's principal executive officer and principal financial officer
have reviewed the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 27, 2008 and have
concluded that they were adequate and effective.
(b) During the most recent fiscal quarter, there were no changes in the
Company's internal control over financial reporting identified in connection
with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 5. Other Information
The Company's recent performance has caused the Board of Directors to suspend
the quarterly dividend. The Board will consider reinstatement of the dividend
when the Company's performance returns to a consistent level of profitability.
Item 6. Exhibits
31.1 - Certification of Principal Executive Officer
31.2 - Certification of Principal Financial Officer
32 - Certificate required by 18 U.S.C.ss.1350.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECORATOR INDUSTRIES, INC.
(Registrant)
Date: November 11, 2008 By: /s/ William A. Johnson
-------------------------------------
William A. Johnson,
Chief Executive Officer and President
Date: November 11, 2008 By: /s/ Michael K. Solomon
-----------------------
Michael K. Solomon,
Chief Financial Officer
13