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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended January 3, 2009
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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1001433
----------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10011 Pines Blvd., Pembroke Pines, Florida 33024
- ------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 436-8909
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, Par Value $.20 Per Share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark 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 $2.50 at June 27, 2008:
$5,670,850
Number of shares of common stock outstanding at March 31, 2009: 2,979,207
DOCUMENTS INCORPORATED BY REFERENCE
Part III- Portions of the Proxy Statement for the 2009
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, THE GENERAL ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS, THE
AVAILABILITY OF CONSUMER CREDIT, AVAILABILITY OF FLOOR-PLAN CREDIT FOR
RECREATIONAL VEHICLE AND MANUFACTURED HOUSING RETAIL DEALERS, 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. 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:
2008 - 53 weeks ended January 3, 2009
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
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 2008, Fleetwood Enterprises, Inc. ("Fleetwood"), accounted for
12.9% of the Company's total sales. No other customer accounted for more than
10% of the Company's sales. On March 10, 2009, Fleetwood filed a Chapter 11
bankruptcy. The accounts receivable due from Fleetwood at the time of the filing
was approximately $115,000 and was fully reserved for in the 2008 year-end
allowance for doubtful accounts. Simultaneously with the bankruptcy filing,
Fleetwood announced its intentions to close all of its remaining travel-trailer
plants. The Company will continue to supply Fleetwood's manufactured housing and
motor home businesses. The expected revenue from Fleetwood in 2009 will be
significantly less than experienced in prior years. In the second quarter of
2008, the Company's management, recognizing its reduced level of business with
Fleetwood, totally impaired the remainder of its identifiable intangible asset
arising from the January 2004 supply agreement with Fleetwood.
1
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 Superior
acquisition has enhanced the Company's position as a supplier to the hospitality
market.
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 Doris Lee acquisition has enhanced the Company's 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 2008 and 2007 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 270 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 Held for sale 35,000 Held for sale
Pembroke Pines, Florida Offices 3,148 Leased
Douglas, Georgia Held for sale 28,000 Held for sale
Elkhart, Indiana Held for sale 51,000 Held for sale
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 Held for sale 56,500 Held for sale
Abbotsford, Wisconsin Offices, manufacturing and warehouse 32,000 Owned
Total Owned 212,400
Total Leased 39,998
Total Held for sale 170,500
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 facility is subject to a mortgage 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.
2008 SALES PRICES 2007 SALES PRICES
--------------------- ----------------------
HIGH LOW HIGH LOW
First Quarter $ 4.65 $ 3.61 $ 7.55 $ 6.20
Second Quarter 3.87 2.48 7.38 6.45
Third Quarter 2.50 1.70 6.87 5.35
Fourth Quarter 1.75 0.25 6.40 4.00
As of March 13, 2009, the Company had 225 shareholders of record of its
Common Stock.
Total cash dividend payments were $0.06 per share in 2008 and $0.12 per
share in 2007. The cash dividend was suspended in 2008. The Company does not
expect to resume paying dividends until it maintains a consistent level of
profitability.
At January 3, 2009, 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 Common Stock. The Company granted
options for 115,000 shares under the 2006 Plan in 2007. No options were granted
in 2008.
The following is a summary of the options outstanding under the 1995
Plan and the 2006 Plan at January 3, 2009:
Number of shares available
Number of shares optioned Weighted average exercise price for future options
------------------------- ------------------------------- ------------------
1995 Plan 168,950 $6.67 0
2006 Plan 105,000 $4.14 145,000
------- ----- -------
Total 273,950 $5.70 145,000
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
2008 and 2007, the Company awarded five non-employee directors a total of 22,354
and 13,544 shares, respectively. All non-employee directors receive their shares
in a Directors Trust, for which the Chairman of the Company is the Trustee.
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.
2008 2007 2006 2005 2004
------------ ------------ ------------ ------------ ------------
FOR THE YEAR
Net Sales $ 39,617,182 $ 46,080,584 $ 52,237,720 $ 50,525,343 $ 50,449,214
Net (Loss)/Income $ (2,585,487) $ (807,509) $ 405,393 $ 1,364,814 $ 1,394,698
------------ ------------ ------------ ------------ ------------
AT YEAR END
Total Assets $ 20,146,809 $ 24,263,904 $ 24,998,571 $ 24,294,365 $ 23,962,077
Debt Obligations $ 3,299,000 $ 2,008,444 $ 1,948,259 $ 1,748,554 $ 1,923,277
Funded Debt/Total Capitalization 19.76% 10.90% 10.05% 9.28% 10.85%
Working Capital $ 407,099 $ 3,913,379 $ 5,382,358 $ 6,092,349 $ 4,167,876
Current Ratio 1.07:1 1.70:1 2.08:1 2.20:1 1.73:1
Stockholders' Equity $ 13,399,693 $ 16,411,651 $ 17,428,542 $ 17,088,012 $ 15,799,668
------------ ------------ ------------ ------------ ------------
PER SHARE
Basic Earnings $ (0.88) $ (0.27) $ 0.14 $ 0.47 $ 0.50
Diluted Earnings $ (0.88) $ (0.27) $ 0.13 $ 0.46 $ 0.47
Book Value $ 4.55 $ 5.43 $ 5.81 $ 5.84 $ 5.58
Cash Dividends Declared $ 0.06 $ 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 2008, the Company's top 10 customers accounted for approximately
46.0% of net sales, as opposed to 54.5% in 2007. The loss of a large customer
can have a significant impact on the Company's results of operations. On March
10, 2009, Fleetwood filed a Chapter 11 bankruptcy. The accounts receivable due
from Fleetwood at the time of the filing was approximately $115,000 and was
fully reserved for in the 2008 year-end allowance for doubtful accounts.
Simultaneously with the bankruptcy filing, Fleetwood announced its intentions to
close all of its remaining travel-trailer plants. The Company will continue to
supply Fleetwood's manufactured housing and motor home businesses. The expected
revenue from Fleetwood in 2009 will be significantly less than experienced in
prior years. In the second quarter of 2008, the Company's management,
recognizing its reduced level of business with Fleetwood, totally impaired the
remainder of its identifiable intangible asset arising from the January 2004
supply agreement with Fleetwood.
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 sharp decrease in 2008 in
the number of units shipped. Total industry shipments of motor homes and travel
trailers decreased from 353,400 in 2007, to 237,000 in 2008. Travel trailer
shipments by the RV industry decreased 30.0% in 2008 when compared to 2007, and
industry shipment of motor homes decreased by 48.9% in 2008 when compared to
2007. The Company's sales to the RV industry declined by 47.1% from 2007 to
2008. The decrease in the Company's sales to the RV industry was directly
related to decreased production of recreational vehicles by its customers.
The manufactured housing market has been declining since its peak of
372,800 shipments in 1998. Industry shipments in 2008 were 81,889; compared to
95,769 shipments in 2007, a decrease of 14.5%. Shipments in 2008 were the lowest
levels experienced by the industry since 1961. The Company's sales to the
manufactured housing industry increased by 5.7% in 2008 when compared to 2007.
The increase was due to the acquisition of Doris Lee Draperies on November 30,
2007. Without this acquisition, the Company's sales to the manufactured housing
industry would likely have declined by 23% in 2008.
The Company's sales to the hospitality industry increased 38.5% during
2008 when compared to the previous year. Approximately 1/3 of this increase is
attributable to owning the Superior Drapery business for all of 2008 versus
seven months in 2007. Hospitality sales are affected by demand for hospitality
accommodations and the growth of the industry. This was the highest volume of
annual sales experienced by the Company to this market.
SALES BY MARKET:
The following table represents net sales to each of the three different
markets that the Company serves for each of the two fiscal years in the period
ended January 3, 2009:
(dollars in thousands)
2008 2007
--------------------- ---------------------
NET % OF NET % OF
SALES TOTAL SALES TOTAL
--------- --------- --------- ---------
Recreational Vehicle $ 13,306 33% $ 25,165 55%
Manufactured Housing 8,559 22% 8,100 17%
Hospitality 17,752 45% 12,816 28%
--------- --------- --------- ---------
Total Net Sales $ 39,617 100% $ 46,081 100%
========= =========
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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 January 3, 2009 was $407,099 compared to
$3,913,379 at December 29, 2007.
2) The current ratio was 1.07:1 at year-end 2008 compared to
1.70:1 at year-end 2007.
3) The liquid ratio was 0.45:1 at year-end 2008 compared to
0.77:1 at year-end 2007.
4) The funded debt ratio was 19.8% at January 3, 2009 compared to
10.9% a year earlier.
The working capital, current ratio and liquid ratio were negatively
impacted by the change in classification in June 2008 of the revolving debt due
Wachovia Bank. This item was classified as long term at year-end 2007 and as
short-term at year 2008, due to its maturity date of June 30, 2009.
Net accounts receivable decreased $1,208,816 (35.3%) at January 3,
2009, when compared to December 29, 2007. Accounts receivable decreased due to a
reduction of sales volume in the fourth quarter of 2008 when compared to the
fourth quarter of 2007. Days Sales Outstanding (DSO) decreased from 30.6 days at
the end of fiscal 2007 to 29.8 days at the end of fiscal 2008.
The allowance for doubtful accounts increased from $136,745 at year-end
2007 to $496,421 at year-end 2008. The allowance was increased because of
management's concern for the viability of specific customers. Subsequent to
year-end, two of these customers, Fleetwood Enterprises and Monaco Coach Corp.,
filed Chapter 11 bankruptcies. The accounts receivable for both of these
customers (approximately $200,000 in total) was fully reserved for at year-end.
The remaining reserve of approximately $250,000 is considered adequate to fully
reserve for the remaining delinquent accounts.
7
ITEM 7. 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). Approved receivables were
approximately $1,235,000 at January 3, 2009. 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.
Net inventories decreased $1,398,064 (27.0%) at January 3, 2009, when
compared to December 29, 2007. The decrease in net inventories was due primarily
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 $36,650 and
$17,020 were due for fiscal 2008 and 2007, respectively.
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. The additional payments will be no more than $1,000,000. Additional
payments of $134,549 were due for fiscal 2008.
Capital expenditures for 2008 were $212,316 compared to $275,342 in
2007. At this time, capital spending for 2009 is expected to be less than
$350,000.
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 on June 30, 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 the financial
covenant in the loan agreement 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 provided a waiver for this
violation through the end of the third quarter of 2008. The waiver agreement
changed the interest rate from LIBOR plus 150 basis points to LIBOR plus 275
basis points. The waiver has expired and the Company is in default of the loan
covenant. At January 3, 2009, the Company had $2,564,000 in outstanding
borrowings on the line-of-credit. The outstanding balance on the line-of-credit
as of March 31, 2009 was $3,863,000.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Management has negotiated with Wachovia Bank, which is now a Wells
Fargo Company, for Wachovia to continue to fund its line-of-credit beyond the
June 30, 2009 expiration date of its current agreement. Wachovia has initially
agreed to provide the Company with a forbearance agreement which will run for
six months to December 31, 2009. Wachovia has suggested that, if need be, it
could provide an additional six month agreement through June 30, 2010. Although
the forbearance agreement has not been completed at this time, Wachovia has
indicated that the interest rate under the forbearance agreement will be eight
percent, and a fee for extending the line will be required.
The Company has offered four of its active facilities in sale/leaseback
packages. The Company has gone to contract on two of these facilities and
expects to close on them in May 2009. These two transactions will provide
proceeds of $1.5 million. The proceeds will be used to pay down the
line-of-credit with Wachovia. The remaining two facilities being offered for
sale/leaseback could provide an additional $1.0 million in proceeds. Currently,
the Company is not in active negotiations on the remaining facilities.
In addition, four of the facilities, which were idled in 2008, have
been listed for sale. If the Company were to realize its asking price for all of
these, the proceeds would be approximately $4,750,000.
None of the eight facilities discussed above are currently encumbered
with debt.
Should all of the above transactions be completed, management projects
a year-end 2009 cash balance in excess of $3,000,000.
Should none of the remaining transactions occur, working capital
provided by the Wachovia agreement will be sufficient to support the existing
business but will not provide room for growth. Management continues to discuss
lending agreements with other financial institutions.
RESULTS OF OPERATIONS:
The Company recorded a charge of $1,015,278 during the second quarter
of fiscal 2008 for 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 was in addition to the regular
quarterly amortization 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 totally impaired the
asset.
The Company closed and consolidated five of its manufacturing
facilities during 2008. (One of these, the Bloomsburg, PA facility, was closed
in March 2009. All allowable charges for the closing were recognized in 2008). A
summary of the impairment and closing costs included in the 2008 results of
operations are:
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Impairment of the
Identifiable Intangible Asset $ 1,015,278
Regular amortization of the
Identifiable Intangible Asset 324,000
Impairment of assets related to
plant closings 354,799
Severance and other plant closing costs 334,924
Inventory obsolescence costs related
to plant closings 125,000
------------
Total impairment, amortization, and
plant closing costs $ 2,154,001
============
The following table shows a comparison of the results of operations between
fiscal 2008 and fiscal 2007:
FISCAL % FISCAL % $ INCREASE
2008 OF SALES 2007 OF SALES (DECREASE) % CHANGE
------------ ------- ------------ ------- ------------ --------
Net Sales $ 39,617,182 100% $ 46,080,584 100% $ (6,463,402) -14.0%
Cost of Products Sold 33,109,093 83.6% 38,798,908 84.2% (5,689,815) -14.7%
------------ ------- ------------ ------- ------------ --------
Gross Profit 6,508,089 16.4% 7,281,676 15.8% (773,587) -10.6%
Selling and Administrative Expenses 10,989,419 27.7% 8,575,289 18.6% 2,414,130 28.2%
------------ ------- ------------ ------- ------------ --------
Operating Loss (4,481,330) -11.3% (1,293,613) -2.8% (3,187,717) 246.4%
Other Income (Expense)
Interest, Investment and
Other Income 60,670 0.2% 94,320 0.2% (33,650) -35.7%
Interest Expense (142,797) -0.4% (92,216) -0.2% (50,581) 54.9%
------------ ------- ------------ ------- ------------ --------
Loss Before Income Taxes (4,563,457) -11.5% (1,291,509) -2.8% (3,271,948) 253.3%
Provision for Income Taxes (1,978,000) -5.0% (484,000) -1.0% (1,494,000) 308.7%
------------ ------- ------------ ------- ------------ --------
NET LOSS $ (2,585,457) -6.5% $ (807,509) -1.8% $ (1,777,948) 220.2%
============ ======= ============ ======= ============ ========
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net sales for fiscal 2008 were $39,617,182 compared to $46,080,584 in
fiscal 2007. The net sales decrease was 14.0%. Sales to the recreational vehicle
market decreased 47.1%, primarily due to decreased shipments of motor homes and
travel trailers by the Company's customers. The recreational vehicle industry
had a 32.9% decrease in shipments in 2008 compared to the prior year. Sales to
the manufactured housing industry increased 5.7% in fiscal 2008 when compared to
the prior year. This was due to increased sales from the Company's Doris Lee
Draperies acquisition. Without this acquisition, the Company's sales to the
manufactured housing industry would likely have declined by 23% in fiscal 2008.
The manufactured housing industry had a 14.5% decrease in shipments in 2008
compared to the same period of the prior year. Sales to the hospitality market
increased 38.5% in fiscal 2008, due largely to organic growth from increased
marketing efforts and to a lesser extent a full year of operations from the
Superior Drapery acquisition.
Cost of products sold as a percentage of sales was 83.6% in 2008 versus
84.2% in 2007. Labor costs increased as a percentage of net sales, largely due
to reduced volume, shorter lead times and smaller production lot sizes,
conditions which may be expected to continue in the current market environment.
The increase in labor costs was more than offset by a change in product mix,
improved margins and a reduction in obsolescence charges. 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.
Selling and administrative expenses increased by $2,414,130 compared to
2007. As a percentage of sales, selling and administrative expenses increased
from 18.6% in fiscal 2007 to 27.7% in fiscal 2008. The major reasons for the
increase were the impairment of the identifiable intangible asset ($1,015,278);
impairment, severance and other plant closing costs ($689,723); an increase in
salaries and wages ($394,051- mostly as a result of the Superior acquisition);
and increase in bad debt expense ($309,096).
Interest, investment and other income decreased 35.7% to $60,670 in
2008, while interest expense increased 54.9% to $142,797. The lower amounts from
other income is largely due to lower cash discounts available on accounts
payable from reduced purchasing activity. Interest expense increased as total
outstanding debt increased.
Net loss was $2,585,457 in 2007 compared to $807,509 in 2007. The
decrease is primarily due to decreased sales volume and the writeoff of the
intangible asset as well as expenses for plant closings. Diluted loss per share
increased from a loss of $0.27 in fiscal 2007 to a loss of $0.88 in fiscal 2008.
11
ITEM 7. 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 each of the three fiscal years in the period ended
January 3, 2009:
2008 2007 2006
----------- ----------- -----------
Net (Loss)/Income $(2,585,457) $ (807,509) $ 405,393
Add:
Income Tax (1,978,000) (484,000) 240,000
Interest Expense 142,797 92,216 90,080
Depreciation and
Amortization 1,067,674 1,461,810 1,449,129
(Gain) Loss on Disposal (353) (13,944) 15,606
of Assets
Noncash Charge for
Asset Impairment 1,370,077 0 0
----------- ----------- -----------
EBITDA $(1,983,262) $ 248,573 $ 2,200,208
=========== =========== ===========
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.
12
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 January
3, 2009, 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 January 3, 2009, and is effective. The evaluation disclosed no
changes in the Company's internal control over financial reporting during the
quarter ended January 3, 2009 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.
On March 31, 2009, William Johnson, the Company's Chief Executive
Officer and President, was appointed to the Company's Board of Directors to fill
the vacancy resulting from the resignation of Timothy J. Lindgren. Mr. Johnson's
term runs until the Annual Meeting of Shareholders in 2011.
13
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 January 3, 2009. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 3, 2009. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 3, 2009. 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 January 3, 2009. Such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after January 3, 2009. Such information is incorporated herein by reference.
14
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
Financial Statements and Schedules
(1) Independent Auditors' Report
(2) Balance Sheets - January 3, 2009 and December 29, 2007
(3) Statements of Earnings for the three fiscal years for the
period ended January 3, 2009
(4) Statements of Stockholders' Equity for the three fiscal years
for the period ended January 3, 2009
(5) Statements of Cash Flows for the three fiscal years for the
period ended January 3, 2009
(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.2 By-laws as amended to date, filed as Exhibit 3B.2 to Form 10-Q for
the Quarter ended March 29, 2008 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.*
15
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.*
10T.3 Amendment dated December 29, 2008 to Employment Agreement between
the registrant and William Bassett, filed herewith.*
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 as
Exhibit 10AA.1 to Form 10-K for the year ended December 29, 2007 and
incorporated herein by reference.
10AA.2 Amended and Restated Revolving Promissory Note, and related Amended
Loan Agreement and Addendum, filed as Exhibit 10AA.2 to Form 10-Q
for the Quarter ended March 29, 2008 and incorporated herein by
reference.
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.
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DECORATOR INDUSTRIES, INC.
(Registrant)
By: /s/ Michael K. Solomon
--------------------------
Michael K. Solomon
Vice President
Dated: March 31, 2009
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, Chief Executive /s/ William A. Johnson March 31, 2009
Officer and Director -----------------------------
Michael K. Solomon Vice President, Treasurer, /s/ Michael K. Solomon March 31, 2009
Secretary, Principal Financial -----------------------------
and Accounting Officer
William A. Bassett Chairman and Director /s/ William A. Bassett March 31, 2009
-----------------------------
Joseph N. Ellis Director /s/ Joseph N. Ellis March 31, 2009
-----------------------------
Ellen Downey Director /s/ Ellen Downey March 31, 2009
-----------------------------
Thomas Dusthimer Director /s/ Thomas Dusthimer March 31, 2009
-----------------------------
William Dixon Director /s/ William Dixon March 31, 2009
-----------------------------
Terrence Murphy Director /s/ Terrence Murphy March 31, 2009
-----------------------------
17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
DECORATOR INDUSTRIES, INC.
We have audited the accompanying balance sheets of Decorator
Industries, Inc. (a Pennsylvania corporation) as of January 3, 2009 and December
29, 2007 and the related statements of earnings, stockholders' equity and cash
flows for each of the three fiscal years in the period ended January 3, 2009.
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 January 3, 2009 and December 29, 2007, and the results of
its operations and its cash flows for each of the three fiscal years in the
period ended January 3, 2009 in conformity with accounting principles generally
accepted in the United States of America.
LOUIS PLUNG & COMPANY, LLP
Certified Public Accountants
Pittsburgh, Pennsylvania
March 31, 2009
F-1
DECORATOR INDUSTRIES, INC
BALANCE SHEETS
ASSETS JANUARY 3, DECEMBER 29,
2009 2007
----------- -----------
CURRENT ASSETS:
Cash and Cash Equivalents $ 16,499 $ 17,544
Accounts Receivable, less allowance for
doubtful accounts ($446,421 and $136,745) 2,214,256 3,423,072
Inventories 3,783,581 5,181,645
Income Taxes Receivable -- 575,594
Other Current Assets 524,879 292,777
----------- -----------
TOTAL CURRENT ASSETS 6,539,215 9,490,632
----------- -----------
Property and Equipment
Land, Buildings & Improvements 4,805,667 9,193,421
Machinery, Equipment, Furniture & Fixtures and Software 7,750,046 7,985,675
----------- -----------
Total Property and Equipment 12,555,713 17,179,096
Less: Accumulated Depreciation and Amortization 7,355,020 7,895,607
----------- -----------
Active Assets, Net 5,200,693 9,283,489
Property Held for Sale, Net 3,369,374 --
----------- -----------
Net Property and Equipment 8,570,067 9,283,489
----------- -----------
Goodwill, less accumulated Amortization of $1,348,569 3,799,300 3,629,943
Identifiable intangible asset, less accumulated Amortization
of $2,555,713 as of December 29, 2007 -- 1,339,278
Deferred Income Taxes 876,000 --
Other Assets 362,227 520,562
----------- -----------
TOTAL ASSETS $20,146,809 $24,263,904
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 830,153 $ 2,315,836
Current Maturities of Long-term Debt 2,684,000 599,444
Checks Issued but Not Yet Presented 321,703 241,815
Accrued Expenses:
Compensation 420,583 432,932
Other 1,875,677 1,987,226
----------- -----------
TOTAL CURRENT LIABILITIES 6,132,116 5,577,253
----------- -----------
Long-Term Debt 615,000 1,409,000
Deferred Income Taxes -- 866,000
----------- -----------
TOTAL LIABILITIES 6,747,116 7,852,253
----------- -----------
Stockholders' Equity
Common Stock $.20 par value: Authorized shares, 10,000,000;
Issued shares, 4,658,729 and 4,636,375 931,746 927,275
Paid-in Capital 2,011,386 1,880,861
Retained Earnings 18,769,484 21,530,436
----------- -----------
21,712,616 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 13,399,693 16,411,651
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,146,809 $24,263,904
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
DECORATOR INDUSTRIES, INC
STATEMENTS OF EARNINGS
FOR THE FISCAL YEAR
------------------------------------------------
2008 2007 2006
------------ ------------ ------------
Net Sales $ 39,617,182 $ 46,080,584 $ 52,237,720
Cost of Products Sold 33,109,093 38,798,908 42,926,510
------------ ------------ ------------
Gross Profit 6,508,089 7,281,676 9,311,210
Selling and Administrative Expenses 10,989,419 8,575,289 8,688,386
------------ ------------ ------------
Operating (Loss)/Income (4,481,330) (1,293,613) 622,824
Other Income/(Expense)
Interest, Investment and
Other Income 60,670 94,320 112,649
Interest Expense (142,797) (92,216) (90,080)
------------ ------------ ------------
(Loss)/Earnings Before Income Taxes (4,563,457) (1,291,509) 645,393
Provision for Income Taxes (1,978,000) (484,000) 240,000
------------ ------------ ------------
NET (LOSS)/INCOME $ (2,585,457) $ (807,509) $ 405,393
============ ============ ============
EARNINGS PER SHARE
BASIC $ (0.88) $ (0.27) $ 0.14
============ ============ ============
DILUTED $ (0.88) $ (0.27) $ 0.13
============ ============ ============
Weighted Average Number of Shares Outstanding
Basic 2,934,530 3,005,988 2,982,735
Diluted 2,934,530 3,005,988 3,036,488
The accompanying notes are an integral part of the financial statements.
F-3
DECORATOR INDUSTRIES, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------------ ------------ ------------ ------------ ------------
BALANCE AT
DECEMBER 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
Transactions for 2008
Net Loss (2,585,457) (2,585,457)
Issuance of stock for
Directors compensation 4,471 90,529 95,000
Purchase of Common
Stock for treasury (386,002) (386,002)
Stock-Based Compensation 39,996 39,996
Dividends paid (175,495) (175,495)
------------ ------------ ------------ ------------ ------------
BALANCE AT
JANUARY 3, 2009 $ 931,746 $ 2,011,386 $ 18,769,484 $ (8,312,923) $ 13,399,693
============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
DECORATOR INDUSTRIES, INC
STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR
---------------------------------------------
2008 2007 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss)/Income $(2,585,457) $ (807,509) $ 405,393
Adjustments to Reconcile Net (Loss)/Income to Net Cash
(Used in)/Provided by Operating Activities
Depreciation and Amortization 1,067,674 1,461,810 1,449,129
Provision for Losses on Accounts Receivable 461,999 152,903 196,416
Deferred Taxes (1,978,000) 55,000 232,000
Stock-Based Compensation 39,996 25,787 47,901
Gain on Disposal of Assets (353) (13,944) 15,606
Noncash charges for asset impairment 1,370,077 -- --
Increase (Decrease) from Changes in:
Accounts Receivable 746,857 149,192 651,832
Inventories 1,398,064 850,288 149,301
Prepaid Expenses 579,492 87,774 (650,542)
Other Assets (63,013) (316,096) 114,133
Accounts Payable (1,485,683) 415,365 (1,175,324)
Accrued Expenses (225,394) 22,266 497,550
----------- ----------- -----------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (673,741) 2,082,836 1,933,395
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Cash Paid for Acquisitions (25,082) (1,300,372) --
Capital Expenditures (212,316) (275,382) (3,091,473)
Proceeds from Property Dispositions 6,147 20,497 3,894
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (231,251) (1,555,257) (3,087,579)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term Debt Payments (599,444) (206,815) (207,295)
Dividend Payments (175,495) (360,622) (358,217)
Change in Checks Issued but Not Yet Presented 79,888 (346,430) 588,245
Proceeds from Exercise of Stock Options -- -- 164,453
Net Borrowings under Line-of-Credit Agreements 1,890,000 267,000 407,000
Issuance of Stock for Directors' Trust 95,000 91,000 81,000
Proceeds from Directors' Trust Stock Purchase -- 34,453 --
Purchase of Common Stock for Treasury (386,002) -- --
----------- ----------- -----------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 903,947 (521,414) 675,186
Net (Decrease)/Increase in Cash and Cash Equivalents (1,045) 6,165 (478,998)
Cash and Cash Equivalents at Beginning of Year 17,544 11,379 490,377
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,499 $ 17,544 $ 11,379
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ 131,569 $ 79,717 $ 80,996
=========== =========== ===========
Income Taxes $ 7,353 $ 50,061 $ 551,368
=========== =========== ===========
Increase in Acquisition Cost/Goodwill $ 169,357 $ 1,300,372 --
Working Capital, other than Cash (144,275) -- --
----------- ----------- -----------
Net Cash Paid for Acquisition/Goodwill $ 25,082 $ 1,300,372 $ --
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-5
(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 2008 was a 53-week period ended
January 3, 2009, Fiscal year 2007 was a 52-week period ended December
29, 2007, and Fiscal year 2006 was a 52-week period ending December 30,
2006.
Revenue Recognition
-------------------
The Company recognizes revenue when the sale is made, which is upon
shipment of the goods to the Company's customers.
Allowance for Doubtful Accounts
-------------------------------
The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on
historical collection experience and a review of the current status of
trade accounts receivable. It is reasonably possible that the Company's
estimate of the allowance for doubtful accounts will change. Accounts
receivable are presented net of an allowance for doubtful accounts of
$446,421 and $136,745 at January 3, 2009 and December 29, 2007,
respectively.
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.
F-6
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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"
Starting in 2002 the Company was required to evaluate the remaining
goodwill for possible impairment. The Company had $3,799,300 of
goodwill at January 3, 2009 and $3,629,943 of goodwill at December 29,
2007. The increase in 2008 consisted of $36,650 from the Superior
Drapery acquisition and $132,707 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 January 3, 2009 and
determined that no impairment exists.
The Company wrote off its identifiable intangible asset of $1,339,278
in the first half of fiscal 2008. This asset was created by the January
2004 purchase of its Douglas, Georgia facility from Fleetwood
Enterprises, Inc. and the related supply agreement. The Company
recorded a pre-tax charge of $1,015,278 in 2008 in addition to its
regular amortization of $162,000 per quarter for the first two quarters
of fiscal 2008.
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 January 3, 2009 and December 29, 2007 were in
general deposit and/or checking accounts.
F-7
(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 fiscal 2007. 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
$280,053 in fiscal 2008, $226,342 in fiscal 2007, and $213,721 in
fiscal 2006. The increasing expenses were incurred to enhance the
Company's visibility as a resource to the hospitality industry.
Advertising expenses are expensed as incurred.
Credit Risk
-----------
The Company sells to three distinct markets, original equipment
manufacturers ("OEM's") of manufactured housing, OEM's of recreational
vehicles, and to the hospitality industry. To the extent that economic
conditions might severely impact these markets, the Company could
suffer an abnormal credit loss.
The Company sells primarily on thirty day terms. The Company's
customers are spread over a wide geographic area. As such the Company
believes that it does not have an abnormal concentration of credit risk
within any one geographic area.
F-8
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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). Approved
receivables were approximately $1,235,000 at January 3, 2009.
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.
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 $10,980 and
$4,442 are included in income for the years ended January 3, 2009 and
December 29, 2007, 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 2008 and 2007 because the effect of the stock
options on net loss was antidilutive. See Note 10 "Earnings Per Share"
for computation of EPS.
F-9
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
At January 3, 2009, the Company had options outstanding under two fixed
stock option plans. The Company expensed $39,996 and $25,787 in 2008
and 2007, 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
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.
F-10
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Information
-------------------
The Company has one business segment, the interior furnishings
business, and follows the requirements of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information".
Recent Accounting Developments
------------------------------
The following Statements of Financial Accounting Standards (SFAS) were
issued by the Financial Accounting Standards Board (FASB):
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities--an amendment of FASB
Statement No. 133". SFAS No. 161 changes the disclosure requirements
for derivative instruments and hedging activities. SFAS 161 will not
have an effect on the Company's financial statements.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles". SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to
be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted
accounting principles in the United States. SFAS No. 162 will not have
an effect on the Company's financial statements.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial
Guarantee Insurance Contracts--an interpretation of FASB Statement No.
60". The scope of SFAS No. 163 is limited to financial guarantee
insurance and reinsurance contracts issued by enterprises included
within the scope of Statement 60. SFAS No. 163 will not have an effect
on the Company's financial statements.
(2) INVENTORIES
Inventories consisted of the following classifications:
2008 2007
---------- ----------
Raw materials & supplies $3,166,886 $4,275,090
In process & finished goods 616,695 906,555
---------- ----------
$3,783,581 $5,181,645
========== ==========
F-11
(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 $374,738 in 2007, $373,709 in 2007, and $385,750 in 2006.
Commitments under these leases extend through August 2012 and are as
follows:
2009 $317,240
2010 $201,488
2011 $109,171
2012 $ 28,815
The Company is offering four of its facilities in sale/leaseback
transactions in an effort to improve liquidity. If these transactions
are completed, the Company's future lease commitments will increase.
(4) COMMITMENTS
The Company has commitments under employment, consulting and
non-compete agreements entered into with three individuals. The minimum
commitments under these agreements are payable as follows:
2009 $427,926
2010 $420,834
2011 $420,834
2012 $358,834
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 12.9%, 21.8% and 26.6% of
Company sales in 2008, 2007 and 2006, respectively. Fleetwood operates
in the manufactured housing and recreational vehicle industries. On
March 10, 2009, Fleetwood filed a Chapter 11 bankruptcy. The accounts
receivable due from Fleetwood at the time of the filing was
approximately $115,000 and was fully reserved for in the 2008 year-end
allowance for doubtful accounts. Simultaneously with the bankruptcy
filing, Fleetwood announced its intentions to close all of its
remaining travel-trailer plants. The Company will continue to supply
Fleetwood's manufactured housing and motor home businesses. The
expected revenue from Fleetwood in 2009 will be significantly less than
experienced in prior years. In the second quarter of 2008, the
Company's management, recognizing its reduced level of business with
Fleetwood, totally impaired the remainder of its identifiable
intangible asset arising from the January 2004 supply agreement with
Fleetwood.
F-12
(6) LONG TERM-DEBT AND CREDIT ARRANGEMENTS
--------------------------------------
Long-term debt consists of the following:
2008 2007
---------- ---------
Bond payable in quarterly installments
through March 2014. The interest rate is
variable and is 2.20% at January 3, 2009.
This bond is secured by the Company's
Goshen, IN property. $ 735,000 $ 840,000
Borrowings on revolving line of credit.
The interest rate is variable and is 3.18%
at January 3, 2009 with interest payable
monthly. Principal is due at the maturity
date of June 30, 2009. 2,564,000 674,000
Note payable in monthly payments of
$3,556 principal plus accrued interest at
4.39% monthly through June 2008. This note
was secured by the Company's Elkhart, IN
building. This note was paid in full
during 2008. -- 444,444
Bond payable in monthly installments
through November 2008. The interest rate
was variable. This bond was secured by the
Company's Bloomsburg, PA property. This
bond was paid in full during 2008.
-- 50,000
---------- ----------
3,299,000 2,008,444
Less amount due within one year 2,684,000 599,444
---------- ----------
$ 615,000 $1,409,000
========== ==========
F-13
(6) LONG TERM-DEBT AND CREDIT ARRANGEMENTS (CONTINUED)
The principal payments on long-term debt for the five years subsequent
to January 3, 2009 are as follows:
2009 $ 2,684,000
2010 $ 125,000
2011 $ 140,000
2012 $ 150,000
2013 $ 100,000
Thereafter $ 100,000
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 on June 30, 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 the financial covenant in the loan agreement
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 provided a waiver for this
violation through the end of the third quarter of 2008. The waiver
agreement changed the interest rate from LIBOR plus 150 basis points to
LIBOR plus 275 basis points. The waiver has expired and the Company is
in default of the loan covenant. At January 3, 2009, the Company had
$2,564,000 in outstanding borrowings on the line-of-credit. The
outstanding balance on the line-of-credit as of March 31, 2009 was
$3,863,000
Management has negotiated with Wachovia Bank, which is now a Wells
Fargo Company, for Wachovia to continue to fund its line-of-credit
beyond the June 30, 2009 expiration date of its current agreement.
Wachovia has initially agreed to provide the Company with a forbearance
agreement which will run for six months to December 31, 2009. Wachovia
has suggested that, if need be, it could provide an additional six
month agreement through June 30, 2010. Although the forbearance
agreement has not been completed at this time, Wachovia has indicated
that the interest rate under the forbearance agreement will be eight
percent, and a fee for extending the line will be required.
(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 2008 ($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. 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 $195,900 in 2008, $60,068 in 2007, and
$66,765 in 2006. As part of the Company's 2009 cost reduction program,
the Company's matching contribution will be suspended as of May 1,
2009.
F-14
(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. The Plan expired during fiscal 2005, and all options
available under the 1995 Plan have been issued. Options granted under
the 1995 Plan continue to be valid until their respective expiration
dates. As of January 3, 2009, 168,950 options remain outstanding under
the 1995 Plan.
Under the 2006 Incentive Stock Option Plan, (the "2006 Plan"), the
Company may issue up to 250,000 shares of Common Stock. Under the 2006
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 January 3, 2009, 105,000 options remain
outstanding under the 2006 Plan.
A summary of the status of the Company's outstanding stock options as
of January 3, 2009, December 29, 2007, and December 30, 2006, and
changes during the years ending on those dates is presented below:
2008 2007 2006
------------------------ ---------------------- -----------------------
EXERCISE EXERCISE EXERCISE
SHARES (1) PRICE (2) SHARES (1) PRICE (2) SHARES (1) PRICE (2)
--------- --------- ---------- --------- --------- --------
Outstanding at beginning of year 318,950 $ 5.83 243,762 $ 6.74 362,728 $ 6.19
Granted -- -- 115,000 4.14 -- --
Exercised -- -- -- -- (109,966) 4.91
Forfeited/Cancelled (45,000) 6.59 (39,812) 6.53 (9,000) 7.08
--------- -------- --------- -------
Outstanding at year-end 273,950 $ 5.70 318,950 $ 5.83 243,762 $ 6.74
Options exercisable at year-end 173,910 173,370 197,442
Weighted average fair value of
options granted during the year -- $ 1.19 --
The following information applies to fixed stock options outstanding at
January 3, 2009:
Number outstanding (1) 273,950
Range of exercise prices $4.14 to $9.30
Weighted-average exercise price $5.70
Weighted-average remaining contractual life 6.03 years
-----------------------
(1) As adjusted for the five-for-four stock split in July 1998.
(2) Based on the weighted-average exercise price.
F-15
(9) INCOME TAXES
------------
A summary of income taxes is as follows:
2008 2007 2006
----------- ----------- -----------
Current:
Federal $ -- $ (470,000) $ 500
State -- (69,000) 7,500
Deferred (1,978,000) 55,000 232,000
----------- ----------- -----------
Total $(1,978,000) $ (484,000) $ 240,000
=========== =========== ===========
For the 2008 tax year, the Company had a net operating loss
carryforward, of approximately $4,187,000, for tax purposes. The
carryforward is available to offset taxable income of future periods
and expires after the Company's 2028 tax year. Realization of the
deferred tax benefit related to the carryforward is dependent upon the
Company generating sufficient taxable income in the future, against
which the loss can be offset, which is not guaranteed.
Deferred income taxes reflect the net tax effect of temporary
differences between carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, as well as tax benefits of net operating loss carryforwards.
The significant components of the Company's deferred tax assets and
liabilities relate to the following:
2008 2007
----------- -----------
Net Operating Loss Carryforward $ 1,754,000 $ --
Depreciation (568,000) (600,000)
Amortization (547,000) (466,000)
Inventories, due to additonal cost
recorded for income tax purposes 11,000 16,000
Accounts receivable, due to allowance
for doubtful accounts 174,000 53,000
Directors' Trust 237,000 200,000
Reserve for Plant Closings 97,000 --
Accrued liabilities, due to expenses not yet
deductible for income tax purposes 33,000 10,000
----------- -----------
Net Deferred Asset/(Liability) $ 1,191,000 $ (787,000)
=========== ===========
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Realization of the
deferred income tax asset is dependent on generating sufficient taxable
income in future years. Although realization is not assured, management
believes it is more likely than not that all of the deferred income tax
asset will be realized. Accordingly, no valuation allowance has been
established. The amount of the deferred income tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income are reduced.
F-16
(9) INCOME TAXES (CONTINUED)
The net deferred income tax asset/(liability) is presented in the
balance sheets as follows:
2008 2007
--------- ---------
Current Asset $ 315,000 $ 79,000
Long-term Asset 876,000 --
Long-term Liability -- (866,000)
The effective income tax rate varied from the statutory Federal tax
rate as follows:
2008 2007 2006
--------- --------- ---------
Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit 4.8 4.9 4.8
Other 4.5 (1.4) (1.6)
------ ------ -------
Effective income tax rate 43.3% 37.5% 37.2%
======= ======= =======
(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.
2008 2007 2006
----------- ----------- -----------
Numerator:
Net (loss)/income $(2,585,457) $ (807,509) $ 405,393
=========== =========== ===========
Denominator
Weighted-average number of
Common Shares outstanding 2,934,530 3,005,988 2,982,735
Dilutive effect of stock
options on net income 0 0 53,753
----------- ----------- -----------
2,934,530 3,005,988 3,036,488
=========== =========== ===========
Diluted (loss)/earnings per share $ (0.88) $ (0.27) $ 0.13
=========== =========== ===========
No dilutive effects are shown for fiscal 2008 and 2007 since the effect
of stock options on the net loss is antidilutive.
(11) PROPERTY HELD FOR SALE
----------------------
During fiscal 2008, the Company adopted a plan to sell four of its
manufacturing facilities. These properties were idled at various times
during 2008. The Company believes the fair values of the properties
exceed their book values; consequently, the Company did not record any
impairment in its Statement of Earnings for this activity. The carrying
value of the properties are recorded in the January 3, 2009 Balance
Sheet as "Property Held for Sale" and are shown net of accumulated
depreciation. Depreciation on each building was stopped as of the date
each property was idled. The Company cannot anticipate when any of
these sales might occur.
F-17
(12) 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 had assigned the excess costs of this acquisition over the
value of the asset acquired to an identifiable intangible asset. On
March 10, 2009, Fleetwood filed a Chapter 11 bankruptcy. Simultaneously
with the bankruptcy filing, Fleetwood announced its intentions to close
all of its remaining travel-trailer plants. The Company will continue
to supply Fleetwood's manufactured housing and motor home businesses.
The expected revenue from Fleetwood in 2009 will be significantly less
than experienced in prior years. In the second quarter of 2008, the
Company's management, recognizing its reduced level of business with
Fleetwood, totally impaired the remainder of its identifiable
intangible asset arising from the January 2004 supply agreement with
Fleetwood.
Fleetwood was the Company's largest customer in 2008 and 2007,
representing 12.9% and 21.8% 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 $36,650 and $17,020 were
due for fiscal 2008 and 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. Additional payments of $134,549 were due for
fiscal 2008. 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 31, 2009 on the
financial statements as of January 3, 2009 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 31, 2009
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
2008 $136,745 461,999 0 152,323 (A) $ 446,421
2007 $201,355 152,903 0 217,513 (A) $ 136,745
2006 $131,690 196,416 0 126,751 (A) $ 201,355
(A) Write-off bad debts
ALLOWANCE FOR SALES
RETURNS
2008 $ 90,000 (6,000) 0 0 $ 84,000
2007 $ 71,849 18,151 0 0 $ 90,000
2006 $ 53,663 18,186 0 0 $ 71,849
F-20