10-K 1 decorator10k.txt ANNULAL REPORT 01/03/2009 ================================================================================ 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. ------------------------------------------------------ (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 ================================================================================ 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
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