10-Q 1 decorator10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 28, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7753 DECORATOR INDUSTRIES, INC. -------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1001433 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10011 Pines Blvd., Suite #201, Pembroke Pines, Florida 33024 ------------------------------------------------------------ (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (954) 436-8909 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each class Outstanding at August 12, 2008 ------------------- ------------------------------ Common Stock, Par Value $.20 Per Share 2,933,002 shares PART I - FINANCIAL INFORMATION Item 1. Financial Statements. DECORATOR INDUSTRIES, INC BALANCE SHEETS
June 28, December 29, 2008 2007 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 18,536 $ 17,544 Accounts Receivable, less allowance for doubtful accounts ($266,745 and $136,745) 4,632,621 3,423,072 Inventories 5,186,621 5,181,645 Income Taxes Receivable 886,509 575,594 Other Current Assets 520,237 292,777 ----------- ----------- TOTAL CURRENT ASSETS 11,244,524 9,490,632 ----------- ----------- Property and Equipment Land, Buildings & Improvements 9,193,421 9,193,421 Machinery, Equipment, Furniture & Fixtures and Software 8,055,879 7,985,675 ----------- ----------- Total Property and Equipment 17,249,300 17,179,096 Less: Accumulated Depreciation and Amortization 8,253,400 7,895,607 ----------- ----------- Net Property and Equipment 8,995,900 9,283,489 ----------- ----------- Goodwill, less accumulated Amortization of $1,348,569 3,734,163 3,629,943 Identifiable intangible asset, less accumulated Amortization of $2,555,713 -- 1,339,278 Other Assets 311,360 520,562 ----------- ----------- TOTAL ASSETS $24,285,947 $24,263,904 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 3,083,146 $ 2,315,836 Current Maturities of Long-term Debt 1,792,000 599,444 Checks Issued But Not Yet Presented 424,689 241,815 Accrued Expenses: Compensation 592,626 432,932 Other 2,460,752 1,987,226 ----------- ----------- TOTAL CURRENT LIABILITIES 8,353,213 5,577,253 ----------- ----------- Long-Term Debt 675,000 1,409,000 Deferred Income Taxes 878,000 866,000 ----------- ----------- TOTAL LIABILITIES 9,906,213 7,852,253 ----------- ----------- Stockholders' Equity Common Stock $.20 par value: Authorized shares, 10,000,000; Issued shares, 4,646,846 and 4,636,375 929,369 927,275 Paid-in Capital 1,944,394 1,880,861 Retained Earnings 19,818,894 21,530,436 ----------- ----------- 22,692,657 24,338,572 Less: Treasury stock, at cost: 1,713,844 and 1,613,844 shares 8,312,923 7,926,921 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 14,379,734 16,411,651 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,285,947 $24,263,904 =========== ===========
The accompanying notes are an integral part of the financial statements. 1 DECORATOR INDUSTRIES, INC. STATEMENTS OF EARNINGS (UNAUDITED)
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended -------------------------------------------- ------------------------------------------- June 28, June 30, June 28, June 30, 2008 2007 2008 2007 --------------------- -------------------- --------------------- -------------------- Net Sales $ 12,563,069 100.0% $ 12,671,235 100.0% $ 23,066,967 100.0% $ 24,918,652 100.0% Cost of Products Sold 10,366,143 82.5% 10,421,302 82.2% 19,373,831 84.0% 20,738,310 83.2% ------------- ------------ ------------ ------------ Gross Profit 2,196,926 17.5% 2,249,933 17.8% 3,693,136 16.0% 4,180,342 16.8% Selling and Administrative Expenses 3,906,527 31.1% 2,149,300 17.0% 6,160,603 26.7% 4,221,578 16.9% ------------- ------------ ------------ ------------ Operating Income/(Loss) (1,709,601) -13.6% 100,633 0.8% (2,467,467) -10.7% (41,236) -0.1% Other Income (Expense) Interest, Investment and Other Income 15,161 0.1% 32,290 0.3% 34,610 0.2% 55,491 0.2% Interest Expense (33,089) -0.2% (19,323) -0.2% (63,190) -0.3% (42,584) -0.2% ------------- ------------ ------------ ------------ Earnings Before Income Taxes (1,727,529) -13.7% 113,600 0.9% (2,496,047) -10.8% (28,329) -0.1% Provision for Income Taxes (667,000) -5.3% 50,000 0.4% (960,000) -4.1% 0 0.0% ------------- ------------ ------------ ------------ NET INCOME/(LOSS) $ (1,060,529) -8.4% $ 63,600 0.5% $ (1,536,047) -6.7% $ (28,329) -0.1% ============= ============ ============ ============ EARNINGS PER SHARE BASIC $ (0.36) $ 0.02 $ (0.52) $ (0.01) ============= ============== ============ ============ DILUTED $ (0.36) $ 0.02 $ (0.52) $ (0.01) ============= ============== ============ ============ Weighted Average Number of Shares Outstanding Basic 2,928,299 3,004,209 2,932,427 3,002,719 Diluted 2,928,299 3,024,121 2,932,427 3,002,719
The accompanying notes are an integral part of the financial statements. 2 DECORATOR INDUSTRIES, INC STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Twenty-six Weeks Ended ------------------------------ June 28, June 30, 2008 2007 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(1,536,047) $ (28,329) Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities Depreciation and Amortization 713,241 740,557 Provision for Losses on Accounts Receivable 130,715 59,077 Deferred Taxes (92,000) (11,000) Stock-Based Compensation 21,127 14,899 Gain on Disposal of Assets (4,000) (13,127) Noncash charges for asset impairment 1,270,077 -- Increase/(Decrease) from Changes in: Accounts Receivable (1,339,144) (1,416,632) Inventories (4,976) (394,962) Prepaid Expenses (434,375) 479,912 Other Assets (4,597) (105,128) Accounts Payable 767,310 1,663,200 Accrued Expenses 529,000 (60,772) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 16,331 927,695 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash paid for acquisitions -- (538,654) Capital Expenditures (143,652) (110,922) Proceeds from Property Dispositions 3,880 19,647 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (139,772) (629,929) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term Debt Payments (519,444) (109,026) Dividend Payments (175,495) (180,130) Change in Checks Issued but Not Yet Presented 182,874 2,415 Net Borrowings under Line-of-Credit Agreement 978,000 (30,000) Issuance of Stock for Directors Trust 44,500 40,500 Purchase of Common Stock for Treasury (386,002) -- ----------- ----------- NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 124,433 (276,241) Net Increase in Cash and Cash Equivalents 992 21,525 Cash and Cash Equivalents at Beginning of Year 17,544 11,379 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,536 $ 32,904 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid for: Interest $ 58,088 $ 38,601 Income Taxes $ 5,453 $ 49,511
The accompanying notes are an integral part of the financial statements. 3 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS TWENTY-SIX WEEKS ENDED JUNE 28, 2008 AND JUNE 30, 2007 (UNAUDITED) NOTE 1. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Company's financial position as of June 28, 2008, the changes therein for the twenty-six week period then ended and the results of operations for the twenty-six week periods ended June 28, 2008 and June 30, 2007. NOTE 2. The financial statements included in the Form 10-Q are presented in accordance with the requirements of the form and do not include all of the disclosures required by accounting principles generally accepted in the United States of America. For additional information, reference is made to the Company's annual report on Form 10-K for the year ended December 29, 2007. The results of operations for the twenty-six week periods ended June 28, 2008 and June 30, 2007 are not necessarily indicative of operating results for the full year. NOTE 3. INVENTORIES Inventories at June 28, 2008 and December 29, 2007 consisted of the following: June 28, December 29, 2008 2007 ----------- ----------- Raw Material and Supplies $ 4,384,611 $ 4,275,090 In Process and Finished Goods 802,010 906,555 ----------- ----------- Total Inventory $ 5,186,621 $ 5,181,645 =========== =========== NOTE 4. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options. No dilution is shown for the thirteen week period ended June 28, 2008 or the twenty-six week periods ended June 28, 2008 and June 30, 2007 since the effect of the stock options on the net loss is antidilutive. In accordance with SFAS No. 128, the following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations:
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended ---------------------------- ------------------------------ June 28, June 30, June 28, June 30, 2008 2007 2008 2007 ------------ ------------ ------------ -------------- Numerator: Net (loss)/income $(1,060,529) $ 63,600 $(1,536,047) $ (28,329) =========== =========== =========== =========== Denominator: Weighted-average number of common shares outstanding 2,928,299 3,004,209 2,932,427 3,002,719 Dilutive effect of stock options on net income 0 19,912 0 0 ----------- ----------- ----------- ----------- 2,928,299 3,024,121 2,932,427 3,002,719 =========== =========== =========== =========== Diluted earnings per share: $ (0.36) $ 0.02 $ (0.52) $ (0.01) =========== =========== =========== ===========
4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY STATEMENT: THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN STATEMENTS RELATING TO FUTURE EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS AND FUTURE LIQUIDITY WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS AND MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS, COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE COMPANY'S MARKETS, THE COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND EXPENSES, AND OTHER FACTORS. FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FINANCIAL CONDITION The Company's financial ratios changed as illustrated below. The financial condition remains strong, and the funded debt to total capitalization ratio remained low at 14.6% June 28, December 29, 2008 2007 ---------- ----------- Current Ratio 1.35:1 1.70:1 Quick Ratio 0.73:1 0.77:1 Funded Debt to Total Capital 14.6% 10.9% Working Capital $2,891,311 $3,913,379 In May 2006, the Company entered into a new line-of-credit agreement with Wachovia Bank. This agreement replaced the previous agreement that the Company had with Washington Mutual Bank. The agreement with Wachovia provides for a revolving line of credit of up to $5,000,000, and expires in June 2009. The interest rate is LIBOR plus 150 basis points and the Company is required to maintain certain financial covenants. The fourth quarter loss caused the Company to violate a financial covenant in its loan agreement with Wachovia Bank. The loan agreement states that the ratio of Senior Funded Debt to EBITDA may not exceed 2.75 to 1.00. The Company believes it is in compliance with all other conditions of the loan agreement. Wachovia has provided a waiver for this violation through the end of the third quarter of 2008. The waiver agreement changes the interest rate from LIBOR plus 150 basis points to LIBOR plus 275 basis points until the Company is in compliance with the covenant. The Company does not expect to be in compliance with the covenant by the end of the fourth quarter of 2008, unless it is able to sell its idled properties. At June 28, 2008, the Company had $1,652,000 in outstanding borrowings on its line-of-credit. The Company expects to use its line of credit throughout 2008. Wachovia has advised the Company that the Bank would like to enter into a forbearance agreement during the remaining term of their commitment. Management believes that if the terms of the forbearance agreement are onerous or if Wachovia decides to accelerate repayment of the credit line that it has alternative sources of financing to replace the line with Wachovia. 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 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) an order from a hospitality customer and the resulting receivables are not paid or disputed by the customer within ninety days of sale, CIT will pay the receivable to the Company and assume ownership of the receivable. CIT begins collection efforts for the assigned receivables (both approved and not approved) when they are due (hospitality sales are made on Net 30 terms). Hospitality customers are instructed to make payments directly to CIT and CIT then wires collected funds to the Company. The Company pays CIT a percentage of all assigned receivables. Management believes this cost is mostly offset by reductions in Bad Debt expense and collection costs. The Company entered into this arrangement to take advantage of CIT's extensive credit checking and collection capabilities. Management believes this arrangement has improved liquidity. Days Sales Outstanding (DSO) in accounts receivable were 32.9 days at June 28, 2008 compared to 30.6 and 33.0 days at December 29, 2007 and June 30, 2007, respectively. Net accounts receivable were $4,632,621 at June 28, 2008, compared to $3,423,072 and $5,082,722 at December 29, 2007 and June 30, 2007, respectively. Inventories were $5,186,621 at June 28, 2008, as compared to $5,181,645 and $6,265,827 at December 29, 2007 and June 30, 2007, respectively. The decrease in inventory from a year ago is due to the reduction of excess inventories from last year. Accounts payable were $3,083,146 at June 28, 2008, as compared to $2,315,836 and $3,563,671 at December 29, 2007 and June 30, 2007, respectively. The changes in accounts receivable and accounts payable from year-end are normal seasonal fluctuations. Capital expenditures were $143,652 for the six months ended June 28, 2008, compared to $110,922 for the same period of the prior year. The Company will idle two facilities during the Third Quarter of 2008. These facilities have been placed for sale. Neither facility has any debt associated with it, and upon completion of the sales, the proceeds should provide enough funds to pay down the outstanding borrowings on the Company's line of credit. Management cannot predict when the sales will occur. The Company's recent performance has caused the Board of Directors to suspend the quarterly dividend. The Board will consider reinstatement of the dividend when the Company's performance returns to a consistent level of profitability. This action will help improve liquidity. SALES BY MARKET The following table represents net sales to each of the three different markets that the Company serves for the thirteen and twenty-six week periods ended June 28, 2008 and June 30, 2007:
(dollars in thousands) For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended --------------------------------------- -------------------------------------- June 28, June 30, June 28, June 30, 2008 2007 2008 2007 ------------------ ----------------- ----------------- ------- ------- Net % of Net % of Net % of Net % of Sales total Sales total Sales total Sales total -------- ------- ------- ------- ------- ------- ------- ------- Recreational Vehicle $ 4,503 36% $ 6,998 55% $ 9,323 40% $14,383 58% Manufactured Housing 2,571 20% 2,248 18% 4,962 22% 4,162 17% Hospitality 5,489 44% 3,425 27% 8,782 38% 6,374 25% ------- ------- ------- ------- ------- ------- ------- ------- Total Net Sales $12,563 100% $12,671 100% $23,067 100% $24,919 100% ======= ======= ======= =======
6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) RESULTS OF OPERATIONS The Company recorded a charge of $1,430,000 during the Second Quarter 2008. This charge included the impairment of the Company's Identifiable Intangible Asset. This asset arose from the Company's contract with Fleetwood Enterprises, signed in January 2004. The impairment charge of $1,015,278 was in addition to the regular quarterly amortization of $162,000 that the Company had been recognizing since the inception of the contract. Management's analysis determined that the revenues and profit margins provided by the contract had fallen sharply and impaired the asset. In addition to the impairment of the Intangible Asset, the Company recognized other impairment charges of $254,799 from obsolete software and the closure of two of its manufacturing facilities. The plant closures also include expenses of $159,923 for severance pay and rent. THIRTEEN WEEK PERIOD ENDED JUNE 28, 2008, (SECOND QUARTER 2008) COMPARED TO THIRTEEN WEEK PERIOD ENDED JUNE 30, 2007, (SECOND QUARTER 2007) The following table shows a comparison of the results of operations between Second Quarter 2008 and Second Quarter 2007:
Second Quarter % Second Quarter % $ Increase 2008 of Sales 2007 of Sales (Decrease) % Change -------------- -------- -------------- -------- ------------ -------- Net Sales $ 12,563,069 100% $ 12,671,235 100% $ (108,166) -0.9% Cost of Products Sold 10,366,143 82.5% 10,421,302 82.2% (55,159) -0.5% -------------- -------- ------------ -------- ------------ Gross Profit 2,196,926 17.5% 2,249,933 17.8% (53,007) -2.4% Selling and Administrative Expenses 3,906,527 31.1% 2,149,300 17.0% 1,757,227 81.8% -------------- --------- ------------ -------- ------------ Operating (Loss)/Income (1,709,601) -13.6% 100,633 0.8% (1,810,234) -1798.8% Other Income/(Expense) Interest, Investment and Other Income 15,161 0.1% 32,290 0.3% (17,129) -53.0% Interest Expense (33,089) -0.2% (19,323) -0.2% (13,766) 71.2% -------------- -------- ------------ ------- ------------ Earnings Before Income Taxes (1,727,529) -13.7% 113,600 0.9% (1,841,129) -1620.7% Provision for Income Taxes (667,000) -5.3% 50,000 0.4% (717,000) -1434.0% -------------- -------- ------------ -------- ------------ NET (LOSS)/INCOME $ (1,060,529) -8.4% $ 63,600 0.5% $ (1,124,129) -1767.5% ============== ======== ============ ======== ============
7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) Net sales for the Second Quarter 2008 were $12,563,069, compared to $12,671,235 for the same period in the previous year, a 0.9% decrease. Sales to the Company's recreational vehicle customers decreased 35.7% in Second Quarter 2008 when compared to the same period of the prior year. The recreational vehicle industry reported a 22.0% decrease in shipments during the Second Quarter 2008 compared to the same period of the prior year. Sales to the Company's manufactured housing customers increased 14.4% in Second Quarter 2008 when compared to the same period of the prior year. The current year's sales increased due to the acquisition of Doris Lee Draperies in the fourth quarter of 2007, as the manufactured housing industry showed an 11.0% decrease in shipments from the prior year. Sales to the Company's hospitality customers increased 60.3% in the Second Quarter 2008 when compared to the same period of the prior year, due to increased sales activity in the Company's ongoing hospitality business, as well as the effect of the Superior Drapery acquisition which only reflected one month of operations for the Second Quarter 2007. Cost of products sold increased to 82.5% of net sales in the Second Quarter 2008 compared to 82.2% of net sales a year ago. The major reasons for the increase in this percentage were an increase in labor costs as a percent of sales due to lower production levels, a higher percentage for factory overhead due to fixed expenses being spread over a lower sales volume, and charges for inventory obsolescence due to falling demand in the recreational vehicle market. Selling and administrative expenses were $3,906,527 in the Second Quarter 2008 versus $2,149,300 in the Second Quarter 2007. The major reason for this increase was the charge of $1,430,000 related to the writeoff of impaired assets and the closing of the underperforming facilities. Also included in this quarter's expenses is an unusually high charge to the bad debt reserve of $125,715. Most of the bad debt charge has been established for customers in the Recreational Vehicle industry. Without these charges, selling and administrative expenses would have been $2,350,812. The percentage of selling and administrative expenses to net sales increased from 17.0% in the Second Quarter 2007 to 31.1% in the Second Quarter 2008 due to the impaired assets and bad debt charge. Without these unusual charges, selling and administrative expenses for the Second Quarter 2008 would have been 18.7%. The increase from the prior year is due to expenses arising from the Superior Drapery acquisition as well as increased commissions on hospitality market sales. Interest expense increased to $33,089 in the Second Quarter 2008 from $19,323 in the Second Quarter 2007, due to increased borrowings on the Company's line of credit during the Second Quarter 2008. Net loss was $1,060,529 in the Second Quarter 2008 compared to net income of $63,600 in the Second Quarter 2007. This decrease is largely the result of the special charges taken in the quarter. Without these special charges, the second quarter loss would have been approximately $110,000. Diluted earnings per share decreased from $0.02 earnings per share during the Second Quarter 2007 to $0.36 loss per share during the Second Quarter 2008. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) TWENTY-SIX WEEK PERIOD ENDED JUNE 28, 2008, (FIRST SIX MONTHS 2008) COMPARED TO TWENTY-SIX WEEK PERIOD ENDED JUNE 30, 2007, (FIRST SIX MONTHS 2007) The following table shows a comparison of the results of operations between First Six Months 2008 and First Six Months 2007:
First First Six Months % Six Months % $ Increase 2008 of Sales 2007 of Sal (Decrease) % Change ------------ -------- ------------ -------- ------------ -------- Net Sales $ 23,066,967 100% $ 24,918,652 100% $ (1,851,685) -7.4% Cost of Products Sold 19,373,831 84.0% 20,738,310 83.2% (1,364,479) -6.6% ------------ -------- ------------ -------- ------------ Gross Profit 3,693,136 16.0% 4,180,342 16.8% (487,206) -11.7% Selling and Administrative Expenses 6,160,603 26.7% 4,221,578 16.9% 1,939,025 45.9% ------------ -------- ------------ -------- ------------ Operating Loss (2,467,467) -10.7% (41,236) -0.1% (2,426,231) 5883.8% Other Income/(Expense) Interest, Investment and Other Income 34,610 0.2% 55,491 0.2% (20,881) -37.6% Interest Expense (63,190) -0.3% (42,584) -0.2% (20,606) 48.4% ------------ -------- ------------ -------- ------------ Earnings Before Income Taxes (2,496,047) -10.8% (28,329) -0.1% (2,467,718) 8710.9% Provision for Income Taxes (960,000) -4.1% 0 0.0% (960,000) N/A ------------ -------- ------------ -------- ------------ NET LOSS $ (1,536,047) -6.7% $ (28,329) -0.1% $ (1,507,718) 5322.2% ============ ======== ============ ======= ============
Net sales for the First Six Months 2008 were $23,066,967, compared to $24,918,652 for the same period in the previous year, a 7.4% decrease. Sales to the Company's recreational vehicle customers decreased 35.2% in the First Six Months 2008 when compared to the same period of the prior year. The recreational vehicle industry reported a 17.1% decrease in shipments during the first half of 2008 compared to the same period of the prior year. Sales to the Company's manufactured housing customers increased 19.2% in the First Six Months 2008 when compared to the same period of the prior year. The current year's sales increased due to the acquisition of Doris Lee Draperies in the fourth quarter of 2007, as the manufactured housing industry showed a 7.4% decrease in shipments from the prior year. Sales to the Company's hospitality customers increased 37.8% in the First Six Months 2008 when compared to the same period of the prior year, due to increased sales activity in the Company's ongoing hospitality business, as well as the effect of the Superior Drapery acquisition which only reflected one month of operations for the First Six Months 2007. Cost of products sold increased to 84.0% of net sales in the First Six Months 2008 compared to 83.2% of net sales a year ago. The major reasons for the increase in this percentage were an increase in labor costs as a percent of sales due to lower production levels, and a higher percentage for factory overhead due to fixed expenses being spread over a lower sales volume. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) Selling and administrative expenses were $6,160,603 in the First Six Months 2008 versus $4,221,578 in the First Six Months 2007. The major reason for this increase was the charge of $1,430,000 to writeoff the Company's intangible asset and the closing of underperforming facilities. Also included in the First Six Months 2008 expenses is an unusually high charge to the bad debt reserve of $130,715. Most of the bad debt charge has been established for customers in the recreational vehicle industry. Without these charges, selling and administrative expenses would have been $4,599,888. The major reasons for this increase were the increased commissions for hospitality market sales, the Superior Drapery business acquired in June 2007 and the Doris Lee Draperies business acquired in December 2007. The percentage of selling and administrative expenses to net sales increased from 16.9% for the First Six Months 2007 to 26.7% for the First Six Months 2008. Without the $1,430,000 and $130,715 charges, selling and administrative expenses for the First Six Months 2008 would have been 19.9%. Interest expense increased to $63,190 in the First Six Months 2008 from $42,584 in the First Six Months 2007, due to greater outstanding borrowings during the First Six Months 2008 on the Company's revolving line of credit compared to the same period of the prior year. Net loss was $1,536,047 in the First Six Months 2008 compared to $28,329 net loss in the First Six Months 2007. The major reason for the increased loss was the $1,430,000 asset impairment charge and the $130,715 bad debt expense. Without these special charges, the loss would have been approximately $590,000. In addition, profitability was adversely affected by the assimilation costs of the customers acquired in the Doris Lee Draperies acquisition. These costs included the higher labor, freight, and other costs associated with moving production from the Doris Lee facility to the Company's own facilities. Diluted loss per share increased from $0.01 during the First Six Months 2007 to $0.52 during the First Six Months 2008. 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. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) The following table reconciles Net Income, the most comparable measure under GAAP, to EBITDA for the thirteen and twenty-six week periods ended June 28, 2008 and June 30, 2007:
For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended ---------------------------- ------------------------------ June 28, June 30, June 28, June 30, 2008 2007 2008 2007 ------------ ------------ ------------- --------------- Net (Loss)/Income $(1,060,529) $ 63,600 $(1,536,047) $ (28,329) Add: Interest 33,089 19,323 63,190 42,584 Taxes (667,000) 50,000 (960,000) -- Depreciation & Amortization 354,906 366,903 713,241 740,557 Gain on Disposal of Assets -- -- (4,000) (13,127) Noncash charge for Asset Impairment 1,270,077 -- 1,270,077 -- ----------- ----------- ----------- ------------ EBITDA $ (69,457) $ 499,826 $ (453,539) $ 741,685 =========== =========== =========== ===========
Item 4. Controls and Procedures. (a) The Company's principal executive officer and principal financial officer have reviewed the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 28, 2008 and have concluded that they were adequate and effective. (b) During the most recent fiscal quarter, there were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II - OTHER INFORMATION Item 5. Other Information The Company's recent performance has caused the Board of Directors to suspend the quarterly dividend. The Board will consider reinstatement of the dividend when the Company's performance returns to a consistent level of profitability. Item 6. Exhibits 31.1 - Certification of Principal Executive Officer 31.2 - Certification of Principal Financial Officer 32 - Certificate required by 18 U.S.C.ss.1350. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DECORATOR INDUSTRIES, INC. (Registrant) Date: August 12, 2008 By: /s/ William A. Johnson ------------------------------------- William A. Johnson, Chief Executive Officer and President Date: August 12, 2008 By: /s/ Michael K. Solomon ------------------------------------------- Michael K. Solomon, Chief Financial Officer 12