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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 October 2, 2009
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 333-116673
DA-LITE SCREEN COMPANY, INC.
(Exact Name of Registrant as Specified in its Charter)
Indiana | 35-1013951 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) |
3100 North Detroit Street, P.O. Box 137 Warsaw, Indiana |
46581-0137 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (574) 267-8101
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act, or a smaller reporting company (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
As of November 4, 2009, there were 5,389.62 shares of the registrants common stock outstanding (all of which are privately owned and are not traded on any public market).
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Page | ||||
PART I | ||||
Item 1. | 1 | |||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||
Item 3. | 18 | |||
Item 4. | 19 | |||
PART II | ||||
Item 1A. | 20 | |||
Item 2. | 20 | |||
Item 6. | 20 | |||
21 | ||||
22 |
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FINANCIAL INFORMATION
Item 1. | Condensed Consolidated Financial Statements. |
DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value amount)
(Unaudited) As of October 2, 2009 |
As of December 26, 2008 |
|||||||
Assets | ||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 1,295 | $ | 1,633 | ||||
Accounts receivable, less allowance for doubtful accounts |
14,555 | 16,033 | ||||||
Inventories |
9,046 | 14,442 | ||||||
Prepaid expenses and other |
2,039 | 2,614 | ||||||
Prepaid income taxes |
854 | 623 | ||||||
Total current assets |
27,789 | 35,345 | ||||||
Property, plant and equipment |
59,399 | 60,160 | ||||||
Less accumulated depreciation |
42,677 | 42,531 | ||||||
Net property, plant, and equipment |
16,722 | 17,629 | ||||||
Goodwill |
20,440 | 26,353 | ||||||
Other assets, net |
605 | 1,620 | ||||||
$ | 65,556 | $ | 80,947 | |||||
Liabilities and Stockholders Deficit | ||||||||
Current liabilities: |
||||||||
Line of credit |
$ | 2,200 | $ | | ||||
Accounts payable |
2,614 | 4,029 | ||||||
Accrued expenses |
||||||||
Interest |
3,709 | 1,295 | ||||||
Other |
5,062 | 4,935 | ||||||
Total accrued expenses |
8,771 | 6,230 | ||||||
Total current liabilities |
13,585 | 10,259 | ||||||
Long-term debt |
101,955 | 119,730 | ||||||
Total liabilities |
115,540 | 129,989 | ||||||
Commitments and contingencies (note 9) |
||||||||
Stockholders deficit: |
||||||||
Common stock, $1 par value. Authorized 1,000,000 shares; issued 10,686 shares |
11 | 11 | ||||||
Additional paid-in capital |
1,710 | 1,710 | ||||||
Accumulated deficit |
(30,587 | ) | (29,052 | ) | ||||
Accumulated other comprehensive income |
4,334 | 3,741 | ||||||
Less treasury stock, 5,296.38 shares at October 2, 2009 and December 26, 2008 at cost |
(25,452 | ) | (25,452 | ) | ||||
Total stockholders deficit |
(49,984 | ) | (49,042 | ) | ||||
$ | 65,556 | $ | 80,947 | |||||
See accompanying notes to condensed consolidated financial statements.
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DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, unaudited)
13 Weeks October 2, 2009 |
13 Weeks September 26, |
40 Weeks October 2, 2009 |
39 Weeks September 26, | |||||||||||
Net sales |
$ | 33,793 | $ | 42,952 | $ | 98,890 | $ | 129,847 | ||||||
Cost of sales |
20,714 | 26,883 | 63,558 | 79,820 | ||||||||||
Gross profit |
13,079 | 16,069 | 35,332 | 50,027 | ||||||||||
Selling, general, and administrative expenses |
4,418 | 4,888 | 14,957 | 16,911 | ||||||||||
Goodwill impairment |
| | 5,926 | | ||||||||||
Operating income (loss) |
8,661 | 11,181 | 14,449 | 33,116 | ||||||||||
Other expense (income): |
||||||||||||||
Interest |
2,914 | 3,044 | 9,295 | 9,361 | ||||||||||
Miscellaneous, net |
(786 | ) | 60 | (2,075 | ) | 85 | ||||||||
Total other expense |
2,128 | 3,104 | 7,220 | 9,446 | ||||||||||
Income (loss) before income taxes |
6,533 | 8,077 | 7,229 | 23,670 | ||||||||||
Income tax expense (benefit) |
(4 | ) | 204 | (276 | ) | 800 | ||||||||
Net income (loss) |
$ | 6,537 | $ | 7,873 | $ | 7,505 | $ | 22,870 | ||||||
See accompanying notes to condensed consolidated financial statements.
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DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, unaudited)
40 weeks Ended October 2, 2009 |
39 weeks Ended September 26, 2008 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 7,505 | $ | 22,870 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
2,177 | 2,404 | ||||||
Amortization and write-off of debt issuance costs |
1,014 | 618 | ||||||
Goodwill impairment |
5,926 | | ||||||
Gain on disposal of assets |
| (43 | ) | |||||
Change in: |
||||||||
Accounts receivable |
1,803 | (914 | ) | |||||
Inventories |
5,497 | (13 | ) | |||||
Prepaid expenses and other |
584 | (132 | ) | |||||
Accounts payable |
(1,692 | ) | (488 | ) | ||||
Accrued expenses |
2,277 | 3,435 | ||||||
Other |
| 32 | ||||||
Net cash provided by operating activities |
25,091 | 27,769 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sale of assets |
| 43 | ||||||
Payments for purchase of minority shares |
| (956 | ) | |||||
Purchase of property, plant and equipment |
(1,036 | ) | (1,317 | ) | ||||
Purchase of short-term investments |
| (5,000 | ) | |||||
Maturities of short-term investments |
| 2,550 | ||||||
Net cash used in investing activities |
(1,036 | ) | (4,680 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from revolving credit facility |
12,700 | | ||||||
Payments on revolving credit facility |
(10,500 | ) | | |||||
Payment to retire senior notes |
(17,775 | ) | (4,250 | ) | ||||
Distributions to stockholders |
(9,040 | ) | (20,440 | ) | ||||
Repurchase of common stock |
| (651 | ) | |||||
Exercise of common stock options |
| 132 | ||||||
Net cash used in financing activities |
(24,615 | ) | (25,209 | ) | ||||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
222 | (296 | ) | |||||
Net change in cash and cash equivalents |
(338 | ) | (2416 | ) | ||||
Cash and cash equivalents at beginning of period |
1,633 | 5,704 | ||||||
Cash and cash equivalents at end of period |
$ | 1,295 | $ | 3,288 | ||||
See accompanying notes to condensed consolidated financial statements.
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DA-LITE SCREEN COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. | Basis of Presentation |
The financial data presented herein is unaudited and should be read in conjunction with the consolidated financial statements and accompanying notes included in the annual report on Form 10-K filed by Da-Lite Screen Company, Inc. (together with all of its subsidiaries, the Company or Da-Lite) for the fiscal year ended December 26, 2008. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all of the adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. In accordance with Accounting Standards Codification (ASC) 855 in preparing the condensed consolidated financial statements, the Company has evaluated events and transactions occurring subsequent to the financial statement date through the financial statement issuance date of November 4, 2009 for potential recognition or disclosure. Results for interim periods should not be considered indicative of results for the full year.
The accompanying consolidated financial statements include the accounts of Da-Lite Screen Company, Inc. (Da-Lite), Da-Lite International, Inc., a domestic international sales corporation, and Projecta B.V. (Projecta), a Netherlands limited liability company, and Projectas wholly-owned subsidiary Procolor S.A.S. (Procolor), a French corporation. All intercompany accounts and transactions have been eliminated.
The Company operates on a 52/53-week fiscal year ending on the last Friday of December. The third quarters of 2009 and 2008 were 13-week periods and the first three quarters of 2009 and 2008 were 39week and 40week periods, respectively. The Companys 2009 and 2008 fiscal years will be 53-week and 52-week years, respectively.
2. | Summary of Significant Accounting Policies and Estimates |
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on managements best knowledge of current events and actions that may impact the Company in the future, actual results may differ from these estimates and assumptions. The Companys critical accounting policies are those that affect its consolidated financial statements materially and involve a significant level of judgment by management.
Revenue Recognition
The Company recognizes revenue when it has received an order from a customer, title has transferred to customer, the sales price is fixed or determinable and the collectability of sales price is reasonably assured. All amounts billed to customers in a sales transaction related to shipping and handling are recorded as revenue, and costs incurred by the Company for shipping and handling are recorded as cost of sales. Provision for customer sales allowances, returns and warranties are made at the time of shipment. The Company does not have any post-shipment obligations related to its sales such as installation, training or customer acceptance.
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Allowance for Doubtful Accounts
The financial status of customers is routinely checked and monitored by the Company when granting credit. The Company provides an allowance for doubtful accounts based upon historical experience and managements estimate of amounts to be collected from past due accounts.
Goodwill
Goodwill represents the excess of purchase price over the fair value of identifiable net assets acquired. The Company applies the provisions of ASC 350 Intangibles-Goodwill and Other, and management tests goodwill for impairment to determine whether its carrying value exceeds its implied fair value at least annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. The Company has three reporting units (Da-Lite US, Procolor S.A.S, and Projecta BV) of which only Da-Lite US and Projecta BV had goodwill as of December 26, 2008. As of October 2, 2009 the goodwill relates only to the Da-Lite reporting unit. The Companys annual impairment testing date is the last day of the fiscal year.
The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting units fair value to its carrying value. The Company estimates fair value based on a combination of the market value approach and income approach using discounted cash flows. These valuations are based on assumptions and estimates including projected future cash flows, discount rates, and determination of appropriate market comparables. The fair value of each reporting unit is estimated using both methods and each method is given equal weighting in arriving at the fair value of the reporting unit.
The second step, if needed, requires the Company to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting units net assets to calculate the implied value of the goodwill. If the carrying value of the reporting units goodwill is in excess of the implied fair value of goodwill, an impairment charge is taken to reduce the goodwill to its implied fair value.
Disclosures About Fair Value of Financial Instruments
Financial instruments are described as cash or contractual obligations or rights to pay or receive cash. The fair value of certain financial instruments approximates the carrying value because of the short-term maturity of these instruments. The estimated fair value of long-term debt is approximately $92.5 million and $105 million based upon the quoted market value at October 2, 2009 and December 26, 2008, respectively.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the companys financial position, operations or cash flows.
In June 2009, the FASB issued SFAS No. 168 (SFAS 168), Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (Codification) has become a source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (SEC) issued under the authority of federal securities laws will continue to be sources of
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authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our quarter ended October 2, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it is not having an impact on our financial position, results of operations and cash flows.
3. | Notes Payable, Revolving Credit Agreement and Long-term Debt |
The Company issued $160 million of 9 1/2% senior unsecured notes due in May 2011 during fiscal year 2004, which were subsequently exchanged for substantially identical notes that were registered with the Securities and Exchange Commission (the 9 1/2% Senior Notes due 2011 or Notes). The net proceeds from the issuance of the Notes were used during fiscal year 2004 to retire approximately $15.0 million of indebtedness outstanding under a then-existing credit facility, to pay a special distribution to stockholders of approximately $134.6 million and for general corporate purposes. The Company currently may redeem any of the Notes at a redemption price of 102.375% of their principal amount plus accrued interest. Any outstanding principal is due in May 2011 and interest is payable semi-annually in arrears on May 15 and November 15 of each year.
In the Indenture related to the 9 1/2% Senior Notes due 2011, the Company agreed to covenants that limit it and its restricted subsidiaries (i.e., Projecta B.V., Procolor S.A.S.) ability, among other things, to: (a) incur additional debt and issue preferred stock, (b) pay dividends, acquire shares of capital stock, make payments on subordinated debt or make investments, (c) place limitations on distributions from restricted subsidiaries, (d) issue or sell capital stock of restricted subsidiaries, (e) issue guarantees, (f) sell or exchange assets, (g) enter into transactions with stockholders and affiliates, (h) create liens and (i) effect mergers. In addition, if a change of control occurs, each holder of Notes will have the right to require the Company to repurchase all or part of the holders Notes at a price equal to 101% of their principal amount, plus any accrued interest to the date of purchase. The Company was in compliance with all covenants at October 2, 2009 and December 26, 2008.
On April 20, 2009, the Company entered into a new two-year arrangement for an unsecured revolving credit facility, with maximum possible borrowings equal to $19.5 million, with Lake City Bank (the Bank). The terms of the new two-year unsecured revolving credit facility are substantially similar to a pre-existing credit facility with the Bank that allowed for maximum borrowings of $15.0 million and which was due to expire on May 1, 2010. Interest on any outstanding borrowings related to the new line of credit is calculated at the prime rate, subject to an interest rate floor of 4.00%. As the prime rate is below the floor, the interest rate in effect as of October 2, 2009 was 4.00%. As of October 2, 2009, $2.2 million of borrowings were outstanding under this facility.
The Companys Dutch subsidiary, Projecta, has an overdraft line of credit with maximum possible borrowings equal to 1.5 million Euros. Interest on outstanding borrowings in Europe related to Projectas overdraft line of credit is calculated at the Fortis Basic Rate plus 1.50%, the sum of which was 6.50% on October 2, 2009. At October 2, 2009, and December 26, 2008, Projecta had no outstanding balances under this credit facility
The Company has provided an insurance carrier with a standby letter of credit for $0.5 million for self-insured amounts under its insurance program.
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4. | Stock Options |
The Company has a nonqualified stock option plan under which options are granted to certain employees. Options under the plan generally vest one-fifth each year from the anniversary date. During 2004, the Company also granted options to certain employees that were immediately 100% vested. The options expire after ten years from the date of grant. Fair value calculations are based on highly subjective assumptions. The Company used the Black-Scholes option pricing model using the minimum value method and determined that the fair value of grants made during 2004 was not material. The Company did not grant awards during periods presented.
The stock option activity and weighted average exercise prices follow:
Year to Date | ||||||||
Options | Exercise Price | Aggregate Intrinsic Value (in thousands) | ||||||
Outstanding at December 26, 2008 |
55 | $ | 17,079 | |||||
Exercised |
| | ||||||
Outstanding at October 2, 2009 |
55 | $ | 17,079 | $ | | |||
Exercisable at October 2, 2009 |
55 | $ | 17,079 | $ | |
5. | Inventories |
The Company accounts for its inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Inventory is comprised of the following (in thousands):
October 2, 2009 |
December 26, 2008 | |||||
Raw materials |
$ | 6,623 | $ | 9,195 | ||
Work in progress |
1,129 | 2,092 | ||||
Finished goods |
1,294 | 3,155 | ||||
$ | 9,046 | $ | 14,442 | |||
6. | Accumulated Other Comprehensive Income |
The only component of accumulated other comprehensive income as of October 2, 2009 and December 26, 2008 was for cumulative foreign exchange translation adjustments.
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7. | Goodwill |
The change in the carrying amount of goodwill by reportable segment is summarized as follows:
US | Europe | Consolidated | |||||||||
Balance at December 26, 2008 |
$ | 20,440 | $ | 5,913 | $ | 26,353 | |||||
Foreign currency |
| 13 | 13 | ||||||||
Impairment |
| (5,926 | ) | (5,926 | ) | ||||||
Balance at October 2, 2009 |
$ | 20,440 | $ | | $ | 20,440 | |||||
During the second quarter of 2009, management determined that the sustained decline in revenues and the continued deterioration of the global economy were indicators of impairment as described in ASC 350 and as such, the Company performed a step one test for the potential impairment of the goodwill related to the Da-Lite US and Projecta BV reporting units. The Da-Lite US reporting unit passed the step one test and a step two test was not required.
The Projecta BV reporting unit failed the step one test and as a result the step two analysis was performed to determine the implied fair value of the reporting units goodwill. As a result of the step two calculation, the goodwill of $5,926 at the Projecta BV reporting unit was deemed to be fully impaired and a resulting impairment charge was recorded in the thirteen week period ended July 3, 2009. The Company finalized the step two analysis during the third quarter and no adjustments to the financial statements were necessary as a result of this process.
The goodwill impairment charge is non-cash and does not affect the Companys liquidity or compliance with debt covenants.
8. | Segment Information |
The Company primarily manufactures projection screens and other meeting room equipment that are sold throughout the United States and Europe. Based on its operations, the Company has established two reportable segments: United States and Europe. The United States segment includes the operations of Da-Lite excluding its foreign subsidiaries. The Europe segment includes the operations of Projecta and Procolor. All intersegment transactions have been eliminated. Information regarding the sales of specific product categories within the Companys geographic business segments is not presented because it is not practical to determine these amounts.
Operating cash flow is the measure reported to the chief operating decision maker for use in assessing segment performance and allocating resources. Operating cash flow for assessing segment performance is net sales less cost of sales and selling, general, and administrative expenses excluding depreciation and amortization. The Company does not allocate costs between segments.
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The following table presents financial information by segment for the periods stated (in thousands):
For the period ended: | 13 Weeks Ended October 2, 2009 |
13 Weeks Ended September 26, 2008 |
40 Weeks Ended October 2, 2009 |
39 Weeks Ended September 26, 2008 | |||||||||
Net sales: |
|||||||||||||
United States |
$ | 28,747 | $ | 36,368 | $ | 84,299 | $ | 107,060 | |||||
Europe |
5,046 | 6,584 | 14,591 | 22,787 | |||||||||
Total net sales |
$ | 33,793 | $ | 42,952 | $ | 98,890 | $ | 129,847 | |||||
Operating income (loss): |
|||||||||||||
United States |
$ | 8,267 | $ | 10,369 | $ | 20,985 | $ | 29,965 | |||||
Europe |
394 | 812 | (6,536 | ) | 3,151 | ||||||||
Total operating income (loss) |
$ | 8,661 | $ | 11,181 | $ | 14,449 | $ | 33,116 | |||||
As of: | October 2, 2009 |
December 26, 2008 |
|||||||||||
Total assets |
|||||||||||||
United States |
$ | 48,461 | $ | 56,430 | |||||||||
Europe |
17,095 | 24,517 | |||||||||||
Total assets |
$ | 65,556 | $ | 80,947 | |||||||||
9. | Commitments and Contingencies |
The Company is subject to certain legal proceedings and claims that have arisen in the ordinary course of business. In the opinion of management, the Company does not have a potential liability related to any of these other current legal proceedings and claims that should individually or in the aggregate have a material adverse effect on its financial condition, liquidity or results of operations.
However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in legal matters, it is possible that its results of operations or financial condition could be materially adversely affected.
10. | Subsequent Events |
Subsequent to October 2, 2009, the Company repurchased $4.0 million of the outstanding $102.0 million principal amount of its 9 1/2% Senior Notes due 2011 from the open market using cash on hand for an aggregate purchase price of $3.8 million. The Company retired these Notes and expects that the discount recorded on the transaction will more than offset the write-off of deferred financing costs related to the repurchase.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Forward Looking Statements
This quarterly report on Form 10-Q contains certain statements that may be deemed to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical facts, included in this report are forward-looking statements. When used in this report, the words may, will, should, would, anticipate, estimate, expect, plan, believe, predict, potential, intend, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, changes in sales or industry trends, changes in economic conditions, competition, retention of senior management and other key personnel, availability of materials or components, ability to make continued product innovations, casualty or work stoppages at the Companys facilities, adverse results of lawsuits against the Company and currency exchange rates, the availability of financing and other factors described under Item 1A in the Companys Annual Report on Form 10-K for the year ended December 26, 2008 and in Item 1A herein. Forward-looking statements are based on assumptions and assessments made by the Companys management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Readers of this report are cautioned not to place undue reliance on these forward-looking statements, as there can be no assurance that these forward-looking statements will prove to be accurate. Management undertakes no obligation to update any forward-looking statements. This cautionary statement is applicable to all forward-looking statements contained in this report.
Overview
Da-Lite is one of the worlds leading manufacturers and distributors of projection screens. Da-Lites projection screens, which are focused on the premium end of the large screen market, are used in a wide range of settings including conference rooms, educational institutions, live entertainment venues, meeting rooms, training facilities, houses of worship and private homes. Da-Lites products provide the viewer with an enhanced visual experience in settings where a large screen adds to the communication of information or entertainment. The Companys products are versatile and can be customized to fit the needs of unique viewing venues.
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Critical Accounting Policies
Goodwill
The Company applies the provisions of ASC 350 Intangibles- Goodwill and Other, and management tests goodwill for impairment at least annually or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. The Companys annual impairment testing date is the last day of the fiscal year.
The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting units fair value to its carrying value. The Company estimates fair value based on a combination of the market value approach and income approach using discounted cash flows. The fair value of each reporting unit is estimated using both methods and each method is given equal weighting in arriving at the fair value of the reporting unit. The income approach uses managements best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. The market value approach requires the Company to make assumptions about the appropriate market comparables.
The second step, if needed, requires the Company to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting units net assets to calculate the implied value of the goodwill. If the carrying value of the reporting units goodwill is in excess of the implied fair value of goodwill, an impairment charge is taken to reduce the goodwill to its implied fair value.
In the second quarter of 2009, management determined that impairment indicators had been identified for the Companys reporting units (Da-Lite US and Projecta BV) and the step one goodwill impairment test was performed as of July 3, 2009. The Da-Lite US reporting unit had a fair value significantly in excess of the carrying value of equity at July 3, 2009 and no step two impairment test was required. A hypothetical decrease of 20% in the fair value would have no impact on the goodwill impairment analysis at July 3, 2009 for the Da-Lite US reporting unit.
Projecta BV failed the step one test and the step two impairment test was performed to determine the implied fair value of goodwill. To calculate the amount of the impairment charge, the Company allocated the fair value of the Projecta BV reporting unit to all of its assets and liabilities, including recognized and unrecognized intangible assets, in order to determine the implied fair value of goodwill. This allocation process required judgment and the use of additional valuation assumptions in deriving the individual fair values of Projecta BVs assets and liabilities as if the reporting unit had been acquired in a business combination. As a result of the step two calculation, the goodwill of $5,926 at the Projecta BV reporting unit was deemed to be fully impaired and a resulting impairment charge was recorded in the thirteen week period ended July 3, 2009. The Company finalized the step two analysis during the third quarter and no adjustments to the financial statements were necessary as a result of this process.
Changes in the market value, cash flow projections, and assumptions surrounding the fair value of assets and liabilities of the Company could have a significant impact on whether or not goodwill is impaired and the amount of the impairment. Fair value estimates are made at a specific point in time, based on the relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.
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There were no other changes in the forty week period ended October 2, 2009 to the application of critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year ended December 26, 2009.
Recent Accounting Pronouncements
There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the companys financial position, operations or cash flows.
In June 2009, the FASB issued SFAS No. 168 (SFAS 168), Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification (Codification) has become a source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the Securities Exchange Commission (SEC) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our quarter ended October 2, 2009, all references made by it to GAAP in its consolidated financial statements now use the new Codification numbering system. The Codification does not change or alter existing GAAP and, therefore, it is not having an impact on our financial position, results of operations and cash flows.
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Results of Operations
Thirteen Weeks Ended October 2, 2009, Compared with Thirteen Weeks Ended September 26, 2008
Net Sales. Net sales were $33.8 million for the 13 weeks ended October 2, 2009, as compared to $43.0 million for the 13 weeks ended September 26, 2008, a decrease of $9.2 million or 21.4%. Net sales by the Companys United States (U.S.) operations decreased 21.0%. In the U.S., electric screen sales decreased $2.8 million, wall screen sales decreased $1.6 million, and portable screen sales decreased $2.6 million, reflecting primarily decreases in volume. Sales were impacted by a slowdown in the economy, including the housing, Business/IT and Hospitality markets. Portable screen sales, in particular, were affected by declining demand from the rental and staging markets within the broader Hospitality market. Results also reflected increased competition from imports and larger plasma screens. Sales of other products decreased $0.7 million from 2008 levels. Net sales from the Companys European subsidiaries decreased $1.5 million or 23.4%. Sales in Europe were also impacted by a slowdown in the economy. The stronger dollar produced a decrease of $0.2 million.
Cost of Sales. The cost of sales was $20.7 million for the 13 weeks ended October 2, 2009, as compared to $26.9 million for the 13 weeks ended September 26, 2008, a decrease of $6.2 million, or 23.0%. As a percentage of net sales, the cost of sales represented 61.3% in the 13 weeks ended October 2, 2009 and 62.6% for the 13 weeks ended September 26, 2008. This constitutes a 1.3 percentage point increase in margins. Margins at our U.S. facilities increased 1.5 points while margins at our European operations decreased 1.3 points. The increase at our U.S. facilities resulted from material cost savings. The European decreases resulted primarily from the decrease in product volumes.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.4 million for the 13 weeks ended October 2, 2009, as compared to $4.9 million for the 13 weeks ended September 26, 2008. Selling, general and administrative expenses in the U.S. decreased $0.4 million primarily as a result of a decrease in marketing costs.
Interest. Interest expense totaled $2.9 million for the 13 weeks ended October 2, 2009, as compared to $3.0 million for the 13 weeks ended September 26, 2008, a decrease of $0.1 million. The decrease was a result of a reduction in the outstanding amount of the 9.5% Senior Notes due 2011.
Miscellaneous, net. Miscellaneous, net was income of $0.8 million for the 13 weeks ended October 2, 2009, as compared to $0.1 million in expense for the 13 weeks ended September 26, 2008, an increase in income of $0.8 million reflecting the repurchase of debt at a discount in the 2009 period.
Income Taxes. As a subchapter S corporation for United States tax purposes, the Company is generally not subject to United States federal and state income taxation. Rather, the Companys income, gains, losses, deductions and credits flow through to its stockholders, and the Company makes distributions to them to meet their tax obligations at an assumed maximum federal and state tax rate (based on the state with the highest tax rate in which any of the Companys stockholders reside). This assumed rate was 40.4% for the 13 weeks ended October 2, 2009 and for the 13 weeks ended September 26, 2008. The Company pays foreign income taxes on the earnings of its European subsidiaries.
Net Income. As a result of the aforementioned factors, net income decreased $1.4 million from $7.9 million for the 13 weeks ended September 26, 2008 to $6.5 million for the 13 weeks ended October 2, 2009.
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Results of Operations
Forty Weeks Ended October 2, 2009, Compared with Thirty Nine Weeks Ended September 26, 2008
Net Sales. Net sales were $98.9 million for the 40 weeks ended October 2, 2009, as compared to $129.8 million for the 39 weeks ended September 26, 2008, a decrease of $30.9 million or 23.8%. Net sales by the Companys United States (U.S.) operations decreased 21.3%. In the U.S., electric screen sales decreased $7.6 million, wall screen sales decreased $4.1 million, and portable screen sales decreased $8.6 million, reflecting primarily decreases in volume. Sales were impacted by a slowdown in the economy, including the housing, Business/IT and Hospitality markets. Portable screen sales, in particular, were affected by declining demand from the rental and staging markets within the broader Hospitality market. Results also reflected increased competition from imports and larger plasma screens. Sales of other products decreased $2.6 million from 2008 levels. Net sales from the Companys European subsidiaries decreased $8.2 million or 36.0%. Sales in Europe were also impacted by a slowdown in the economy. The stronger dollar produced a decrease of $1.6 million.
Cost of Sales. The cost of sales was $63.6 million for the 40 weeks ended October 2, 2009, as compared to $79.8 million for the 39 weeks ended September 26, 2008, a decrease of $16.2 million, or 20.4%. As a percentage of net sales, the cost of sales represented 64.3% in the 40 weeks ended October 2, 2009 and 61.5% for the 39 weeks ended September 26, 2008. This constitutes a 2.8 percentage point decrease in margins. Margins at our U.S. facilities decreased 1.9 points while margins at our European operations decreased 8.5 points. These decreases resulted primarily from the decrease in product volumes.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $15.0 million for the 40 weeks ended October 2, 2009, as compared to $16.9 million for the 39 weeks ended September 26, 2008. Selling, general and administrative expenses in the U.S. decreased $1.8 million as a result of a decrease in legal fees reflecting the settlement of patent litigation in 2008, and a decrease in marketing costs.
Goodwill Impairment. The goodwill impairment charge totaled $5.9 million for the 40 weeks ended October 2, 2009 as a result of the impairment charge taken at the Projecta BV reporting unit. There were no impairment charges in the 39 weeks ended September 26, 2008.
Interest. Interest expense totaled $9.3 million for the 40 weeks ended October 2, 2009, as compared to $9.4 million for the 39 weeks ended September 26, 2008, a decrease of $0.1 million. The decrease was a result of a reduction in the outstanding amount of the 9.5% Senior Notes due 2011.
Miscellaneous, net. Miscellaneous, net was an income of $2.1 million for the 40 weeks ended October 2, 2009, as compared to $0.1 million of expense in the 39 weeks ended September 26, 2008, an increase of $2.2 million, reflecting the increase in the repurchase of debt at a discount in the 2009 period.
Income Taxes. As a subchapter S corporation for United States tax purposes, the Company is generally not subject to United States federal and state income taxation. Rather, the Companys income, gains, losses, deductions and credits flow through to its stockholders, and the Company makes distributions to them to meet their tax obligations at an assumed maximum federal and state tax rate (based on the state with the highest tax rate in which any of the Companys stockholders reside). This assumed rate was 40.4% for the 40 weeks ended October 2, 2009 and for the 39 weeks ended September 26, 2008. The Company pays foreign income taxes on the earnings of its European subsidiaries.
Net Income. As a result of the aforementioned factors, net income decreased $15.4 million from $22.9 million for the 39 weeks ended September 26, 2008 to $7.5 million for the 40 weeks ended October 2, 2009.
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Liquidity and Capital Resources
The Company expects to be able to fund its working capital requirements, interest expense, capital expenditures and its distributions to stockholders with cash generated from operations, although there can be no assurances in this regard. The financial results for the 40 weeks ended October 2, 2009 showed a substantial reduction from the results reported for the 39 weeks ended September 26, 2008, reflecting difficult economic conditions. As a result, the Company has been seeking to conserve resources. In this regard, the Company discontinued making cash distributions to its stockholders (other than distributions to pay estimated taxes) after having made a distribution of $137.50 per share in April of 2009.
The Companys bank debt and senior notes become due in May of 2011. Although the Company expects that it will be able to generate cash from operations to pay or prepay a portion of this indebtedness, it expects that it will need to refinance most of this indebtedness on or before the respective maturity dates. Credit market conditions, as well as other economic conditions are difficult. There is no assurance that such new financing will be available when needed or as to the cost or other terms of this financing.
The Company explores from time to time alternatives to establish new financing arrangements, which could be used to purchase or retire all or part or its outstanding senior notes. No assurance can be given as to the availability or terms of any such potential financing arrangements or whether the Company will elect to go forward with any financing arrangements that may be available.
In March 2009, the Company repurchased $5.0 million of the outstanding principal amount of its 9 1/2% senior notes from the open market for an aggregate purchase price of $4.3 million. In April 2009, the Company repurchased an additional $2.3 million principal amount of such notes for an aggregate purchase price of $2.0 million. In May 2009, the Company repurchased an additional $2.0 million principal amount of such notes for an aggregate purchase price of $1.7 million. In July 2009 the Company repurchased $3.3 million principal amount of such notes for an aggregate purchase price of $2.9 million. In August, 2009 the Company repurchased an additional $5.2 million principal amount of such notes for an aggregate purchase price of $4.7 million. The Company retired these notes and wrote-off the related deferred financing costs and recorded a gain of $2.2 million during the 40 weeks ended October 2, 2009 relating to the repurchase. In October 2009 the Company repurchased an additional $4.0 million principal amount of such notes for an aggregate purchase price of $3.8 million. Depending on the Companys expected cash needs, the prevailing prices of its 9 1/2% senior notes and other factors, the Company may repurchase some amount of its outstanding 9 1/2 % senior notes from time to time in the open market or otherwise.
Management believes the principal indicators of the Companys liquidity are its cash position (total cash and cash equivalents), remaining availability under its bank credit facilities and its excess working capital. At October 2, 2009, the Companys cash position was $1.3 million, a decrease of $0.3 million from December 26, 2008. Additionally, the Company had an unsecured revolving credit facility, with maximum possible borrowings equal to $19.5 million, which expires in May 2011. Interest on any outstanding borrowings related to this line of credit is calculated at the prime rate, subject to a floor of 4.00%. As the prime rate is below the floor, the interest rate in effect as of October 2, 2009 was 4.00%. At October 2, 2009, the Company had a $2.2 million outstanding balance under this line of credit. Da-Lites working capital position decreased to $14.2 million (including $1.3 million of total cash and cash equivalents) at October 2, 2009, from $25.1 million (including $1.6 million of total cash and cash equivalents) at December 26, 2008.
The Companys Dutch subsidiary, Projecta, has an overdraft line of credit, with maximum possible borrowings equal to 1.5 million Euros. Interest on outstanding borrowings in Europe related to Projectas overdraft line of credit is calculated at the Fortis Basic Rate plus 1.50%, the sum of which was 6.50% on October 2, 2009. At October 2, 2009, Projecta had no outstanding balances under this credit facility.
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Cash Flows
For the 40 weeks ended October 2, 2009, cash provided by operating activities was $25.1 million, as compared to $27.8 million for the 39 weeks ended September 26, 2008, a decrease of $2.7 million or 9.8%, reflecting reduced net income. Cash used in investing activities was $1.0 million for the 40 weeks ended October 2, 2009, as compared to $4.7 million for the 39 weeks ended September 26, 2008. Cash used in investing activities in 2009 resulted from capital expenditures of $1.0 million. In 2008, cash used in investing activities resulted from the purchase of short-term investments of $5.0 million, capital expenditures of $1.3 million, and purchase of minority shares of $1.0 million partially offset by maturities in short-term investments of $2.6 million. Cash used in financing activities was $24.6 million during the 40 weeks ended October 2, 2009, as compared to $25.2 million for the 39 weeks ended September 26, 2008. The decrease in cash used in financing activities in 2009 was related to the receipt of proceeds from borrowings under the revolving credit facility of $2.2 million, and a reduction in distributions to stockholders of $11.4 million, partially offset by a $13.5 million increase in retirement of the 9.5% Senior Notes due 2011.
Capital Expenditures
Capital expenditures were $1.0 million for the forty weeks ended October 2, 2009 compared to $1.3 million for the thirty nine weeks ended September 26, 2008. The Companys management currently expects to spend approximately $1.5 million on capital expenditures in 2009, using cash generated from operations.
Contractual Obligations
The following table sets forth, as of October 2, 2009, certain of the Companys contractual obligations:
Payments due by period | |||||||||||||
Contractual Obligations |
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years | ||||||||
(in millions) | |||||||||||||
Interest and principal payments for senior debt |
$ | 121.3 | $ | 9.7 | $ | 111.6 | | | |||||
Interest and principal for line of credit |
2.3 | .1 | 2.2 | | | ||||||||
Self-insurance letter of credit |
0.5 | 0.5 | | | | ||||||||
Total |
$ | 124.1 | $ | 10.3 | $ | 113.8 | | | |||||
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Distributions
As a subchapter S corporation under the Internal Revenue Code of 1986, Da-Lite is not subject to U.S. federal income taxes. Instead, such taxes are payable by Da-Lites stockholders. Distributions are made by Da-Lite to its stockholders to pay estimated taxes relating to taxable income allocated to them by the Company on a quarterly basis. Tax related distributions were $5.9 million and $10.7 million for the 40 weeks ended October 2, 2009 and the 39 weeks ended September 26, 2008, respectively.
The Company paid regular distributions to its stockholders in 2009 at a monthly rate of $150 per share or $0.8 million in the aggregate for the months of January through March. The Company reduced the regular distribution to its stockholders to a monthly rate of $137.50 per share or $0.7 million in the aggregate in April of 2009 and discontinued making regular distributions thereafter. The Company paid regular distributions to its stockholders in 2008 at a monthly rate of $200 per share or $1.1 million in the aggregate, subject to the covenants contained in the indenture. The Company plans to continue making distributions to its stockholders to pay estimated taxes.
Inflation
The Company manages its inflation risks by ongoing review of product selling prices and production costs. Management does not believe that inflation risks are material to the Companys business, its consolidated financial position, results of operations or cash flows. However, there can be no assurance that future inflation will not have an adverse impact on the Companys operating results and financial condition.
Environmental
The Company has incurred, and in the future will continue to incur, expenditures for matters relating to environmental control, remediation, monitoring and compliance. The Companys management believes that compliance with current environmental laws and regulations is not likely to have a material adverse effect on the Companys financial condition, the results of its operations or its liquidity; however, environmental laws and regulations have changed rapidly in recent years and the Company may become subject to more stringent environmental laws and regulations in the future.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
The Company maintains cash and cash equivalents with well-capitalized financial institutions.
The Companys sales are not materially dependent on a single customer or a small group of customers. No one individual customer balance represented more than 11% of the Companys total outstanding receivables as of October 2, 2009. Credit risk associated with the Companys receivables is representative of the geographic, industry and customer diversity associated with the Companys global business.
The Company also maintains credit controls for evaluating and granting customer credit. As a result, the Company may require that customers provide some type of financial guarantee in certain circumstances.
Foreign Currency Risk
Da-Lite routinely uses forward exchange contracts to economically hedge raw material purchases from vendors outside of the country of purchase.
Interest Rate Risk
The Company has two credit facilities available for general corporate purposes that are subject to variable interest rates. Interest related to any outstanding balances on the Companys $19.5 million revolving credit facility in the U.S. is calculated at 4.00% on October 2, 2009. At October 2, 2009, the Company had an outstanding balance of $2.2 million under this revolving credit facility. Interest on outstanding borrowings in Europe, related to Projectas overdraft line of credit, is calculated at the Fortis Basic Rate plus 1.50%, the sum of which was 6.50% on October 2, 2009. At October 2, 2009, Projecta had no outstanding balances under this credit facility.
At October 2, 2009, the Company had $102.0 million in fixed-rate long-term debt outstanding. There is no interest rate risk associated with the Companys fixed rate debt. The fair market value of the fixed-rate debt (based on discounted cash flows reflecting borrowing rates currently available for debt with similar terms and maturities) varies with fluctuations in interest rates. A 10% decrease in interest rates would have changed the fair market value of the fixed-rate debt to approximately $94.9 million from the fair value of approximately $92.5 million at October 2, 2009. Note that financial instruments are described as cash or contractual obligations or rights to pay or receive cash. The fair value of all other financial instruments approximates the carrying value because of the short-term maturity of these instruments.
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Item 4. | Controls and Procedures. |
(a) | Evaluation of Disclosure Controls and Procedures. Based on the evaluation required by Rule 15d-15(e) under the Securities Exchange Act of 1934, the principal executive officer and principal financial officer of the Da-Lite have concluded that the Companys disclosure controls and procedures (as defined in Rule 15d-15(e)) as of the end of the period covered by this report were effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures |
(b) | Changes in Internal Control Over Financial Reporting. There were no changes in the Companys internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. |
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OTHER INFORMATION
Item 1A. | Risk Factors. |
The following supplements the risk factors set forth in Item 1A of the Companys Annual Report of Form 10-K for the year ended December 26, 2008
We have been adversely affected by the current difficult economic and market conditions, including conditions in the residential and commercial real estate, Business/IT and Hospitality markets, and the continuation or worsening of these conditions could further negatively impact our results and financial condition.
The Companys success depends to a significant extent on numerous factors affecting business and consumer spending and residential and commercial construction, including economic conditions relating to the markets we serve. In the current weak economy, our customers have reduced their level of discretionary spending or investment which has materially adversely affected our business and results of operations. Our results have been adversely affected in recent periods by a decline in residential construction, which reduces the demand for projection screens for home theaters, the declines in commercial construction and business investment generally, which reduces the demand in the Business/IT market, and the decline in convention activity has adversely affected the demand in the Hospitality market. The continuation or worsening of difficult economic and market conditions could further negatively impact our business, financial condition, results of operations and cash flows.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None
Item 6. | Exhibits |
Exhibit No. |
Description | |
31.1 |
Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 |
Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 |
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 |
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
DA-LITE SCREEN COMPANY, INC. (Registrant) | ||
By: | /S/ JERRY C. YOUNG | |
Jerry C. Young | ||
Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |
Date: November 4, 2009
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Exhibit No. |
Description | |
31.1 |
Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 |
Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 |
Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 |
Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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