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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 1, 2010

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)

Registrant’s 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 2, 2010, there were 5,412,570 shares of the registrant’s common stock outstanding (all of which are privately owned and are not traded on any public market).

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

          Page  
PART I    Financial Information   
Item 1.    Condensed Consolidated Financial Statements (unaudited)      1   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      11   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      17   
Item 4.    Controls and Procedures      18   
PART II    Other Information   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      19   
Item 4.    Submission of Matters to a Vote of Security Holders      19   
Item 6.    Exhibits      20   
   Signatures      21   
   Exhibit Index      22   

 

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Table of Contents

 

PART I

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 1,
2010
    As of
January 1,
2010
 
Assets     

Current Assets:

    

Cash and cash equivalents

   $ 489      $ 552   

Accounts receivable, less allowance for doubtful accounts

     16,850        13,559   

Inventories

     8,869        8,482   

Prepaid expenses and other

     2,493        2,045   

Prepaid income taxes

     1,071        519   
                

Total current assets

     29,772        25,157   
                

Property, plant and equipment

     60,192        60,104   

Less accumulated depreciation

     45,028        43,256   
                

Net property, plant, and equipment

     15,164        16,848   
                

Goodwill

     20,440        20,440   

Other assets, net

     3,486        805   
                
   $ 68,862      $ 63,250   
                
Liabilities and Stockholders’ Deficit     

Current liabilities:

    

Revolving credit facility

   $ 9,800      $ 1,975   

Checks written in excess of bank balance

     867        890   

Accounts payable

     2,593        3,281   

Accrued expenses

    

Interest

     —          1,167   

Vacation

     1,229        1,239   

Other

     3,048        3,088   
                

Total accrued expenses

     4,277        5,494   
                

Total current liabilities

     17,537        11,640   

Long-term debt

     91,918        98,005   
                

Total liabilities

     109,455        109,645   
                

Commitments and contingencies (note 8)

    

Stockholders’ deficit:

    

Common stock, $.001 par value. Authorized 10,000,000 shares; issued 5,409,331 shares at October 1, 2010

     5        11   

Additional paid-in capital

     2,287        1,710   

Accumulated deficit

     (46,513     (26,770

Accumulated other comprehensive income

     3,628        4,120   

Less treasury stock, 5,297.38 shares at January 1, 2010 at cost

     —          (25,466
                

Total stockholders’ deficit

     (40,593     (46,395
                
   $ 68,862      $ 63,250   
                

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
Ended

October 1,
2010
    13 Weeks
Ended

October 2,
2009
    39 Weeks
Ended

October 1,
2010
    40 Weeks
Ended

October 2,
2009
 

Net sales

   $ 34,149      $ 33,793      $ 99,327      $ 98,890   

Cost of sales

     21,009        20,714        60,398        63,558   
                                

Gross profit

     13,140        13,079        38,929        35,332   

Selling, general, and administrative expenses

     4,329        4,418        14,036        14,957   

Goodwill impairment

     —          —          —          5,926   
                                

Operating income

     8,811        8,661        24,893        14,449   
                                

Other expense (income):

        

Interest

     4,116        2,914        11,348        9,295   

Miscellaneous, net

     254        (786     1,249        (2,075
                                

Total other expense

     4,370        2,128        12,597        7,220   
                                

Income before income taxes

     4,441        6,533        12,296        7,229   

Income tax benefit

     (20     (4     (61     (276
                                

Net income

   $ 4,461      $ 6,537      $ 12,357      $ 7,505   
                                

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)

 

     39 weeks
Ended

October 1,
2010
    40 weeks
Ended

October 2,
2009
 

Cash flows from operating activities:

    

Net income

   $ 12,357      $ 7,505   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     2,072        2,177   

Amortization and write-off of debt issuance costs

     1,081        1,014   

Accretion of original issue discount on senior notes due 2015

     498        —     

Stock compensation expense

     217        —     

Goodwill impairment

     —          5,926   

Change in:

    

Accounts receivable

     (3,875     1,803   

Inventories

     (479     5,497   

Prepaid expenses and other

     (482     584   

Accounts payable

     28        (1,692

Accrued expenses

     (1,721     2,277   
                

Net cash provided by operating activities

     9,696        25,091   
                

Cash flows from investing activities:

    

Purchase of property, plant and equipment

     (783     (1,036
                

Net cash used in investing activities

     (783     (1,036
                

Cash flows from financing activities:

    

Decrease in checks written in excess of bank balance

     (23     —     

Proceeds from revolving credit facility, 2009 agreement

     3,050        12,700   

Payments on revolving credit facility, 2009 agreement

     (5,025     (10,500

Proceeds from revolving credit facility, 2010 agreement

     13,200        —     

Payments on revolving credit facility, 2010 agreement

     (3,400     —     

Proceeds from sale of senior notes due 2015

     102,170        —     

Payments to retire senior notes due 2011

     (98,005     (17,775

Payments to retire senior notes due 2015

     (10,750     —     

Distributions to stockholders

     (6,638     (9,040

Payment of financing costs

     (3,762     —     

Exercise of common stock options

     360        —     
                

Net cash used in financing activities

     (8,823     (24,615
                

Effect of foreign currency exchange rate changes on cash and cash equivalents

     (153     222   
                

Net change in cash and cash equivalents

     (63     (338

Cash and cash equivalents at beginning of period

     552        1,633   
                

Cash and cash equivalents at end of period

   $ 489      $ 1,295   
                

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 January 1, 2010. 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. 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 Projecta’s 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 2010 and 2009 were 13-week periods, respectively. The Company’s 2010 fiscal year will be a 52-week year and its 2009 fiscal year consisted of 53 weeks.

 

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 management’s 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 Company’s 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 management’s estimate of amounts to be collected from past due accounts.

If circumstances change, for example, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet its financial obligations to the Company, estimates of recoverability of receivable amounts due could be reduced.

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 has goodwill as of October 1, 2010 and January 1, 2010. The Company’s 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 unit’s 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 unit’s net assets to calculate the implied value of the goodwill. If the carrying value of the reporting unit’s 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 the 12 1/2% Senior Notes due 2015 was $101 million at October 1, 2010.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the Company’s financial position, operations or cash flows.

 

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3. Notes Payable, Revolving Credit Agreement and Long-term Debt

 

Long-term debt consists of the following (in thousands):    October 1,
2010
     January 1,
2010
 

9 1/2% Senior Notes due May 2011

   $ —         $ 98,005   

12 1/2% Senior Notes due April 2015 (net of unamortized issue discount of $2,332)

     91,918         —     
                 

Total Long-term debt

   $ 91,918       $ 98,005   
                 

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”). On March 29, 2010, the Company repurchased $43.5 million of the outstanding $98.0 million principal amount of its 9 1/2% Senior Notes from the open market for an aggregate purchase price of $44.5 million. The Company retired these Notes and wrote-off the purchase premium and the deferred financing cost related to the repurchase. On May 17, 2010, the Company redeemed the remaining $54.5 million of its 9 1/2% Senior Notes at the principal amount plus accrued interest due and wrote-off the remaining purchase premium and the deferred financing cost.

The Company issued $105 million of 12 1/2% senior unsecured notes due in April 2015 during the first quarter of 2010 (the “12 1/2% Senior Notes”). The 12 1/2% Senior Notes were issued with an original issue discount at a price of 97.305% and were recorded at the discounted amount of $102.2 million. The discount will be accreted over the life of these notes as interest expense. The Company used the proceeds from the issuance of the 12 1/2% Senior Notes, together with borrowings under our bank credit facility, to purchase approximately $43.5 million principal amount of the 9 1/2% senior unsecured notes in March 2010, to redeem the remaining $54.5 million of 9 1/2% senior unsecured notes in May 2010 and to pay issuance costs for the new 12 1/2% Senior Notes. The Company may redeem any of the 12 1/2% Senior Notes beginning on April 1, 2013. The initial redemption price is 106.250% of their principal amount, plus accrued interest. The redemption price will decline each year after 2013 and will be 100% of their principal amount, plus accrued interest, beginning on April 1, 2014. In addition, before April 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of outstanding notes with the proceeds from sales of certain kinds of our capital stock at a redemption price equal to 112.500% of their principal amount, plus accrued interest to the redemption date. The Company may make such redemption only if, after any such redemption, at least 65% of the aggregate principal amount of notes originally issued under the indenture remains outstanding. Interest is payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2010.

The Company registered with the Securities and Exchange Commission (the “SEC”) $105 million of new 12 1/2% Senior Notes due 2015 (“Exchange Notes”), which have substantially identical terms to the Company’s outstanding 12 1/2% Senior Notes (“Original Notes”), pursuant to a Registration Statement on Form S-4 which was declared effective by the SEC on June 8, 2010. On June 8, 2010, the Company commenced an offer to exchange its outstanding Original Notes for the Exchange Notes which have been registered with the SEC. This exchange offer expired on July 12, 2010. All of the Original Notes were tendered and exchanged for the Exchange Notes.

In the Indenture related to the 12 1/2% Senior Notes, 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 holder’s 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 1, 2010.

 

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On September 2, 2010, the Company repurchased $10.8 million of the outstanding $105.0 million principal amount of its 12 1/2% Senior Notes from the open market for an aggregate purchase price of $11.0 million. The Company retired these Notes and wrote-off the original issuance discount and the deferred financing cost related to the repurchase, and recognized a loss on the premium paid to repurchase the notes.

On March 26, 2010, the Company entered into a two-year arrangement for an unsecured revolving credit facility, with maximum possible borrowings equal to $19.5 million, with Lake City Bank (the “Bank”). Under the agreement, borrowings from the revolving credit facility are not due until May 1, 2012. As part of this agreement, Lake City Bank may demand full payment at any time. When borrowings have taken place, the Company has paid down on the line as funds have become available. As the Company intends to repay the revolving line of credit as funds become available, the line of credit has been classified as short term. Interest on any outstanding borrowings related to the 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 1, 2010 was 4.00%. As of October 1, 2010, $9.8 million of borrowings were outstanding under this facility.

The Company’s Dutch subsidiary, Projecta, has an overdraft line of credit with maximum possible borrowings equal to 1.5 million Euros. Projecta’s agreement with ABN AMRO Bank has no fixed expiration date. Interest on outstanding borrowings in Europe related to Projecta’s overdraft line of credit is calculated at the ABN AMRO Bank Basic Rate plus 1.50%, the sum of which was 6.10% on October 1, 2010. At October 1, 2010, Projecta had no outstanding balance with ABN AMRO Bank under this credit facility.

The Company has provided an insurance carrier with a standby letter of credit for $0.4 million for self-insured amounts under its insurance program.

 

4. Stock Split and Stock Options

On June 21, 2010 the Board of Directors of the Company approved a 1,000 to 1 stock split and in connection with the stock split, amended and restated the Amended and Restated Articles of Incorporation of the Company. The Second Amended and Restated Articles of Incorporation were approved by the shareholders in a shareholders meeting on July 2, 2010. All share and per share information set forth herein gives retrospective effect to the stock split. The amended and restated articles of incorporation required that all treasury shares be retired prior to the stock split. The Company retired the treasury shares and retained deficit was impacted by the retirement of the treasury shares by $25.5 million.

The Company has a nonqualified stock option plan under which options are granted to certain employees. During 2004, the Company granted options to certain employees that were immediately 100% vested. The options expire after ten years from the date of grant.

During the thirteen weeks ended July 2, 2010, the Company adopted the Da-Lite Screen Company, Inc. 2010 Stock Option Plan (“2010 Stock Option Plan”) pursuant to which eligible employees may be granted options to purchase up to 200,000 new shares of the Company. The Company granted 159,000 nonqualified options to certain employees that were immediately 100% vested. The options expire after five years from the date of grant.

 

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The stock option activity and weighted average exercise prices follow:

 

     Option
Shares
    Weighted
Average

Exercise
Price
     Option
Exercisable
    Weighted
Average

Exercise
Price
 

Outstanding, January 1, 2010 (1)

     54,000      $ 17.11         54,000      $ 17.11   

Granted

     159,000        17.62         159,000        17.62   

Exercised

     (20,711     17.35         (20,711     17.35   

Canceled

     (3,000     17.62         (3,000     17.62   
                                 

Outstanding October 1, 2010

     189,289      $ 17.50         189,289      $ 17.50   
                                 

 

(1) Amounts restated to report the 1,000 to 1 stock split.

The aggregate intrinsic value of exercisable shares at October 1, 2010 was less than $0.1 million with a weighted average contractual term of 4.6 years.

Under the 2010 Stock Option Plan the fair value of the employees’ purchase right under this Plan was estimated on the date of grant. The employees’ purchase right was determined using the Black-Scholes option-pricing model with the following assumptions and results:

 

     2010 Stock
Option  Plan
 

Expected life in years

     2.8   

Interest rate

     1.11

Volatility

     16.7

Dividend yield

     3.4

Fair value of options

   $ 1.36   

The Company recognized share based compensation expense of $0.2 million during the 13 weeks ended July 2, 2010.

 

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 1,
2010
     January 1,
2010
 

Raw materials

   $ 6,288       $ 5,715   

Work in progress

     958         915   

Finished goods

     1,623         1,852   
                 
   $ 8,869       $ 8,482   
                 

 

6. Accumulated Other Comprehensive Income

The only component of accumulated other comprehensive income as of October 1, 2010 and January 1, 2010 was for cumulative foreign exchange translation adjustments.

 

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7. 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 European segment includes the operations of Projecta and Procolor. All intersegment transactions have been eliminated. Information regarding the sales of specific product categories within the Company’s 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.

The following table presents financial information by segment for the periods stated (in thousands):

 

For the period ended:    13 Weeks
Ended
October 1,
2010
    13 Weeks
Ended

October 2,
2009
     39 Weeks
Ended
October 1,
2010
    40 Weeks
Ended

October 2,
2009
 

Net sales:

         

United States

   $ 29,733      $ 28,747       $ 84,754      $ 84,299   

Europe

     4,416        5,046         14,573        14,591   
                                 

Total net sales

   $ 34,149      $ 33,793       $ 99,327      $ 98,890   
                                 

Operating income (loss):

         

United States

   $ 8,832      $ 8,267       $ 24,911      $ 20,985   

Europe

     (21     394         (18     (6,536
                                 

Total operating income

   $ 8,811      $ 8,661       $ 24,893      $ 14,449   
                                 

 

As of:    October 1,
2010
     January 1,
2010
 

Total assets

     

United States

   $ 53,714       $ 47,751   

Europe

     15,148         15,499   
                 

Total assets

   $ 68,862       $ 63,250   
                 

 

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8. 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.

 

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Item 2. Management’s 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 Company’s 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 Company’s Annual Report on Form 10-K for the year ended January 1, 2010. Forward-looking statements are based on assumptions and assessments made by the Company’s 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. The Company’s actual results could differ materially from those currently anticipated and discussed in the forward-looking statements as a result of risks and uncertainties described under Item 1A in the Company’s Annual Report on Form 10-K for the year ended January 1, 2010. 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 world’s leading manufacturers and distributors of projection screens. Da-Lite’s 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-Lite’s products provide the viewer with an enhanced visual experience in settings where a large screen adds to the communication of information or entertainment. The Company’s products are versatile and can be customized to fit the needs of unique viewing venues.

Critical Accounting Policies

There were no changes in the thirty nine week period ended October 1, 2010 to the application of critical accounting policies and estimates as described in our Annual Report on Form 10-K for the year ended January 1, 2010.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material impact on the company’s financial position, operations or cash flows.

 

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Results of Operations

Thirteen Weeks Ended October 1, 2010, Compared with Thirteen Weeks Ended October 2, 2009

Net Sales. Net sales were $34.1 million for the 13 weeks ended October 1, 2010, as compared to $33.8 million for the 13 weeks ended October 2, 2009, an increase of $0.3 million or 0.9%. Net sales by the Company’s United States (U.S.) operations increased 3.4%. In the U.S., electric screen sales increased $0.3 million, wall screen sales decreased $0.1 million, portable screen sales increased $0.4 million, and the sales of other products increased $0.3 million from 2009 levels, reflecting primarily a marginal increase in volume. Sales benefited from a marginal improvement in economic activity during the third quarter. Net sales from the Company’s European subsidiaries decreased 12.5%. Sales in Europe were lower due to the stronger dollar that produced a decrease of $0.5 million.

Cost of Sales. Cost of sales was $21.0 million for the 13 weeks ended October 1, 2010, as compared to $20.7 million for the 13 weeks ended October 2, 2009, an increase of $0.3 million, or 1.4%. As a percentage of net sales, the cost of sales represented 61.5% in the 13 weeks ended October 1, 2010 and 61.3% for the 13 weeks ended October 2, 2009. This constitutes a 0.2 percentage point decrease in margins. Percentage margins at our U.S. facilities were unchanged while margins at our European operations decreased 8.7 points. The decrease resulted primarily from a change in the product mix in the European operations.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.3 million for the 13 weeks ended October 1, 2010, as compared to $4.4 million for the 13 weeks ended October 2, 2009. Selling, general and administrative expenses in Europe decreased $0.2 million primarily as a result of changes in exchange rates.

Interest. Interest expense totaled $4.1 million for the 13 weeks ended October 1, 2010, as compared to $2.9 million for the 13 weeks ended October 2, 2009, an increase of $1.2 million. The increase was primarily due to the changes in rates as a result of refinancing the 9 1/2% Senior Notes with 12 1/2% Senior Notes.

Miscellaneous, net. Miscellaneous, net was $0.3 million in expense for the 13 weeks ended October 1, 2010, as compared to $0.8 million in income for the 13 weeks ended October 2, 2009. The $1.1 million increase in expense was primarily due to a gain from the repurchase of debt at a discount in the third quarter of 2009 of $0.9 million and a loss from the repurchase of debt at a premium in the third quarter of 2010 of $0.3 million.

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 Company’s 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 Company’s stockholders reside). This assumed rate was 40.4% for the 13 weeks ended October 1, 2010 and for the 13 weeks ended October 2, 2009. 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 $2.0 million to $4.5 million for the 13 weeks ended October 1, 2010, compared to $6.5 million for the 13 weeks ended October 2, 2009.

 

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Results of Operations

Thirty Nine Weeks Ended October 1, 2010, Compared with Forty Weeks Ended October 2, 2009

Net Sales. Net sales were $99.3 million for the 39 weeks ended October 1, 2010, as compared to $98.9 million for the 40 weeks ended October 1, 2009, an increase of $0.4 million or 0.4%. Net sales by the Company’s United States (U.S.) operations increased 0.5%. In the U.S., electric screen sales decreased $0.7 million and wall screen sales decreased $0.2 million. Portable screen sales increased $0.7 million and sales of other product increased $0.7 million from 2009 levels. Sales were marginally assisted by a perceived leveling in the economy, in the hospitality, business/IT and housing markets. Portable screen sales were positively impacted by a slight increase in demand from the rental and staging markets within the broader Hospitality market. Net sales from the Company’s European subsidiaries decreased 0.1%. Such decrease was due to the stronger dollar against the Euro.

Cost of Sales. Cost of sales was $60.4 million for the 39 weeks ended October 1, 2010, as compared to $63.6 million for the 40 weeks ended October 2, 2009, a decrease of $3.2 million, or 5.0%. As a percentage of net sales, the cost of sales represented 60.8% in the 39 weeks ended October 2, 2010 and 64.3% for the 40 weeks ended October 2, 2009. This constitutes a 3.5 percentage point increase in margins. Margins at our U.S. facilities increased 3.3 points while margins at our European operations decreased 0.4 points. This overall increase resulted primarily from the decrease in material cost in the U.S. facilities as compared to the same period for 2009.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $14.0 million for the 39 weeks ended October 1, 2010, as compared to $15.0 million for the 40 weeks ended October 2, 2009. Selling, general and administrative expenses in the U.S. decreased $0.5 million as a result of a decrease in marketing expense.

Goodwill Impairment There was no impairment charge in the 39 weeks ended October 1, 2010. 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 Project BV reporting unit.

Interest. Interest expense totaled $11.3 million for the 39 weeks ended October 1, 2010, as compared to $9.3 million for the 40 weeks ended October 2, 2009, an increase of $2.0 million, reflecting the increase in interest as a result of refinancing the 9 1/2% Senior Notes with 12 1/2% Senior Notes.

Miscellaneous, net. Miscellaneous net was an expense of $1.2 million for the 39 weeks ended October 1, 2010, as compared to income of $2.1 million for the 40 weeks ended October 2, 2009. The $3.3 million increase in expense was due primarily to a gain from the repurchase of debt at a discount of $2.2 million in 2009 and a loss of 1.4 million from the repurchase of debt at a premium in 2010.

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 Company’s 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 Company’s stockholders reside). This assumed rate was 40.4% for the 39 weeks ended October 1, 2010 and for the 40 weeks ended October 2, 2009. The Company pays foreign income taxes on the earnings of its European subsidiaries.

 

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Net Income. As a result of the aforementioned factors, net income increased $4.9 million to $12.4 million for the 39 weeks ended October 1, 2010 compared to $7.5 million for the 40 weeks ended October 2, 2009.

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 Company issued $105 million 12 1/2% Senior Notes during the first quarter of 2010. These notes were issued with an original issue discount at a price of 97.305% and this debt was recorded at the discounted amount of $102.2 million. The discount will be accreted over the life of these notes as interest expense.

In March 2010, the Company repurchased $43.5 million of the outstanding principal amount of its 9 1/2% Senior Notes from the open market for an aggregate purchase price of $44.5 million. On May 17, 2010, the Company redeemed the remaining $54.5 million of the 9 1/2% Senior Notes balance at the principal amount. The funds to repurchase these notes were from the cash received from the $102.2 million of the 12 1/2% Senior Notes along with the borrowings under our bank credit facility.

On September 2, 2010, the Company repurchased $10.8 million of the outstanding $105.0 million principal amount of its 12 1/2% Senior Notes from the open market for an aggregate purchase price of $11.0 million. The Company retired these Notes and wrote-off the purchase premium and the deferred financing cost related to the repurchase. The Company increased its borrowing under the unsecured revolving credit facility in connection with the repurchase.

Management believes the principal indicators of the Company’s liquidity are its cash position (total cash and cash equivalents), remaining availability under its bank credit facilities and its excess working capital. At October 1, 2010, the Company’s cash position was $0.5 million, a decrease of $0.1 million from January 1, 2010. Additionally, the Company has an unsecured revolving credit facility, with maximum possible borrowings equal to $19.5 million, which expires in April 2012. As part of this agreement, Lake City Bank may demand full payment at any time. When borrowings have taken place, the Company has paid down on the line as funds have become available. As the Company intends to repay the revolving line of credit as funds become available, the line of credit has been classified as short term. 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 1, 2010 was 4.00%. At October 1, 2010, the Company had $9.8 million outstanding balance under this line of credit. Da-Lite’s working capital position decreased to $12.2 million (including $0.5 million of total cash and cash equivalents) at October 1, 2010, from $13.5 million (including $0.6 million of total cash and cash equivalents) at January 1, 2010.

The Company’s Dutch subsidiary, Projecta, has an overdraft line of credit, with maximum possible borrowings equal to 1.5 million Euros. Projecta’s agreement with ABN AMRO Bank has no fixed expiration date. Interest on outstanding borrowings in Europe related to Projecta’s overdraft line of credit is calculated at the ABN AMRO Bank Basic Rate plus 1.50%, the sum of which was 6.10% on October 1, 2010. At October 1, 2010, Projecta had no outstanding balances under this credit facility.

Cash Flows

For the 39 weeks ended October 1, 2010, cash provided by operating activities was $9.7 million, as compared to $25.1 million for the 40 weeks ended October 2, 2009, a decrease of $15.4 million or 61.4%, that resulted primarily from changes in the levels of accounts receivables, inventories, and accrued expenses for the 39 weeks ended October 1, 2010 compared to the decrease in working capital for the 40 weeks ended October 2, 2009. Cash used in investing activities was $0.8 million for the 39 weeks ended October 2, 2010, as compared to $1.0 million for the 40 weeks ended October 2, 2009 due to a reduction in capital expenditures. Cash used in financing activities was $8.8 million during the 39 weeks ended October 1, 2010, as compared to $24.6 million for the 40 weeks ended October 2, 2009. The decrease in cash used in financing activities in 2010 was primarily due to the refinancing.

 

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Capital Expenditures

Capital expenditures were $0.8 million for the thirty nine weeks ended October 1, 2010 compared to $1.0 million for the forty weeks ended October 2, 2009. The Company’s management currently expects to spend approximately $1.0 million on capital expenditures in 2010, using cash generated from operations.

Contractual Obligations

The following table sets forth, as of October 1, 2010, certain of the Company’s 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

   $ 147.3       $ 5.9       $ 23.6         117.8         —     

Interest and principal for line of credit

     10.4         —           10.4         —           —     

Self-insurance letter of credit

     0.4         0.4         —           —           —     
                                            

Total

   $ 158.1       $ 6.3       $ 34.0         117.8         —     
                                            

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-Lite’s 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 $6.6 million and $5.9 million for the 39 weeks ended October 1, 2010 and the 40 weeks ended October 2, 2009, respectively.

The Company paid regular distributions to its stockholders in the amount of $3.2 million during the 39 weeks ending October 2, 2009. The Company has not paid any regular distribution to its stockholders during the nine month period ended October 1, 2010, and there are no current plans to commence making any regular distributions to its stockholders in 2010.

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 Company’s 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 Company’s operating results and financial condition.

 

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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 Company’s management believes that compliance with current environmental laws and regulations is not likely to have a material adverse effect on the Company’s 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 Company’s sales are not materially dependent on a single customer or a small group of customers. No one individual customer balance represented more than 7.5% of the Company’s total outstanding receivables as of October 1, 2010. Credit risk associated with the Company’s receivables is representative of the geographic, industry and customer diversity associated with the Company’s 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 Company’s $19.5 million revolving credit facility in the U.S. is calculated at 4.00% on October 1, 2010. At October 1, 2010, the Company had a $9.8 million outstanding balance. Interest on outstanding borrowings in Europe, related to Projecta’s overdraft line of credit, is calculated at the ABN AMRO Basic Rate plus 1.50%, the sum of which was 6.10% on October 1, 2010. At October 1, 2010, Projecta had no outstanding balance with ABN AMRO Bank.

At October 1, 2010, the Company had $94.3 million in fixed-rate long-term debt outstanding from the 12 1/2% Senior Notes. There is no interest rate risk associated with the Company’s 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 on the value of the 12 1/2% Senior Notes due in 2015 would have changed the fair market value of the fixed-rate debt to approximately $106.2 million from the fair value of approximately $100.7 million at October 1, 2010. 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.

Evaluation of Disclosure Controls and Procedures.

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchanges Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by the report.

Changes in Internal Control

There were no significant changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended October 1, 2010.

 

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PART II

OTHER INFORMATION

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the 13 weeks ended October 1, 2010, an executive officer exercised options to purchase 15,000 shares of common stock at an aggregate purchase price of $258,675. Additionally, non-executive officers of the Company in total, exercised options to purchase 5,711 shares of common stock at an aggregate purchase price of $100,628. These transactions were exempt from registration pursuant to, among other things, Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated under this Act.

 

Item 4. Submission of Matters to a Vote of Security Holders.

The Company’s annual meeting of stockholders was held on August 17, 2010. Set forth below are the matters that were presented to and voted upon by our stockholders, and the results of such stockholders’ votes.

Election of directors.

 

Nominee

   Votes For    Votes Withheld    Votes Against

James S. Cownie

   5,284,143      

James M. Hoak

   5,284,143      

Wayne Kern

   5,284,143      

Richard E. Lundin

   5,284,143      

David J. Lundquist

   5,284,143      

David N. Walthall

   5,284,143      

 

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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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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.

 

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 2, 2010

 

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EXHIBIT INDEX

 

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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