UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7753 DECORATOR INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1001433 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10011 Pines Blvd., Suite #201, Pembroke Pines, Florida 33024 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 436-8909 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each class Outstanding at November 4, 2002 ------------------- ------------------------------- Common Stock, Par Value $.20 Per Share 2,787,817 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. DECORATOR INDUSTRIES, INC. BALANCE SHEETS September 28, 2002 December 29, 2001 ------------------ ----------------- ASSETS (UNAUDITED) CURRENT ASSETS: Cash and Cash Equivalents $ 2,753,483 $ 2,319,568 Accounts Receivable, less allowance for doubtful accounts ($273,287 and $221,462) 4,184,373 3,525,377 Inventories 4,758,335 3,789,665 Other Current Assets 385,313 327,784 ----------- ----------- TOTAL CURRENT ASSETS 12,081,504 9,962,394 ----------- ----------- Property and Equipment: Land, Buildings & Improvements 4,241,457 4,240,777 Machinery, Equipment, Furniture and Fixtures 5,560,321 5,212,066 ----------- ----------- Total Property and Equipment 9,801,778 9,452,843 Less: Accumulated Depreciation and Amortization 4,460,328 4,045,789 ----------- ----------- Net Property and Equipment 5,341,450 5,407,054 ----------- ----------- Goodwill 2,731,717 2,731,717 Other Assets 293,061 264,351 ----------- ----------- TOTAL ASSETS $20,447,732 $18,365,516 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 3,371,111 $ 2,102,730 Current Maturities of Long-term Debt 121,503 105,441 Accrued Expenses: Income taxes 29,692 39,518 Compensation 862,275 764,305 Other 916,695 876,327 ----------- ----------- TOTAL CURRENT LIABILITIES 5,301,276 3,888,321 ----------- ----------- Long-Term Debt 1,509,540 1,604,245 Deferred Income Taxes 447,000 409,000 ----------- ----------- TOTAL LIABILITIES 7,257,816 5,901,566 ----------- ----------- Stockholders' Equity Common stock $.20 par value: Authorized shares, 10,000,000; Issued shares, 4,485,635 897,127 897,127 Paid-in Capital 1,425,588 1,425,437 Retained Earnings 19,207,039 18,300,698 ----------- ----------- 21,529,754 20,623,262 Less: Treasury stock, at cost: 1,697,913 and 1,669,948 shares 8,339,838 8,159,312 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 13,189,916 12,463,950 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,447,732 $18,365,516 =========== =========== The accompanying notes are an integral part of the financial statements. 1 DECORATOR INDUSTRIES, INC. STATEMENTS OF EARNINGS (UNAUDITED) FOR THIRTEEN WEEKS ENDED: FOR THIRTY-NINE WEEKS ENDED: --------------------------------------------- -------------------------------------------------- September 28, 2002 September 29, 2001 September 28, 2002 September 29, 2001 Net sales $ 9,971,156 100.00% $ 9,205,017 100.00% $ 29,252,684 100.00% $ 26,733,634 100.00% Cost of products sold 7,855,531 78.78% 7,147,010 77.64 22,786,202 77.89% 21,114,597 78.98% ----------- ----------- ------------- ------------ 2,115,625 21.22% 2,058,007 22.36% 6,466,482 22.11% 5,619,037 21.02% Selling and Administrative expenses 1,549,224 15.54% 1,441,145 15.66% 4,561,172 15.59% 4,572,944 17.11% ----------- ----------- ------------- ------------ Operating income 566,401 5.68% 616,862 6.70% 1,905,310 6.52% 1,046,093 3.91% Interest and investment income 14,903 0.15% 11,607 0.13% 40,007 0.13% 31,710 0.12% Interest expense (8,668) (0.09)% (12,940) (0.14)% (23,517) (0.08)% (54,235) (0.20)% ----------- ----------- ------------- ------------ Earnings before 572,636 5.74% 615,529 6.69% 1,921,800 6.57% 1,023,568 3.83% income taxes Provision for income taxes 229,000 2.30% 243,000 2.64% 764,000 2.61% 414,000 1.55% ----------- ----------- ------------- ------------ NET INCOME $ 343,636 3.44% $ 372,529 4.05% $ 1,157,800 3.96% $ 609,568 2.28% =========== =========== ============= ============ EARNINGS PER SHARE: Basic $ 0.12 $ 0.14 $ 0.41 $0.22 Diluted $ 0.12 $ 0.14 $ 0.41 $0.22 Weighted-average number of shares outstanding: Basic 2,786,142 2,832,593 2,795,575 2,811,905 Diluted 2,836,547 2,832,593 2,834,149 2,822,432 The accompanying notes are an integral part of the financial statements. 2 DECORATOR INDUSTRIES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THIRTY-NINE WEEKS ENDED: September 28, 2002 September 29, 2001 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,157,800 $ 609,568 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation And Amortization 497,492 570,287 Provision For Losses On Accounts Receivable 53,131 111,000 Deferred Taxes 27,000 121,000 Loss On Disposal Of Assets 19 94,981 (Increase) Decrease from Changes in Accounts Receivable (712,127) (625,478) (Increase) Decrease from Changes in Inventories (968,670) 1,073,114 (Increase) Decrease from Changes in Prepaid Expenses (46,529) 416,466 (Increase) Decrease from Changes in Other Assets (28,710) (14,681) Increase (Decrease) from Changes in Accounts Payable 1,268,381 536,337 Increase (Decrease) from Changes in Accrued Expenses 128,512 (579,542) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,376,299 2,313,052 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (441,156) (430,726) Proceeds from Property Dispositions 9,250 76,638 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (431,906) (354,088) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-Term Debt Payments (78,643) (77,864) Dividend Payments (251,459) (253,852) Proceeds from Exercise of Stock Options -- 22,324 Purchase of Common Stock for Treasury (210,376) (89,791) Issuance of Stock for Director's Trust 30,000 32,559 ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (510,478) (366,624) ----------- ----------- Net Increase in Cash and Cash Equivalents 433,915 1,592,340 Cash and Cash Equivalents at Beginning of Year 2,319,568 307,819 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,753,483 $ 1,900,159 =========== =========== Supplemental disclosures of cash flow information: Cash paid for: Interest $ 24,005 $ 52,617 Income taxes $ 754,325 $ 202,792 The accompanying notes are an integral part of the financial statements. 3 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (UNAUDITED) NOTE 1. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Company's financial position as of September 28, 2002, the changes therein for the thirty-nine week period then ended and the results of operations for the thirty-nine week periods ended September 28, 2002 and September 29, 2001. NOTE 2. The financial statements included in the Form 10-Q are presented in accordance with the requirements of the form and do not include all of the disclosures required by accounting principles generally accepted in the United States of America. For additional information, reference is made to the Company's annual report on Form 10-K for the year ended December 29, 2001. The results of operations for the thirty-nine week periods ended September 28, 2002 and September 29, 2001 are not necessarily indicative of operating results for the full year. Certain numbers from prior periods have been reclassified for comparative purposes. NOTE 3. INVENTORIES Inventories at September 28, 2002 and December 29, 2001 consisted of the following: September 28, 2002 December 29, 2001 ------------------ ----------------- Raw Material and Supplies $4,355,629 $3,475,824 In Process and Finished Goods 402,706 313,841 ---------- ---------- Total Inventory $4,758,335 $3,789,665 ========== ========== 4 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (UNAUDITED) NOTE 4. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by weighted-average number of shares outstanding. Diluted earnings per share include the dilutive effect of stock options. In accordance with SFAS No. 128, the following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations. Thirteen weeks ended: Thirty-nine weeks ended: September 28, 2002 September 29, 2001 September 28, 2002 September 29, 2001 ------------------ ------------------ ------------------ ------------------ Numerator: Net income $ 343,636 $ 372,529 $1,157,800 $ 609,568 ========== ========== ========== ========== Denominator: Weighted-average number of common shares outstanding 2,786,142 2,832,593 2,795,575 2,811,905 Dilutive effect of stock options on net income 50,405 -- 38,574 10,527 ---------- ---------- ---------- ---------- 2,836,547 2,832,593 2,834,149 2,822,432 ========== ========== ========== ========== Diluted earnings per share: $ 0.12 $ 0.14 $ 0.41 $ 0.22 ========== ========== ========== ========== 5 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001 (UNAUDITED) NOTE 5. ADOPTION OF STATEMENT 142 In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", in the period of initial application and thereafter, goodwill amortization expense is to be excluded from net earnings, as illustrated in the following reconciliation. Thirteen weeks ended: Thirty-nine weeks ended: ---------------------------------- ----------------------------------- September 28, September 29, September 28, September 29, 2002 2001 2002 2001 Reported net earnings $ 343,636 $ 372,529 $ 1,157,800 $ 609,568 Add back: goodwill amortization (after tax) -- 21,410 -- 64,231 ----------- ----------- ------------- ----------- Adjusted net earnings $ 343,636 $ 393,939 $ 1,157,800 $ 673,799 =========== =========== ============= =========== Basic earnings per share Reported net earnings $ 0.12 $ 0.14 $ 0.41 $ 0.22 Goodwill amortization (after tax) -- .01 -- .02 ----------- ----------- ------------- ----------- Adjusted net earnings $ 0.12 $ 0.15 $ 0.41 $ 0.24 =========== =========== ============= =========== Diluted earnings per share Reported net earnings $ 0.12 $ 0.14 $ 0.41 $ 0.22 Goodwill amortization (after tax) -- .01 -- .02 ----------- ----------- ------------- ----------- Adjusted net earnings $ 0.12 $ 0.15 $ 0.41 $ 0.24 =========== =========== ============= =========== 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY STATEMENT: THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN STATEMENTS RELATING TO FUTURE EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS AND FUTURE LIQUIDITY WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS AND MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS, COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE COMPANY'S MARKETS, THE COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND EXPENSES, AND OTHER FACTORS. FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FINANCIAL CONDITION The Company's financial condition, as measured by the following ratios, continues to be strong at the end of the Third Quarter 2002. September 28, 2002 December 29, 2001 ------------------ ----------------- Current Ratio 2.28 2.56 Quick Ratio 1.38 1.59 LT Debt to Total Capital 10.27% 11.40% Working Capital $6,780,228 $6,074,073 Days sales outstanding in accounts receivable were 37.3 days at September 28, 2002 compared to 38.5 days at September 29, 2001. Accounts receivable increased by 18.7%, inventories increased by 25.6%, and cash increased by $433,915 over the nine month period ended September 28, 2002. Management does not foresee any events which will adversely affect its liquidity during 2002. At the quarter end, the Company had no borrowings against its $5,000,000 revolving line of credit. With the available borrowing capacity and the Company's cash balances, the financial condition is more than adequate to finance internal growth and the acquisitions of businesses. 7 RESULTS OF OPERATIONS The following tables show the percentage relationship to net sales of certain items in the Company's Statement of Earnings: Third Third Quarter Quarter YTD YTD Earnings Ratios 2002 2001 2002 2001 --------------- ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 78.78 77.64 77.89 78.98 Selling and administrative 15.54 15.66 15.59 17.11 Interest and investment income (0.15) (0.13) (0.13) (0.12) Interest expense 0.09 0.14 0.08 0.20 Income taxes 2.30 2.64 2.61 1.55 Net income 3.44 4.05 3.96 2.28 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Continued) THIRTEEN WEEK PERIOD ENDED SEPTEMBER 28, 2002 (THIRD QUARTER 2002) COMPARED TO THIRTEEN WEEK PERIOD ENDED SEPTEMBER 29, 2001 (THIRD QUARTER 2001) - ------------------------------------------------------------------------------ Net sales for the Third Quarter 2002 were $9,971,156, compared to $9,205,017 for the same period in the previous year, an 8.3% increase. The Company experienced increased sales in the recreational vehicle market, while sales decreased in the manufactured housing market. Cost of products sold increased to 78.8% in the Third Quarter 2002 compared to 77.6% a year ago. This increase was the result of somewhat higher labor and material costs. Selling and administrative expenses were $1,549,224 in the Third Quarter 2002 versus $1,441,145 in the Third Quarter 2001. This increase resulted from increased performance based compensation and costs related to the implementation of a new computer system. These costs were partially offset by the change in accounting for goodwill (see Note 5). Interest expense decreased to $8,668 in the Third Quarter 2002 from $12,940 in the Third Quarter 2001 because of reduced borrowings and lower interest rates. Net income decreased to $343,636 in the Third Quarter 2002 compared to $372,529 of net income in the Third Quarter 2001. This decrease is largely the result of the increases in the cost of products sold and administrative expenses. THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 28, 2002 (FIRST NINE MONTHS 2002) COMPARED TO THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 29, 2001 (FIRST NINE MONTHS 2001) - ------------------------------------------------------------------------------- Net sales for the First Nine Months 2002 were $29,252,684, up from $26,733,634 in the prior year, a 9.4% increase. The Company experienced a significant sales increase in the recreational vehicle market. Hospitality sales increased modestly while manufactured housing sales have decreased. Cost of products sold decreased to 77.9% in the First Nine Months 2002 compared to 78.9% a year ago. The improvement is largely the result of increased labor and material efficiencies and allocating fixed expenses over a larger sales volume. Selling and administrative expenses were $4,561,172 in the First Nine Months 2002 versus $4,572,944 in the First Nine Months 2001. This decrease is attributable to the change in accounting for goodwill (see Note 5), a reduction in bad debt expense, a decrease in the administrative workforce, offset by an increase in performance based compensation and costs related to the implementation of a new computer system. Net income for the First Nine Months 2002 increased to $1,157,800 or $0.41 cents per share (diluted) compared to $609,568 or 22 cents per share (diluted) in the same period in 2001. This increase is largely the result of increased sales, better material utilization, and improved labor efficiencies. 9 Item 4. Controls and Procedures. (a) The Company's Chief Financial Officer (CFO) and its Controller have reviewed the effectiveness of the Company's disclosure controls and procedures as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) within 90 days of the date of this report. These officers have concluded that the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the financial statements has been disclosed. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls and procedures subsequent to the review date, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions. 10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 99.2 - Certificate required by 18 U.S.C.ss.1350. (b) No reports on Form 8-K were filed by the Company during the quarterly period ended September 28, 2002. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DECORATOR INDUSTRIES, INC. (Registrant) Date: November 12, 2002 By: /s/ William A. Bassett --------------------------------- William A. Bassett, President Date: November 12, 2002 By: /s/ Michael K. Solomon --------------------------------- Michael K. Solomon, Treasurer 12 CERTIFICATIONS I, William A. Bassett, President, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Decorator Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By: /s/ William A. Bassett --------------------------------- William A. Bassett, President 13 I, Michael K. Solomon, Treasurer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Decorator Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 By: /s/ Michael K. Solomon ----------------------------- Michael K. Solomon, Treasurer 14