UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 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., Pembroke Pines, Florida 33024 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 436-8909 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, Par Value $.20 Per Share American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X] Aggregate market value at March 17, 2003 of outstanding shares of Common Stock other than shares held by officers, directors and their respective associates: $11,636,278 Number of shares outstanding at March 17, 2003: 2,792,878 DOCUMENTS INCORPORATED BY REFERENCE Part III- Definitive Proxy Statement for the 2003 Annual Meeting of Shareholders CAUTIONARY STATEMENT: THE COMPANY'S REPORTS ON FORM 10-K AND FORM 10-Q, ANY CURRENT REPORTS ON FORM 8-K, AND ANY OTHER WRITTEN OR ORAL STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY CONTAIN OR MAY CONTAIN STATEMENTS RELATING TO FUTURE EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS 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. ANY FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. NOTE: In this report, unless the context otherwise requires, Registrant or Company means Decorator Industries, Inc. and its subsidiaries, herein sometimes also called "Decorator Industries". Reference to a particular year or the captions "For the Year" and "At Year End" refer to the fiscal periods as follows: 2002 - 52 weeks ended December 28, 2002 2001 - 52 weeks ended December 29, 2001 2000 - 52 weeks ended December 30, 2000 1999 - 52 weeks ended January 1, 2000 1998 - 52 weeks ended January 2, 1999 PART I ------ ITEM 1. BUSINESS. The Company designs, manufactures and sells a broad range of interior furnishings, principally draperies, curtains, shades, blinds, bedspreads, valance boards, comforters, pillows and cushions. These products are sold to original equipment manufacturers of recreational vehicles and manufactured housing and to the hospitality industry (motels/hotels) either through distributors or directly to the customers. The Company has one industry segment and one class of products. The business in which the Company is engaged is very competitive, and the Company competes with manufacturers located throughout the country. However, no reliable information is available to enable the Company to determine its relative position among its competitors. The principal methods of competition are price, design and service. During 2002, one customer, Fleetwood Enterprises, accounted for approximately 23.8% of the Company's total sales. In the event of the loss of this customer, there would be a material adverse effect on the Company. Fleetwood operates in the manufactured housing and recreational vehicle industries. 1 The Company's backlog of orders at any given time is not material in amount and is not significant in the business. No material portion of the Company's sales or income is derived from customers in foreign countries. The chief raw materials used by the Company are largely fabrics made from both natural and man-made fibers. The raw materials are obtained primarily from converters and mills. The Company is not dependent upon one or a very few suppliers. Most of its suppliers are large firms with whom, in the opinion of management, the Company enjoys good relationships. The Company has never experienced any significant shortage in its supply of raw materials. The Company has no significant patents, licenses, franchises, concessions, trademarks or copyrights. Expenditures for research and development during 2002 and 2001 were not significant. Compliance with federal, state and local environmental protection provisions is not expected to have a material effect upon the capital expenditures, earnings or competitive position of the Company. The Company employs approximately 580 sales, production, warehouse and administrative employees and also uses the services of independent sales representatives. ITEM 2. PROPERTIES. The following table summarizes certain information concerning the Company's principal properties: Approx. Location Principal Use Square Feet Owned/Leased - -------- ------------- ----------- ------------ Haleyville, Alabama Offices, manufacturing and warehouse 54,000 Owned Red Bay, Alabama Offices, manufacturing and warehouse 29,000 Leased Lakeland, Florida Offices, manufacturing and warehouse 7,500 Leased Pembroke Pines, Florida Offices 3,148 Leased Elkhart, Indiana Offices, manufacturing and warehouse 35,000 Owned Goshen, Indiana Offices, manufacturing and warehouse 55,700 Owned Bossier, Louisiana Offices, manufacturing and warehouse 20,000 Owned Salisbury, North Carolina Offices, manufacturing and warehouse 22,800 Leased Berwick, Pennsylvania Offices, manufacturing and warehouse 12,500 Leased Bloomsburg, Pennsylvania Offices, manufacturing and warehouse 56,500 Owned Abbotsford, Wisconsin Offices, manufacturing and warehouse 23,900 Leased The Company considers that its offices, plants, machinery and equipment are well maintained, adequately insured and suitable for their purposes and that its plants are adequate for the presently anticipated needs of the business. The Goshen, IN and Bloomsburg, PA facilities are subject to mortgages as mentioned in Note 7 of the financial statements. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 2 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed and traded on the American Stock Exchange, AMEX symbol DII. Common Stock price information is set forth in the table below. 2002 Sales Prices 2001 Sales Prices ----------------- ----------------- High Low High Low ---- --- ---- --- First Quarter 6.20 3.86 3.31 2.15 Second Quarter 6.80 5.27 3.00 2.30 Third Quarter 6.45 5.40 3.67 2.90 Fourth Quarter 6.23 4.80 4.60 2.96 As of March 17, 2003, the Company had 321 shareholders of record of its Common Stock. Total cash dividend payments were $.12 per share in 2002 and 2001. ITEM 6. SELECTED FINANCIAL DATA. 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- FOR THE YEAR Net Sales $38,641,605 $34,782,121 $42,609,584 $49,206,018 $48,788,610 Income from Continuing Operations $ 1,384,379 $ 861,561 $ 1,037,112 $ 2,717,418 $ 3,090,230 Net Income $ 1,384,379 $ 861,561 $ 133,198 $ 2,552,278 $ 3,080,895 ----------- ----------- ----------- ----------- ----------- AT YEAR END Total Assets $19,480,134 $18,365,516 $18,855,387 $21,665,523 $21,462,694 Long Term Obligations $ 1,477,973 $ 1,604,245 $ 1,709,686 $ 1,814,169 $ 463,037 Long-term Debt/Total Capitalization 9.97% 11.40% 12.49% 11.21% 2.89% Working Capital $ 6,191,028 $ 6,074,073 $ 5,154,647 $ 6,646,856 $ 8,244,161 Current Ratio 2.49:1 2.56:1 2.07:1 2.30:1 2.59:1 Stockholders' Equity $13,348,108 $12,463,950 $11,979,479 $14,364,969 $15,559,732 ----------- ----------- ----------- ----------- ----------- PER SHARE Continuing Operations $ 0.49 $ 0.31 $ 0.34 $ 0.80 $ 0.85 Basic $ 0.49 $ 0.31 $ 0.04 $ 0.76 $ 0.85 Diluted $ 0.49 $ 0.31 $ 0.04 $ 0.73 $ 0.79 Book Value $ 4.78 $ 4.43 $ 4.29 $ 4.50 $ 4.37 Cash Dividends Declared $ 0.12 $ 0.12 $ 0.24 $ 0.28 $ 0.28 3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Liquidity and Financial Resources: The Company's financial condition continues to be strong, as evidenced by the following statistical measures: 1) Working capital at December 28, 2002 was $6,191,028 compared to $6,074,073 at December 29, 2001. 2) The current ratio was 2.49:1 at year-end 2002 compared to 2.56:1 at year-end 2001. 3) The liquid ratio was 1.43:1 at year-end 2002 compared to 1.59:1 at year-end 2001. 4) The long-term debt ratio was 9.97% at December 28, 2002 compared to 11.40% a year earlier. The Company used $210,376 of working capital for purchases of Common Stock to be held for the treasury. Net accounts receivable decreased $110,748 (3.1%) and net inventories increased $598,405 (15.8%). The increase in inventories is compared to an 11.1% increase in sales for the year. Most of the increased inventories were required for increased sales to the RV market. Also, late in fiscal 2002 the Company began production of tent and awning products for the RV market, which required additional inventories. Capital expenditures for 2002 were $1,290,149 compared to $442,772 in 2001. Included in the capital expenditures for 2002 was $802,000 for the purchase of the building which houses the Company's pleated shade business. This building was previously leased. The Company expects to close on a $640,000 mortgage on this building during 2003. The Company had no borrowings at year-end under its $5,000,000 revolving line-of-credit. Management believes that its liquidity and available borrowing capacity are more than adequate to finance internal growth and any additional acquisitions of businesses. Results of Operations: The following table shows the percentage relationship to net sales of certain items in the Company's Statement of Earnings: 2002 2001 2000 ---- ---- ---- Net sales ......................... 100.0% 100.0% 100.0% Cost of products sold ............. 78.4 78.3 79.6 Selling and administrative expenses 15.7 17.5 16.4 Interest and investment income .... (.1) (.1) (.1) Interest expense .................. .1 .2 .3 Income from continuing operations . 3.6 2.5 2.4 Net income ........................ 3.6 2.5 .3 4 2002 vs. 2001 Net sales for fiscal 2002 were $38,641,605 compared to $34,782,121 in fiscal 2001. The net sales increase was 11%. An increase in sales to the recreational vehicle market more than offset the sales decreases experienced in the manufactured housing market. The Recreational Vehicle Institute reported increased vehicle shipments of 21% over 2001, one of the industries' best performances in 25 years. The Manufactured Housing Institute reported a 13% decline in unit production for 2002, the fourth consecutive year of declining production. The industry manufactured 168,500 units in 2002 versus 373,100 units in 1998 (a decline of 55%). Company sales to the hospitality industry were virtually flat compared to the previous year. Cost of goods sold as a percentage of sales was 78.4% in 2002 versus 78.3% in 2001. The unfavorable impact of product mix on the cost of goods sold was offset by improvements in manufacturing efficiencies. Selling and administrative expenses decreased to $6,082,129 in 2002 from $6,092,740 in 2001. The 2001 selling and administrative expenses included goodwill amortization of $104,589. Goodwill was not amortized in 2002 (per compliance with Statements of Financial Accounting Standards No. 142). This benefit was offset by increased wages and the initial charges relating to the ongoing implementation of a Enterprise-Resource-Planning (ERP) system. Net income was $1,384,379 in 2002 compared to $861,561 in 2001. Net income as a percent of sales increased to 3.6% in 2002 compared to 2.5% in 2001. This was due to a higher sales volume. 2001 vs. 2000 Net sales for the year 2001 were $34,782,121 compared to 2000 sales of $42,609,584. Sales decreased in all markets the Company serves. The Manufactured Housing Institute reported a 23% decline in nationwide shipments for the year 2001, while the Recreational Vehicle Institute reported a decrease of over 14%. Cost of goods sold as a percentage of sales decreased to 78.3% in 2001 from 79.6% in 2000. This improvement was largely attributable to better material utilization and, to a lesser extent, better labor efficiency. At the same time, fixed expenses continued to be absorbed over a smaller sales volume. Selling and administrative expenses decreased to $6,092,740 in 2001 from $6,987,203 in 2000. This decrease came from a reduction in the administrative workforce, and the charge for impairment of goodwill in 2000. Income from continuing operations as a percent of sales increased to 2.5% in 2001 compared to 2.4% in 2000. This was achieved while 2001 sales decreased by 18.4% compared to 2000 sales. Net income was $861,561 in 2001 compared to $133,198 in 2000. The year 2000 was adversely affected by charges from discontinued operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements, financial statements schedule, and reports of independent certified public accountants listed in Item 15(a) of this report are filed under this Item 8. 5 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after December 28, 2002. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after December 28, 2002. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by this item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after December 28, 2002. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item will be included in a definitive proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days after December 28, 2002. Such information is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES. (a) The Company's principal executive officer and principal financial officer evaluated 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 filing date of this report and concluded that such 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 date that evaluation was made, nor were there any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions. 6 PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: Financial Statements and Schedules (1) Independent Auditors' Report (2) Balance Sheets - December 28, 2002 and December 29, 2001 (3) Statements of Earnings for the three fiscal years ended December 28, 2002 (4) Statements of Stockholders' Equity for the three fiscal years ended December 28, 2002 (5) Statements of Cash Flows for the three fiscal years ended December 28, 2002 (6) Notes to the Financial Statements (7) Independent Auditors' Report on Financial Statement Schedule Schedule VIII - Valuation and Qualifying Accounts All other schedules are omitted because they are not required or are inapplicable or the information is included in the financial statements or notes thereto. Exhibits 3A Articles of Incorporation as amended to date, filed as Exhibit 3A to Form 10-K for the fiscal year ended December 28, 1985 and incorporated herein by reference. 3B.1 By-laws as amended to date, filed as Exhibit 3B.1 to Form 10-Q for the Quarter ended July 2, 1988 and incorporated herein by reference. 10E Lease dated February 9, 1984 between registrant, as lessee, and Leon and Eleanor Bradshaw covering property at 500 North Long Street, Salisbury, North Carolina, filed as Exhibit 10(b)(4)(iv) to Registration Statement No. 2-92853 and incorporated herein by reference. 10H Lease Agreement dated December 13, 1983 covering property at 101 West Linden Street, Abbotsford, Wisconsin, and assignment thereof to the registrant, as lessee, dated October 2, 1985, filed as Exhibit 10H to Form 10-K for the fiscal year ended December 28, 1985 and incorporated herein by reference. 10H.1 Lease Modification Agreement dated May 20, 1988 regarding Exhibit 10H, filed as Exhibit 10H.1 to Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference. 10H.2 Lease Modification Agreement dated September 30, 1996 regarding Exhibit 10H, filed as Exhibit 10H.2 to Form 10-K for the fiscal year ended December 28, 1996 and incorporated herein by reference. 7 10K.1 1984 Incentive Stock Option Plan, as amended to date, filed as Exhibit 10K.1 to Form 10-Q for the quarter ended October 3, 1987 and incorporated herein by reference.* 10M.1 Medical and Dental Reimbursement Plan, as amended to date, filed as Exhibit 10M.1 to Form 10-K for the fiscal year ended January 3, 1987 and incorporated herein by reference.* 10T Employment Agreement dated August 2, 1994 between the registrant and William Bassett, filed as Exhibit 10T to Form 10-Q for the quarter ended July 2, 1994 and incorporated herein by reference.* 10U 1995 Incentive Stock Option Plan, filed as Exhibit 10U to Form 10-K for the fiscal year ended December 30, 1995 and incorporated herein by reference.* 10U.1 Tender Offer Statement on Schedule TO, as amended, filed with the Commission on March 13, 2002 and incorporated herein by reference.* 10W Stock Plan for Non-employee Directors and related Grantor Trust Agreement, filed as Exhibit 10W to Form 10-Q for the quarter ended June 28, 1997 and incorporated herein by reference.* 10X Employment Agreement dated January 5, 1999 between the registrant and Michael S. Baxley, filed as Exhibit 10X to Form 10-K for the fiscal year ended January 1, 2000 and incorporated herein by reference.* 10Y Revolving line of credit agreement with Comerica Bank dated April 19, 2000, filed as Exhibit 10Y to Form 10-Q for the quarter ended April 1, 2000 and incorporated herein by reference. 10Y.1 Amendment effective March 30, 2001 to Exhibit 10Y, filed as Exhibit 10Y.1 to Form 10-K for the fiscal year ended December 30, 2000 and incorporated herein by reference. 10Y.2 Promissory Note dated April 19, 2000, and Amendment thereto effective March 30, 2001, relating to Exhibit 10Y, filed as Exhibit 10Y.2 to Form 10-K for the fiscal year ended December 30, 2000 and incorporated herein by reference. 11R Computation of diluted income per share, filed herewith. 23D Consent of Independent Auditors, filed herewith. 99.3 Certificate required by 18 U.S.C.ss.1350, filed herewith. ----------------------- *Management contract or compensatory plan. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 2002. 8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DECORATOR INDUSTRIES, INC. (Registrant) By: /s/ Michael K. Solomon ----------------------------------- Michael K. Solomon Vice President Dated: March 23, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Name Title Signature Date - ---- ----- --------- ---- William A. Bassett Chairman, President, /s/ William A. Bassett March 23, 2003 Chief Executive Officer and ------------------------- Director Michael K. Solomon Vice President, Treasurer, /s/ Michael K. Solomon March 23, 2003 Principal Financial and ------------------------- Accounting Officer Jerome B. Lieber Director /s/ Jerome B. Lieber March 23, 2003 ------------------------- Joseph N. Ellis Director /s/ Joseph N. Ellis March 23, 2003 ------------------------- Ellen Downey Director /s/ Ellen Downey March 23, 2003 ------------------------- Thomas Dusthimer Director /s/ Thomas Dusthimer March 23, 2003 ------------------------- William Dixon Director /s/ William Dixon March 23, 2003 ------------------------- 9 CERTIFICATIONS I, William A. Bassett, President, certify that: 1. I have reviewed this annual report on Form 10-K of Decorator Industries, Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and (c) presented in this annual 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; nd 6. The registrant's other certifying officer and I have indicated in this annual 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: March 23, 2003 By: /s/ William A. Bassett -------------- ---------------------------------------- William A. Bassett, President and Principal Executive Officer 10 I, Michael K. Solomon, Treasurer, certify that: 1. I have reviewed this annual report on Form 10-K of Decorator Industries, Inc.; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and (c) presented in this annual 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 cont ls; and 6. The registrant's other certifying officer and I have indicated in this annual 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: March 23, 2003 By: /s/ Michael K. Solomon -------------------- ------------------------------------- Michael K. Solomon, Treasurer and Principal Financial Officer 11 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors and Stockholders of DECORATOR INDUSTRIES, INC. We have audited the accompanying balance sheets of Decorator Industries, Inc. (a Pennsylvania corporation) as of December 28, 2002 and December 29, 2001 and the related statements of earnings, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 28, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Decorator Industries, Inc. as of December 28, 2002 and December 29, 2001, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 2002 in conformity with accounting principles generally accepted in the United States of America. LOUIS PLUNG & COMPANY, LLP Certified Public Accountants Pittsburgh, Pennsylvania February 26, 2003 (March 20, 2003 as to Note 9) F-1 DECORATOR INDUSTRIES, INC. BALANCE SHEETS ASSETS December 28, December 29, 2002 2001 ---- ---- Current Assets: Cash and Cash Equivalents $ 2,117,762 $ 2,319,568 Accounts Receivable, less allowance for doubtful accounts ($202,933 and $221,462) 3,414,629 3,525,377 Inventories 4,388,070 3,789,665 Other Current Assets 419,620 327,784 ----------- ----------- Total Current Assets 10,340,081 9,962,394 ----------- ----------- Property and Equipment Land, Buildings & Improvements 5,043,458 4,240,777 Machinery, Equipment, Furniture & Fixtures 5,585,401 5,212,066 ----------- ----------- Total Property and Equipment 10,628,859 9,452,843 Less: Accumulated Depreciation and Amortization 4,640,040 4,045,789 ----------- ----------- Net Property and Equipment 5,988,819 5,407,054 ----------- ----------- Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717 Other Assets 419,517 264,351 ----------- ----------- Total Assets $19,480,134 $18,365,516 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts Payable $ 2,059,871 $ 2,102,730 Current Maturities of Long-term Debt 126,750 105,441 Accrued Expenses: Income taxes -- 39,518 Compensation 856,786 764,305 Other 1,105,646 876,327 ----------- ----------- Total Current Liabilities 4,149,053 3,888,321 ----------- ----------- Long-Term Debt 1,477,973 1,604,245 Deferred Income Taxes 505,000 409,000 ----------- ----------- Total Liabilities 6,132,026 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 1,425,826 1,425,437 Retained Earnings 19,349,984 18,300,698 ----------- ----------- 21,672,937 20,623,262 Less: Treasury stock, at cost: 1,694,856 and 1,669,948 shares 8,324,829 8,159,312 ----------- ----------- Total Stockholders' Equity 13,348,108 12,463,950 ----------- ----------- Total Liabilities and Stockholders' Equity $19,480,134 $18,365,516 =========== =========== F-2 DECORATOR INDUSTRIES, INC. STATEMENTS OF EARNINGS For the Fiscal Year ------------------- 2002 2001 2000 ---- ---- ---- Net Sales $ 38,641,605 $ 34,782,121 $ 42,609,584 Cost of Products Sold 30,281,017 27,231,533 33,906,006 ------------ ------------ ------------ Gross Profit 8,360,588 7,550,588 8,703,578 Selling and Administrative Expenses 6,082,189 6,092,740 6,987,203 ------------ ------------ ------------ Operating Income 2,278,399 1,457,848 1,716,375 Other Income (Expense) Interest and Investment Income 56,394 49,104 55,899 Interest Expense (31,414) (64,391) (114,162) ------------ ------------ ------------ Earnings Before Income Taxes 2,303,379 1,442,561 1,658,112 Provision for Income Taxes 919,000 581,000 621,000 ------------ ------------ ------------ Income from Continuing Operations 1,384,379 861,561 1,037,112 Loss from Discontinued Operations, net of income tax benefit of $93,000 -- -- (152,433) Loss on Disposal of Discontinued Operations, net of income tax benefit of $460,000 -- -- (751,481) ------------ ------------ ------------ Net Income $ 1,384,379 $ 861,561 $ 133,198 ============ ============ ============ EARNINGS PER SHARE Continuing Operations $ 0.49 $ 0.31 $ 0.34 ============ ============ ============ Basic $ 0.49 $ 0.31 $ 0.04 ============ ============ ============ Diluted $ 0.49 $ 0.31 $ 0.04 ============ ============ ============ Weighted Average Number of Shares Outstanding Basic 2,793,781 2,812,882 3,041,364 Diluted 2,830,307 2,820,777 3,077,260 The accompanying notes are an integral part of the financial statements. F-3 DECORATOR INDUSTRIES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY COMMON PAID-IN RETAINED TREASURY STOCK CAPITAL EARNINGS STOCK TOTAL ----- ------- -------- ----- ----- Balance at January 1, 2000 $ 881,766 $ 1,427,788 $ 18,368,158 $ (6,312,743) $ 14,364,969 Transactions for 2000 Net profit -- -- 133,198 -- 133,198 Issuance of stock for Exercise of options 7,233 14,227 -- -- 21,460 Issuance of stock for Directors compensation -- (360) -- 40,360 40,000 Purchase of Common Stock for treasury -- -- -- (1,856,253) (1,856,253) Dividends paid -- -- (723,895) -- (723,895) ------------ ------------ ------------ ------------ ------------ Balance at December 30, 2000 $ 888,999 $ 1,441,655 $ 17,777,461 $ (8,128,636) $ 11,979,479 Transactions for 2001 Net profit -- -- 861,561 -- 861,561 Issuance of stock for Exercise of options 7,833 14,491 -- -- 22,324 Issuance of stock for Directors compensation -- (30,414) -- 72,973 42,559 Purchase of Common Stock for treasury -- -- -- (103,649) (103,649) Dividends paid -- -- (338,324) -- (338,324) Conversion of $.10 par value shares to $.20 par value shares 295 (295) -- -- 0 ------------ ------------ ------------ ------------ ------------ Balance at December 29, 2001 $ 897,127 $ 1,425,437 $ 18,300,698 $ (8,159,312) $ 12,463,950 Transactions for 2002 Net profit -- -- 1,384,379 -- 1,384,379 Issuance of stock for Directors compensation -- 389 -- 44,859 45,248 Purchase of Common Stock for treasury -- -- -- (210,376) (210,376) Dividends paid -- -- (335,093) -- (335,093) ------------ ------------ ------------ ------------ ------------ Balance at December 28, 2002 $ 897,127 $ 1,425,826 $ 19,349,984 $ (8,324,829) $ 13,348,108 ============ ============ ============ ============ ============ The accompanying notes are an integral part of the financial statements. F-4 DECORATOR INDUSTRIES, INC. STATEMENTS OF CASH FLOWS For the Fiscal Year ------------------- 2002 2001 2000 ---- ---- ---- Cash Flows From Operating Activities: Net Income $ 1,384,379 $ 861,561 $ 133,198 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization 680,908 761,563 752,672 Write-off of goodwill -- -- 705,976 Provision for Losses on Accounts Receivable 52,500 155,864 168,709 Deferred Taxes 126,000 154,000 (151,000) Loss on Disposal of Assets 18,226 103,428 7,868 Increase (Decrease) from Changes in: Accounts Receivable 58,248 (186,566) 62,171 Short-term Investments -- -- 1,455,796 Inventories (598,405) 1,413,575 536,063 Prepaid Expenses 20,162 506,350 (411,876) Other Assets (155,166) (8,786) 157,271 Accounts Payable (42,859) (290,274) (707,677) Accrued Expenses 140,284 (620,427) 374,745 ----------- ----------- ----------- Net Cash Provided by Operating Activities 1,684,277 2,850,288 3,083,916 ----------- ----------- ----------- Cash Flows From Investing Activities: Capital Expenditures (1,290,149) (442,772) (631,064) Proceeds from Property Dispositions 9,250 85,963 2,539 Deferred Purchase Price Payments -- -- (9,498) ----------- ----------- ----------- Net Cash Used in Investing Activities (1,280,899) (356,809) (638,023) ----------- ----------- ----------- Cash Flows From Financing Activities: Long-term Debt Payments (104,963) (104,640) (103,714) Dividend Payments (335,093) (338,324) (723,895) Proceeds from Exercise of Stock Options -- 22,324 21,460 Issuance of Stock for Directors Trust 45,248 42,559 40,000 Purchase of Common Stock for Treasury (210,376) (103,649) (1,856,253) ----------- ----------- ----------- Net Cash Used in Financing Activities (605,184) (481,730) (2,622,402) Net (Decrease) Increase in Cash and Cash Equivalents (201,806) 2,011,749 (176,509) Cash and Cash Equivalents at Beginning of Year 2,319,568 307,819 484,328 ----------- ----------- ----------- Cash and Cash Equivalents at End of Period $ 2,117,762 $ 2,319,568 $ 307,819 =========== =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid for: Interest $ 32,150 $ 63,362 $ 92,340 Income Taxes $ 987,323 $ 347,180 $ 685,345 The accompanying notes are an integral part of the financial statements. F-5 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Nature of Operations -------------------- The Company designs, manufactures and sells a broad range of interior furnishings, principally draperies, curtains, shades, blinds, bedspreads, valance boards, comforters, pillows and cushions. These products are sold to original equipment manufacturers of recreational vehicles and manufactured housing and to the hospitality industry (motels/hotels) either through distributors or directly to the customers. The Company has one industry segment and one class of products. The business in which the Company is engaged is very competitive, and the Company competes with manufacturers located throughout the country. However, no reliable information is available to enable the Company to determine its relative position among its competitors. The principal methods of competition are price, design and service. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of the Company and all subsidiary companies. All significant intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year ----------- The Company's fiscal year is a 52-53 week period ending the Saturday nearest to December 31, which results in every sixth year containing 53 weeks. Fiscal year 2002 was a 52-week period ending December 28, 2002; 2001 was a 52-week period ending December 29, 2001; and 2000 was a 52-week period ending December 30, 2000. Inventories ----------- Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Depreciation ------------------------- Buildings and equipment are stated at cost, and depreciated on both straight-line and accelerated methods over estimated useful lives. Leasehold improvements are capitalized and amortized over the assets' estimated useful lives or remaining terms of leases, if shorter. Equipment is depreciated over 3-10 years, buildings over 20-30 years and leasehold improvements over 5-10 years. Excess of Cost over Net Assets Acquired --------------------------------------- The excess of investment costs over the fair value of net assets related to the acquisitions of Haleyville Manufacturing (1973), Liberia Manufacturing (1985) and Specialty Windows (1997) was being amortized over a period of 40 years. Amortization of $104,589 was charged to income during fiscal year ended December 29, 2001, and $116,182 in fiscal year ended December 30, 2000. For the year ended December 30, 2000 management wrote off $140,495 of excess cost related to Paragon Interiors (1995) and $565,481 related to Southern Interiors (1997). (See Note 13 (a)). F-6 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" the Company no longer amortizes goodwill. Accordingly, no goodwill was amortized in 2002. Starting in 2002 the Company was required to evaluate the remaining goodwill of $2,731,717 for possible impairment. Management has evaluated the goodwill as of December 28, 2002 and determined that no impairment exists. Reclassification ---------------- Certain prior year amounts have been reclassified to conform to the current year presentation. Cash and Cash Equivalents ------------------------- For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents consist of the following: 2002 2001 ---- ---- General Funds $ (111,262) $ (224,743) Overnight repurchase agreements 2,229,024 2,544,311 ----------- ----------- $ 2,117,762 $ 2,319,568 =========== =========== Deferred Income Taxes --------------------- The Company accounts for income taxes in accordance with the Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," which requires the recognition of deferred tax liabilities and assets at currently enacted tax rates for the expected future tax consequences of events that have been included in the financial statements or tax returns. Credit Risk ----------- The Company sells to three distinct markets, Original Equipment Manufacturers ("OEM's") of manufactured housing, OEM's of recreational vehicles, and to the hospitality industry. To the extent that economic conditions might severely impact these markets, the Company could suffer an abnormal credit loss. The Company sells primarily on thirty day terms. The Company's customers are spread over a wide geographic area. As such the Company believes, that it does not have an abnormal concentration of credit risk within any one geographic area. Estimates --------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results may differ from these estimates and assumptions. F-7 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ Fair Value of Financial Instruments ----------------------------------- Marketable securities are carried at fair value. A gain of $434 is included in income for the year ended December 28, 2002 compared to a gain of $6,178 for the year ended December 29, 2001. All other financial instruments are carried at amounts believed to approximate fair value. Earnings Per Share ------------------ Basic earnings per share is computed by dividing net income by weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options. See Note 11 "Earnings Per Share" for computation of EPS. Stock Based Compensation ------------------------ In accordance with the provisions of SFAS No. 123, the Company follows the intrinsic value based method of accounting as prescribed by APB 25, "Accounting for Stock Issued to Employees", for its stock-based compensation. Accordingly, no compensation cost is recognized. Segment Information ------------------- The Company has one business segment, the interior furnishings business, and follows the requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". Recent Accounting Developments ------------------------------ The following Statements of Financial Accounting Standards (SFAS) were issued by the Financial Accounting Standards Board. SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", issued April 2002, will have no effect on the Company. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", issued June 2002, requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 and will not have a material effect on the Company. SFAS No. 147, "Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9", issued October 2002, will have no effect on the Company. F-8 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" issued in December 2002, amends SFAS No. 123, "Accounting for Stock Based Compensation", to provide alternate methods of transition for a voluntary change to the fair value based method of accounting for stock based compensation. In addition, the Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure on both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. The Company will continue to apply stock-based compensation in the method prescribed by APB opinion 25, and does not expect SFAS No. 148 to have a material effect on the Company. (2) ACQUISITIONS ------------ As of March 15, 1997, the Company acquired the business and certain assets of Specialty Window Coverings Corp. for $2,455,783. Additional consideration of $705,415 was paid based on Specialty's earnings over the two years ending April 3, 1999. Specialty is an Elkhart, Indiana based manufacturer of pleated shades for the recreational vehicle market. As of May 12, 1997, the Company acquired the business and certain assets of Southern Interiors, Inc. for $844,313 and future consideration, not to exceed $500,000, based on Southern's sales over the three years ending July 1, 2000. Southern was located in Memphis, Tennessee and manufactured draperies for the hospitality market from fabric supplied by its customers, largely hotel design and supply firms. During the second quarter of 2000, the Company disposed of this operation and wrote off the remaining goodwill of $565,481 from this acquisition. (See note 13(a)) These acquisitions have been included in the consolidated financial statements from the dates of acquisition. They have been accounted for as a purchase. In each case, the purchase price has been allocated to the underlying assets based upon their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired ("goodwill") is $1,965,743 for the Specialty acquisition, which was being amortized over 40 years. In accordance with SFAS 142, effective December 30, 2001 the Company no longer amortizes goodwill, but will test it for impairment annually. The cash payment for deferred purchase price of $9,498 in 2000 represents the additional consideration paid for the acquisition of Southern Interiors. F-9 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (3) INVENTORIES ----------- Inventories consisted of the following classifications: 2002 2001 ---- ---- Raw materials & supplies $3,944,768 $3,475,824 In process & finished goods 443,302 313,841 ---------- ---------- $4,388,070 $3,789,665 ========== ========== (4) LEASES ------ The Company leases certain buildings and equipment used in its operations. Building leases generally provide that the Company bears the cost of maintenance and repairs and other operating expenses. Rent expense was $470,697 in 2002, $516,748 in 2001 and $536,987 in 2000. Commitments under these leases extend through October 2007 and are as follows: 2003 $316,374 2004 $165,912 2005 $ 98,272 2006 $ 83,449 2007 $ 20,874 (5) COMMITMENTS ----------- The Company has a commitment under an employment and non-compete agreement entered into with an individual in a current management position. The commitment under this agreement is payable $214,200 in 2003 and $107,100 in 2004. (6) SIGNIFICANT CUSTOMERS --------------------- Sales to Fleetwood Enterprises accounted for 23.8%, 18.9% and 22.7% of Company sales in 2002, 2001 and 2000, respectively. Fleetwood operates in the manufactured housing and recreational vehicle industries. Sales to Champion Enterprises accounted for 8.4%, 12.0% and 11.4% of Company sales in 2002, 2001 and 2000, respectively. Champion operates solely in the manufactured housing industry. F-10 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (7) LONG TERM-DEBT AND CREDIT ARRANGEMENTS -------------------------------------- Long-term debt consists of the following: 2002 2001 ---- ---- Note payable in monthly payments of $2,088 through August 2007 at 4% interest. This note is secured by the first mortgage on the Bloomsburg, PA building $ 104,336 $ 124,686 Bond payable in monthly installments through November 2008. The interest rate is variable and is currently less than 2%. This bond is secured by the Company's Bloomsburg, PA property 225,387 250,000 Bond payable in quarterly installments through March 2014. The interest rate is variable and is currently less than 2%. This bond is secured by the Company's Goshen, IN property 1,275,000 1,335,000 ---------- ---------- 1,604,723 1,709,686 Less amount due within one year 126,750 105,441 ---------- ---------- $1,477,973 $1,604,245 ========== ========== The principal payments on long-term debt for the five years subsequent to December 28, 2002 are as follows: 2003 $ 126,750 2004 $ 127,140 2005 $ 128,042 2006 $ 168,981 2007 $ 163,810 Thereafter $ 890,000 On April 19, 2000 the Company signed an agreement for a $5,000,000 revolving line of credit. The maximum borrowed under this agreement during 2002 was $80,000 and there were no outstanding borrowings at December 28, 2002. This agreement contains certain financial covenants. The Company was in compliance with these covenants at December 28, 2002. (8) EMPLOYEE BENEFIT PLANS ---------------------- On September 1, 1998 the Company began a 401(k) Retirement Savings Plan available to all eligible employees. To be eligible for the plan, the employee must be at least 21 years of age and have completed 1 year of employment. Eligible employees may contribute up to 15% of their earnings with a maximum of $11,000 for 2002 based on the Internal Revenue Service annual contribution limit. The Company will match 25% of the first 4% of the employee's contributions up to 1% of each employee's earnings. Contributions are invested at the direction of the employee to one or more funds. Company contributions begin to vest after two years, with 100% vesting after five years. Company contributions to the plan were $44,276 in 2002, $ 47,068 in 2001, and $53,261 in 2000. F-11 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (9) STOCK OPTIONS ------------- At December 28, 2002, the Company had options outstanding under two fixed stock option plans, which are described below. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's two fixed stock option plans been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 2002 2001 2000 ---- ---- ---- Pro forma net income (loss) $1,291,210 $782,660 $(21,147) Pro forma earnings (loss) per share: Basic $0.46 $0.28 $(0.01) Diluted $0.46 $0.28 $(0.01) During the initial phase-in period of SFAS No. 123 the pro forma disclosure may not be representative of the impact on the net income in future years. Under the 1984 Incentive Stock Option Plan, which expired in 1994, the Company granted options to its employees for 804,976 shares (as adjusted for stock splits). Under the 1995 Incentive Stock Option Plan, the Company may grant options to its key employees for up to 520,830 (as adjusted for stock splits) shares of Common Stock. Under both plans, the exercise price of the option equals the fair market price of the Company's stock on the date of the grant and an option's maximum term is 10 years. Under the 1995 Incentive Stock Option Plan options for 260,410 (as adjusted for stock splits) shares were granted in 1996, options for 7,813 (as adjusted for stock splits) shares were granted in 1997, options for 168,750 (as adjusted for stock splits) shares were granted in 1998 and options for 98,250 shares were granted in 1999. The options granted in 1997 and 1996 vest 20% each year starting with the date of the grant. The options granted in 1999 and 1998, and the 15,000 new options granted in 2002, vest 20% each year beginning at the end of the first year. The 166,250 exchanged options granted in 2002 vest 60% at the date of grant, and 20% each at the end of the first and second year. The option grants for each year were calculated using the following assumptions: Year of Valuation Dividend Expected Risk-free Expected Grant Method Yield Volatility Interest rate Life - -------------- ----------------------- ------------- ------------- --------------- ------------ 1996 Flexible Binomial 3.6% 40.6% 6.4% 3.7 years 1997 Flexible Binomial 3.6% 40.6% 6.4% 3.7 years 1998 Black-Scholes 2.6% 47.7% 5.6% 5.0 years 1999 Black-Scholes 2.5% 42.8% 5.8% 5.0 years 2002 Black-Scholes 2.3% 41.2% 3.6% 10.0 years F-12 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (9) STOCK OPTIONS (CONTINUED) ------------------------- A summary of the status of the Company's outstanding stock options as of December 28, 2002, December 29, 2001 and December 30, 2000, and changes during the years ending on those dates is presented below: 2002 2001 2000 ---- ---- ---- Exercise Exercise Exercise Shares (1) Price (2) Shares (1) Price (2) Shares (1) Price (2) ------------- ------------ ------------- ------------ ---------------- ------------ Outstanding at beginning of year 502,386 $6.18 568,801 $5.87 619,717 $5.03 Granted 181,250 $5.86 -- -- -- -- Excercised -- -- (39,165) $0.57 (36,166) $0.59 Forfeited/Cancelled (207,500) $7.76 (27,250) $7.73 (14,750) $7.43 ------------ ------------ --------------- Outstanding at year-end 476,136 $5.37 502,386 $6.18 568,801 $5.87 Options excercisable at year-end 390,136 398,636 397,939 Weighted average fair value of options granted during the year $2.45 -- -- The following information applies to fixed stock options outstanding at December 28, 2002: Number outstanding (1) 476,136 Range of exercise prices $4.80 to $8.10 Weighted-average exercise price $5.37 Weighted-average remaining contractual life 5.75 years ----------------------- (1) As adjusted for the five-for-four stock splits in June 1997 and July 1998. (2) Based on the weighted-average exercise price. On February 22, 2002 the Company made an offer to exchange outstanding options to purchase shares of the Company's Common Stock with an exercise price greater than or equal to $7.00 per share for new options which will be granted under the 1995 Plan. The offer expired on March 22, 2002 and the Company received tenders of options for 207,500 shares. The tendered options were cancelled on March 23, 2002. In keeping with the Company's normal compensation practices, the actual number of shares for which each new option will be granted has been determined with respect to each employee individually. Subject to the terms and conditions of the offer, the Company granted the new options on October 9, 2002. The Company granted options for an aggregate of 166,250 shares in exchange for the tendered options that were cancelled on March 23, 2002. The new options have an exercise price equal to the fair market value of the Common Stock on the date of grant. F-13 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (10) INCOME TAXES ------------ A summary of income taxes is as follows: 2002 2001 2000 ---- ---- ---- Current: Federal $ 649,000 $ 344,000 $ 207,000 State 144,000 83,000 12,000 Deferred 126,000 154,000 (151,000) --------- --------- --------- Total $ 919,000 $ 581,000 $ 68,000 ========= ========= ========= Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to net deferred income tax liability relate to the following: 2002 2001 ---- ---- Depreciation $ 402,000 $ 357,000 Amortization 192,000 135,000 Inventories, due to additonal cost recorded for income tax purposes (14,000) (16,000) Accounts receivable, due to allowance for doubtful accounts (79,000) (84,000) Directors' Trust (89,000) (82,000) Accrued liabilities, due to expenses not yet deuctible for income tax purposes (46,000) (71,000) --------- --------- $ 366,000 $ 239,000 ========= ========= The net deferred income tax liability is presented in the balance sheets as follows: 2002 2001 ---- ---- Current Asset $140,000 $170,000 Long-term Liability 505,000 409,000 The effective income tax rate varied from the statutory Federal tax rate as follows: 2002 2001 2000 ---- ---- ---- Federal statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit 4.3 4.7 4.3 Other 1.6 1.6 (4.5) ---- ---- ---- Effective income tax rate 39.9% 40.3% 33.8% ==== ==== ==== F-14 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (11) EARNINGS PER SHARE ------------------ In accordance with SFAS No. 128, the following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations. 2002 2001 2000 ---- ---- ---- Numerator: Net income $1,384,379 $ 861,561 $ 133,198 ========== ========== ========== Denominator Weighted-average number of Common Shares outstanding 2,793,781 2,812,882 3,041,364 Dilutive effect of stock options on net income 36,526 7,895 35,896 ---------- ---------- ---------- 2,830,307 2,820,777 3,077,260 ========== ========== ========== Diluted earnings per share $ 0.49 $ 0.31 $ 0.04 ========== ========== ========== F-15 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (12) QUARTERLY FINANCIAL INFORMATION ------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 2002 - ---- Net Sales $ 8,918,133 $10,363,395 $ 9,971,156 $ 9,388,921 $38,641,605 Gross Profit $ 1,904,734 $ 2,446,123 $ 2,115,625 $ 1,894,106 $ 8,360,588 Net Earnings $ 305,141 $ 509,022 $ 343,637 $ 226,579 $ 1,384,379 Earnings Per Common Share: Basic $ 0.11 $ 0.18 $ 0.12 $ 0.08 $ 0.49 Diluted $ 0.11 $ 0.18 $ 0.12 $ 0.08 $ 0.49 Average Common Shares Outstanding: Basic 2,812,826 2,787,800 2,786,142 2,788,355 2,793,781 Diluted 2,820,594 2,845,348 2,836,547 2,818,737 2,830,307 First Second Third Fourth Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ---- 2001 - ---- Net Sales $ 8,052,955 $ 9,475,661 $ 9,205,017 $ 8,048,488 $34,782,121 Gross Profit $ 1,465,571 $ 2,095,460 $ 2,058,007 $ 1,931,550 $ 7,550,588 Net Earnings $ (68,734) $ 305,774 $ 372,529 $ 251,992 $ 861,561 Earnings Per Common Share: Basic $ (0.02) $ 0.10 $ 0.14 $ 0.09 $ 0.31 Diluted $ (0.02) $ 0.10 $ 0.14 $ 0.09 $ 0.31 Average Common Shares Outstanding: Basic 2,793,772 2,809,155 2,832,593 2,815,785 2,812,882 Diluted 2,825,352 2,809,155 2,832,593 2,815,785 2,820,777 F-16 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS (13) DISCONTINUED OPERATIONS ----------------------- (a) During the second quarter of 2000, the Company adopted a plan to dispose of its contract sewing operations for the hospitality industry through liquidation. At July 1, 2000, the net assets of this operation consisted primarily of goodwill ($565,481), inventories, machinery and equipment, and trade receivables. This decision resulted in an after-tax loss of $422,000 for disposal of this operation. Included in the loss on disposal was a pre-tax provision of $60,000 for estimated operating losses during the phase-out period. (b) In the fourth quarter of 2000, the Company decided to discontinue the manufacturing of furniture for sale to the recreational vehicle and hospitality industries. At December 30, 2000, the assets of this operation consisted primarily of inventories, equipment and trade receivables. This decision resulted in an after-tax loss of $329,000 for disposal of this operation. Included in the loss on disposal is a pre-tax provision of $160,000 for estimated operating losses during the phase-out period. F-17 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE ------------------------------- The Board of Directors and Stockholders of DECORATOR INDUSTRIES, INC. The audit referred to in our opinion dated February 26, 2003, (March 20, 2003 as to Note 9), on the financial statements as of December 28, 2002 and for each of the three fiscal years then ended includes the related supplemental financial schedule as listed in Item 15 (a), which, when considered in relation to the basic financial statements, presents fairly in all material respects the information shown therein. LOUIS PLUNG & COMPANY, LLP Certified Public Accountants Pittsburgh, Pennsylvania February 26, 2003 (March 20, 2003 as to Note 9) F-18 DECORATOR INDUSTRIES, INC. SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions (1) (2) Charged to Charged to Balance at Costs Other Balance at Beginning And Accounts Deductions End Description of Period Expenses Described Described of Period - ----------- --------- -------- --------- --------- --------- DEDUCTED FROM ASSETS TO WHICH THEY APPLY: ALLOWANCE FOR DOUBTFUL ACCOUNTS 2002 $221,462 $52,500 $0 $71,029 (A) $ 202,933 2001 $144,395 $155,864 $0 $78,797 (A) $ 221,462 2000 $158,996 $168,709 $0 $183,310 (A) $ 144,395 (A) Write-off bad debts F-19