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 July 3, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-7753 DECORATOR INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1001433 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10011 Pines Blvd., Suite #201, Pembroke Pines, Florida 33024 - ------------------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (954) 436-8909 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each class Outstanding at August 17, 2004 ------------------- ------------------------------ Common Stock, Par Value $.20 Per Share 2,819,706 shares PART I - FINANCIAL INFORMATION Item 1. Financial Statements. DECORATOR INDUSTRIES, INC BALANCE SHEETS July 3, January 3, 2004 2004 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and Cash Equivalents $ 141,924 $ 3,991,631 Accounts Receivable, less allowance for doubtful accounts ($200,202 and $200,598) 5,412,664 3,519,418 Inventories 5,701,348 4,123,397 Other Current Assets 524,593 274,285 ----------- ----------- TOTAL CURRENT ASSETS 11,780,529 11,908,731 ----------- ----------- Property and Equipment Land, Buildings & Improvements 5,682,523 5,114,341 Machinery, Equipment, Furniture & Fixtures 6,362,926 6,064,877 ----------- ----------- Total Property and Equipment 12,045,449 11,179,218 Less: Accumulated Depreciation and Amortization 5,527,189 5,157,452 ----------- ----------- Net Property and Equipment 6,518,260 6,021,766 ----------- ----------- Goodwill, less accumulated Amortization of $1,348,569 2,731,717 2,731,717 Identifiable intangible asset, less accumulated Amortization of $331,500 4,168,500 -- Other Assets 258,052 426,108 ----------- ----------- TOTAL ASSETS $25,457,058 $21,088,322 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable $ 3,902,812 $ 1,878,683 Current Maturities of Long-term Debt 170,495 166,251 Accrued Expenses: Income Taxes 22,535 -- Compensation 845,159 940,158 Acquisition Liability 1,391,936 -- Other 1,105,729 915,777 ----------- ----------- TOTAL CURRENT LIABILITIES 7,438,666 3,900,869 ----------- ----------- Long-Term Debt 1,837,922 1,926,832 Deferred Income Taxes 670,000 646,000 ----------- ----------- TOTAL LIABILITIES 9,946,588 6,473,701 ----------- ----------- Stockholders' Equity Common Stock $.20 par value: Authorized shares, 10,000,000; Issued shares, 4,485,728 897,146 897,146 Paid-in Capital 1,381,503 1,426,435 Retained Earnings 21,429,766 20,576,497 ----------- ----------- 23,708,415 22,900,078 Less: Treasury stock, at cost: 1,669,022 and 1,686,840 shares 8,197,945 8,285,457 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 15,510,470 14,614,621 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,457,058 $21,088,322 =========== =========== The accompanying notes are an integral part of the financial statements. 1 DECORATOR INDUSTRIES, INC STATEMENTS OF EARNINGS (UNAUDITED) For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended ------------------------------------------- ------------------------------------------ July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 -------------------- -------------------- ------------------- -------------------- Net Sales $ 14,320,830 100.00% $ 10,767,015 100.00% $ 27,112,878 100.00% $ 20,546,768 100.00% Cost of Products Sold 11,240,647 78.49% 8,316,549 77.24% 21,446,860 79.10% 16,026,250 78.00% ------------ ------------ ------------ ------------ Gross Profit 3,080,183 21.51% 2,450,466 22.76% 5,666,018 20.90% 4,520,518 22.00% Selling and Administrative Expenses 2,099,941 14.67% 1,640,167 15.23% 3,977,382 14.67% 3,200,891 15.58% ------------ ------------ ------------ ------------ Operating Income 980,242 6.84% 810,299 7.53% 1,688,636 6.23% 1,319,627 6.42% Other Income (Expense) Interest and Investment Income 26,035 0.18% 26,071 0.24% 53,476 0.20% 41,962 0.20% Interest Expense (28,308) -0.19% (13,442) -0.13% (55,070) -0.21% (23,786) -0.11% ------------ ------------ ------------ ------------ Earnings Before Income Taxes 977,969 6.83% 822,928 7.64% 1,687,042 6.22% 1,337,803 6.51% Provision for Income Taxes 385,000 2.69% 325,000 3.02% 665,000 2.45% 532,000 2.59% ------------ ------------ ------------ ------------ NET INCOME $ 592,969 4.14% $ 497,928 4.62% $ 1,022,042 3.77% $ 805,803 3.92% ============ ============ ============ ============ EARNINGS PER SHARE BASIC $ 0.21 $ 0.18 $ 0.36 $ 0.29 ============ ============ ============ ============ DILUTED $ 0.20 $ 0.18 $ 0.35 $ 0.29 ============ ============ ============ ============ Weighted Average Number of Shares Outstanding Basic 2,813,699 2,793,229 2,809,831 2,792,228 Diluted 2,956,044 2,796,524 2,942,386 2,802,086 The accompanying notes are an integral part of the financial statements. 2 DECORATOR INDUSTRIES, INC STATEMENTS OF CASH FLOWS (UNAUDITED) For the Twenty-six Weeks Ended ------------------------------ July 3, 2004 June 28, 2003 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 1,022,042 $ 805,803 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization 718,270 350,305 Provision for Losses on Accounts Receivable -- 20,000 Deferred Taxes 15,000 38,000 (Gain) Loss on Disposal of Assets (584) 10,767 Increase (Decrease) from Changes in: Accounts Receivable (1,893,246) (947,070) Inventories (320,837) 349,444 Prepaid Expenses (241,308) (23,384) Other Assets 168,056 (80,997) Accounts Payable 2,024,129 1,018,074 Accrued Expenses 117,488 (65,605) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,609,010 1,475,337 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash paid for acquisitions (4,696,588) -- Capital Expenditures (552,420) (397,197) Proceeds from Property Dispositions 1,150 900 ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (5,247,858) (396,297) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term Debt Payments (84,666) (62,878) Dividend Payments (168,773) (167,512) Proceeds from Exercise of Stock Options 17,580 -- Issuance of Stock for Directors Trust 25,000 20,000 Proceeds on Debt from Building -- 640,000 ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (210,859) 429,610 Net (Decrease) Increase in Cash and Cash Equivalents (3,849,707) 1,508,650 Cash and Cash Equivalents at Beginning of Year 3,991,631 2,117,762 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 141,924 $ 3,626,412 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash Paid for: Interest $ 26,527 $ 12,898 Income Taxes $ 621,757 $ 245,259 The accompanying notes are an integral part of the financial statements. 3 DECORATOR INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS TWENTY-SIX WEEKS ENDED JULY 3, 2004 AND JUNE 28, 2003 (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 July 3, 2004, the changes therein for the twenty-six week period then ended and the results of operations for the twenty-six week periods ended July 3, 2004 and June 28, 2003. 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 January 3, 2004. The results of operations for the twenty-six week periods ended July 3, 2004 and June 28, 2003 are not necessarily indicative of operating results for the full year. NOTE 3. INVENTORIES Inventories at July 3, 2004 and January 3, 2004 consisted of the following: July 3, 2004 January 3, 2004 ------------ --------------- Raw Material and supplies $5,238,787 $3,506,619 In Process and Finished Goods 462,561 616,778 ---------- ---------- Total Inventory $5,701,348 $4,123,397 ========== ========== NOTE 4. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options. In accordance with SFAS No. 128, the following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations. For the Thirteen Weeks Ended For the Twenty-Six Weeks Ended --------------------------------- --------------------------------- July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Numerator: Net income $ 592,969 $ 497,928 $1,022,042 $ 805,803 ========== ========== ========== ========== Denominator: Weighted-average number of common shares outstanding 2,813,699 2,793,229 2,809,831 2,792,228 Dilutive effect of stock options on net income 142,345 3,295 132,555 9,858 ---------- ---------- ---------- ---------- 2,956,044 2,796,524 2,942,386 2,802,086 ========== ========== ========== ========== Diluted earnings per share: $ 0.20 $ 0.18 $ 0.35 $ 0.29 ========== ========== ========== ========== 4 NOTE 5. BUSINESS ACQUISITION On January 22, 2004, the Company entered into an agreement, effective January 26, 2004, to purchase the land, building, machinery, equipment, inventory and other assets of Fleetwood Enterprises Inc.'s ("Fleetwood") drapery operation in Douglas, Georgia for a purchase price of $4 million in cash, plus an additional amount for inventory of up to $1,257,114. Payment for the inventory is due to Fleetwood on January 24, 2005 and will include interest at 4%. In connection with the acquisition, the Company and Fleetwood entered into an agreement for the Company to be the exclusive supplier of Fleetwood's drapery, bedspread, and other decor requirements for a period of six years. If, at the end of three years, Fleetwood is satisfied with the Company's performance under this agreement, it will extend the terms of this agreement an additional three years. The acquired business was engaged in the manufacture of curtains, valances, bedspreads and other decor items. Fleetwood used the acquired business to supply most of its Manufactured Housing and some of its Recreational Vehicle requirements for these items. Sales to other customers were negligible. The Company used internal funds for the purchase price paid at closing and will likely generate sufficient funds internally to satisfy the remaining obligation due in January 2005. At the date of closing, the Company's $5,000,000 line of credit was unused. The Company does expect to use its line of credit for working capital requirements during 2004. Fleetwood was the Company's largest customer in 2003, representing approximately 26% of total sales. The combined sales of the acquired business and the Company's to Fleetwood's Manufactured Housing and Recreational Vehicle businesses would have been approximately 36% of the Company's total sales in 2003. The total acquisition cost and liability is as follows: Total Acquisition Cost $6,088,524 Cash Paid through July 3, 2004 4,696,588 ---------- Acquisition Liability at July 3, 2004 $1,391,936 ========== 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. CAUTIONARY STATEMENT: THIS QUARTERLY REPORT ON FORM 10-Q MAY CONTAIN STATEMENTS RELATING TO FUTURE EVENTS, INCLUDING RESULTS OF OPERATIONS, THAT ARE CONSIDERED "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEF AS TO FUTURE EVENTS AND, BY THEIR VERY NATURE, ARE SUBJECT TO RISKS AND UNCERTAINTIES WHICH MAY RESULT IN ACTUAL EVENTS DIFFERING MATERIALLY FROM THOSE ANTICIPATED. IN PARTICULAR, FUTURE OPERATING RESULTS AND FUTURE LIQUIDITY WILL BE AFFECTED BY THE LEVEL OF DEMAND FOR RECREATIONAL VEHICLES, MANUFACTURED HOUSING AND HOTEL/MOTEL ACCOMMODATIONS AND MAY BE AFFECTED BY CHANGES IN ECONOMIC CONDITIONS, INTEREST RATE FLUCTUATIONS, COMPETITIVE PRODUCTS AND PRICING PRESSURES WITHIN THE COMPANY'S MARKETS, THE COMPANY'S ABILITY TO CONTAIN ITS MANUFACTURING COSTS AND EXPENSES, AND OTHER FACTORS. FORWARD-LOOKING STATEMENTS BY THE COMPANY SPEAK ONLY AS OF THE DATE MADE, AND THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE SUCH STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FINANCIAL CONDITION The Company's financial ratios changed significantly as illustrated below. The financial condition remains strong, and the long-term debt to total capitalization ratio remained low at 10.59% July 3, 2004 April 3, 2004 January 3, 2004 ------------ ------------- --------------- Current Ratio 1.58 1.48 3.05 Quick Ratio 0.82 0.76 2.00 LT Debt to Total Capital 10.59% 11.18% 11.65% Working Capital $4,341,863 $3,608,081 $8,007,862 The change in the Company's financial ratios reflects the acquisition in January 2004 of Fleetwood's drapery operation in Douglas, Georgia. The Company paid $4,000,000 at closing and on January 24, 2005 will pay up to $1,257,114, plus interest at 4%, for inventory purchased from Fleetwood. The Company used internal funds for the purchase price paid at closing and will likely generate sufficient funds to satisfy the remaining obligation. Days sales outstanding in accounts receivable were 33.4 days at July 3, 2004, compared to 35.8 days at June 28, 2003. Net accounts receivable increased by $1,070,965 and inventories increased by $1,662,722 from June 28, 2003 to July 3, 2004. These increases are attributable to the acquisition of the Fleetwood Drapery operation and to the overall increase in business. Capital expenditures, excluding the assets acquired from Fleetwood, were $552,420 for the twenty-six weeks ended July 3, 2004. This was primarily due to a building addition to the Company's Elkhart, Indiana facility of $303,410, which increased the Company's pleated shade capacity by 50%. The Company is under contract to purchase a manufacturing facility in Phoenix, Arizona. The cost of this facility is $1,485,000 and is scheduled to close before the end of August 2004. The Company will use its line of credit to finance this purchase. As of this date, the Company has no borrowings against its $5,000,000 line of credit. Management does not foresee any events which will adversely affect its liquidity during 2004. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (continued) RESULTS OF OPERATIONS The following tables show the percentage relationship to net sales of certain items in the Company's Statements of Earnings: Second Second Quarter Quarter YTD YTD Earnings Ratios 2004 2003 2004 2003 --------------- ------- ------- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 78.49 77.24 79.10 78.00 Selling and administrative 14.67 15.23 14.67 15.58 Interest and investment income (0.18) (0.24) (0.20) (0.20) Interest expense 0.19 0.13 0.21 0.11 Income taxes 2.69 3.02 2.45 2.59 Net income 4.14 4.62 3.77 3.92 THIRTEEN WEEK PERIOD ENDED JULY 3, 2004, (SECOND QUARTER 2004) COMPARED TO THIRTEEN WEEK PERIOD ENDED JUNE 28, 2003, (SECOND QUARTER 2003) Net sales for the Second Quarter 2004 were $14,320,830, compared to $10,767,015 for the same period in the previous year, a 33% increase. Excluding sales arising from the acquisition of Fleetwood's drapery operation, net sales of existing business increased approximately 17%. Sales to the Company's recreational vehicle customers increased about 36% compared to the same period of the prior year, partially due to the additional Fleetwood business. Sales to the Company's manufactured housing customers increased by 36%, due to the additional Fleetwood business. Sales to the Company's hospitality customers increased about 21% for the quarter ended July 3, 2004 compared to the same quarter of the prior year. Cost of products sold increased to 78.5% in the Second Quarter 2004 compared to 77.2% a year ago. Increases in material and labor expenses were responsible for the overall increase in cost of goods sold percentage. Selling and administrative expenses were $2,099,941 in the Second Quarter 2004 versus $1,640,167 in the Second Quarter 2003. The increase is largely due to amortization expense of the intangible asset resulting from the Fleetwood acquisition ($187,500), and expenses related to the ongoing implementation of the Company's Enterprise-Resource-Planning system (approximately $47,000). As a percentage of sales, selling and administrative expenses decreased from 15.2% to 14.7% due to increased sales volume. Interest expense increased to $28,308 in the Second Quarter 2004 from $13,442 in the Second Quarter 2003 because of periodic borrowings on the Company's line of credit, interest on the inventory purchased from Fleetwood in January 2004, and interest on the loan secured by the Company's Elkhart, Indiana facility which was not outstanding during part of the Second Quarter 2003. Net income increased to $592,969 in the Second Quarter of 2004 compared to $497,928 in the Second Quarter of 2003, an increase of 19.1%. This increase is largely the result of increased sales, partially offset by increased administrative expenses. The Company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) increased by 37.6% to $1,390,629 from $1,010,364 in the Second Quarter of 2003. 7 TWENTY-SIX WEEK PERIOD ENDED JULY 3, 2004, (FIRST SIX MONTHS 2004) COMPARED TO TWENTY-SIX WEEK PERIOD ENDED JUNE 28, 2003, (FIRST SIX MONTHS 2003) Net sales for the First Six Months 2004 were $27,112,878, compared to $20,546,768 for the same period in the previous year, a 32% increase. Excluding sales arising from the acquisition of Fleetwood's drapery operation, net sales of existing business increased more than 18%. Sales to the Company's recreational vehicle customers increased about 40% compared to the same period of the prior year, partially due to the additional Fleetwood business. Sales to the Company's manufactured housing customers increased by 34%, due to the additional Fleetwood business. Sales to the Company's hospitality customers increased about 10% for the six months ended July 3, 2004 compared to the same period of the prior year. Cost of products sold increased to 79.1% in the First Six Months 2004 compared to 78.0% a year ago. Increases in material and labor expenses were responsible for the overall increase in cost of goods sold percentage. Selling and administrative expenses were $3,977,382 in the First Six Months 2004 versus $3,200,891 in the First Six Months 2003. The increase is largely due to amortization expense of the intangible asset resulting from the Fleetwood acquisition ($331,500) and expenses related to the ongoing implementation of the Company's Enterprise-Resource-Planning system (approximately $68,000). As a percentage of sales, selling and administrative expenses decreased from 15.6% to 14.7% due to increased sales volume. Interest expense increased to $55,070 in the First Six Months 2003 from $23,786 in the First Six Months 2003 because of periodic borrowings on the Company's line of credit, interest on the inventory purchased from Fleetwood in January 2004, and interest on the loan secured by the Company's Elkhart, Indiana facility which was not outstanding during the entire First Six Months 2003. Net income increased to $1,022,042 in the First Six Months 2004 compared to $805,803 in the First Six Months 2003, an increase of 26.8%. This increase is largely the result of increased sales, partially offset by increased administrative expenses. The Company's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) increased by 43.7% to $2,460,382 from $1,711,894 in the first Six Months 2003. Item 4. Controls and Procedures. (a) The Company's Chief Executive Officer and Chief Financial Officer 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. 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits filed herewith: 10T.2 Amendment dated May 25, 2004 to the Employment agreement between the registrant and William Bassett. 10U.3 1995 Incentive Stock Option Plan, as amended to date. 10W.1 Amended and Restated Stock Plan for Non-Employee Directors and related Grantor Trust Agreement, as amended, effective July 1, 2004. 31.1 Certification of President 31.2 Certification of Treasurer 32 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 July 3, 2004. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DECORATOR INDUSTRIES, INC. (Registrant) Date: August 17, 2004 By: /s/ William A. Bassett ------------------------- William A. Bassett, President Date: August 17, 2004 By: /s/ Michael K. Solomon ------------------------- Michael K. Solomon, Treasurer 10