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United States Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23898
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MITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0448892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 West 400 North
Orem, Utah 84057
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (801) 224-0589
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of class
Common Stock, par value $.01
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. [ ]
The aggregate market value of the registrant's voting Common Stock held
by non-affiliates of the registrant was approximately $31,927,000 (computed
using the closing price of $12.25 per share of Common Stock on May 28, 2002 as
reported by Nasdaq). Shares of Common Stock held by each officer and director
(and their affiliates) and each person who owns 5 percent or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates for purposes of this calculation. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 5,010,555 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on May 28, 2002.
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Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on August 6, 2002, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended March 31, 2002, are incorporated by reference
in Part III of this Annual Report on Form 10-K.
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, in particular "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. These statements
represent the Company's expectations or beliefs concerning, among other
things, future revenue, earnings and other financial results, new products,
marketing, operations and manufacturing. The Company wishes to caution and
advise readers that these statements involve risks and uncertainties that
could cause actual results to differ materially from the expectations and
beliefs contained herein. For a summary of certain risks related to the
Company's business see "Item 1. Business-Risk Factors That May Affect Future
Results" beginning on page 8 and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Forward-Looking Statements and Factors
That May Affect Future Results of Operations" beginning on page 28.
Unless the context otherwise requires, references to the Company or MITY
Enterprises are to MITY Enterprises, Inc. and its subsidiaries. Mity-Lite(R),
MityTuff(R), MityStack(R), MityHost(TM), SwiftSet(R), Xpeditor(TM), Xtreme
Edge(TM), Summit(TM) Lectern, MitySnap(TM), BRODA(TM), Comfort Tension
Seating(TM), Pedal Chair(TM), Domore(R), Series System Seven(TM), DO3(TM),
Neo7(R), CenterCore(R), TEC2000(R), Spacemaker 2000(R), and AIRFLOW 2000(R)
are trademarks or trade names of the Company.
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PART I
ITEM 1. BUSINESS
BACKGROUND
MITY Enterprises, Inc. designs, manufactures and markets premium quality,
innovative institutional furniture created to meet the efficiency needs of its
customers. The Company's product lines include multipurpose room furniture,
health care seating, and specialty office systems. Its line of multipurpose
room furniture is sold both domestically and internationally in educational,
recreational, hotel and hospitality, government, office, health care, church
and other public assembly markets. Its health care seating is sold mainly in
Canada and the U.S. in the long term healthcare market. The Company sells its
specialty office systems products domestically and internationally in the call
center, high density office use, corporate and dispatch markets.
INSTITUTIONAL FURNITURE PRODUCTS
MULTIPURPOSE ROOM FURNITURE. The Company's multipurpose room furniture
consists of lightweight, durable, folding leg tables, stacking chairs, folding
chairs, lecterns and other related products used in multipurpose rooms.
Lightweight, highly durable tables. The Company has developed and currently
manufactures and markets more than 50 different plastic table sizes. These
tables are made with several different folding leg and custom color options.
The Company has successfully applied engineering grade plastics and
sophisticated manufacturing and assembly methods to the production of tables
that weigh less and are more durable than competing particle board or plywood
table products of similar size. The Company's plastic tables are manufactured
using abrasion, stain and water resistant materials. The Company's cornered
tables are constructed using the Company's proprietary high-impact corners
which can withstand a two-foot drop without sustaining debilitating damage.
All of the Company's plastic tables include reinforced edging. Cornered
tables are equipped with non-skid pads which facilitate stacking and storage.
Management believes the Company's plastic table products appeal to its
customers because they are durable, lightweight, easy to handle and
attractive.
Folding and stacking chairs. The Company currently offers three lines of
stacking chairs and a line of folding chairs: MityTuff, MityStack, MityHost,
and SwiftSet. The MityHost chair line is manufactured in-house while the
Company's other stacking chair lines are purchased from suppliers and marketed
under the Mity-Lite name. The SwiftSet is manufactured in-house and has a
plastic seat and back designed to be more comfortable, durable and lightweight
than other folding chairs.
Other multipurpose room products. The Company markets the Summit lectern, a
new line of lightweight, durable lecterns. The lecterns are made of high
quality polyethylene and can withstand abusive environments. They are
offered in a variety of colors, with custom inserts that allow customers to
match decor. In addition to lightweight, durable tables, chairs, and
lecterns, the Company manufactures and/or markets accessory products including
table and chair carts, tablecloths, skirting and skirt clips.
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HEALTHCARE SEATING. Through its wholly owned subsidiary, Broda Enterprises,
Inc., the Company designs, manufactures and markets healthcare seating and
accessories used in long term healthcare facilities located primarily in the
United States and Canada. Broda has developed and manufactures a line of
premium wheeled and stationary specialty chairs. Most chair models come in
two standard sizes and six standard colors. The Company also custom
manufactures other sizes and colors of its standard healthcare seating
products. Heavy gauge steel tube chair frames and large wheels and casters
allow for greater weight capacity. In addition, high quality nickel/chrome
plating provides a scratch-resistant surface. Broda's high end seating
products offer a combination of features that differentiate them from the
competition. Broda chairs have been tested for interface pressures and
stability that, combined with their rigid and durable design, make Broda
chairs suitable seating for long term care residents including those with
Huntington's Chorea Disease, Alzheimer's or Acquired Brain Injury. In
addition, nursing home residents susceptible to skin breakdown, suffering from
loss of upper body strength, or with other conditions that might otherwise
restrict them to bed or place them at risk of self injury or falls, can be
safely and comfortably seated in a Broda chair.
SPECIALTY OFFICE SYSTEMS. In April 1999, the Company, through its wholly
owned subsidiary, C Core, Inc. acquired certain assets and obligations of The
CenterCore Group, Inc. ("CenterCore"), a privately-owned designer,
manufacturer and marketer of pod style and panel systems furniture marketed to
call centers and other high density office use environments. The Company's
office products include a line of cluster furniture, designed to improve
productivity and save space in offices and call center environments.
CenterCore was the originator of the "cluster concept" office furniture
designed for high-density institutional environments, call centers, as well as
the federal government. Within the CenterCore product line are two product
families. The circular Spacemaker2000 system pioneered by CenterCore provides
a simple, cost-conscious solution to meet the needs of call center operations.
The Tec2000 system provides an array of different applications for support
staff, supervisors and managers, receptionists and team conferences. It is
available in a wide variety of shapes and sizes. Tec2000 combines privacy
panels, free standing modules and storage options. Tec2000 can also integrate
with Spacemaker2000 furniture for high density work environments. The
Company's CenterCore product line is manufactured in Marked Tree, Arkansas.
Also included in specialty office systems is the Company's wholly owned
subsidiary, DO Group, Inc. ("DO Group"), headquartered in Marked, Tree,
Arkansas. The Company acquired its initial 49.9 percent equity interest in DO
Group, Inc. in March 1997 and acquired the remainder of DO Group on April 1,
2000. DO Group markets its products under the Domore and DO3 Systems trade
names. The DO Group's products consist of open plan systems panel furniture,
computer free standing furniture, panel clusters and other related products.
DO Group's systems products include office panels, movable full height walls,
work surfaces, pedestals, storage units, tables and other accessory items used
in office cubicles. DO Group offers two styles of panel systems. The DO3
post to panel system facilitates ease of assembly and takedown. Panels are
available in a variety of fabric, laminate or painted surfaces. Domore Series
System Seven panels are a value-oriented panel to panel system and connect
using interlocking hinges. These panels are available in a variety of fabric
and laminate surfaces. Both the DO3 and Domore panel systems offer the latest
electrical and voice/data transmission capabilities, including access to CAT5
wiring at the beltline level.
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During the quarter ended June 30, 2001, the Company developed a plan for
exiting and selling the specialty office seating and systems furniture segment
of its operations. This segment consists of the CenterCore and DO Group
businesses. As a result of these actions, the Company is treating DO Group
and CenterCore as a discontinued operation. In September and October of 2001,
the Company completed the sale of its specialty office seating lines. The
Company still retains the specialty office systems furniture operation and
continues to pursue its plan for exiting and selling this operation.
MARKET OVERVIEW
Based upon management's analysis of companies known to sell multipurpose room
furniture and based upon management's experience and contacts in its industry,
management estimates that the domestic market for multipurpose room furniture
exceeds $1.5 billion annually. It is estimated that folding tables alone make
up more than $400 million of this domestic market. Chairs and other related
seating products are estimated to account for approximately $1 billion of the
domestic multipurpose room furniture market. Other products such as staging,
risers, partitions, lecterns, and flooring account for the balance of the
estimated domestic market.
In the healthcare seating market, management estimates that in the United
States and Canada there are more than 28,000 nursing homes with over 1.8
million beds. Nursing homes and their residents represent the typical Broda
customer. In addition, Broda's market can include chronic care, psychiatric
care or long term care facilities. Management estimates that the North
American market for its current healthcare seating products is $60 million.
In the office systems market, the Company has positioned itself as a niche
supplier of specialty office system products. Based upon independent
research from professional organizations like the Business and Institutional
Furniture Manufacturers Association, management believes the office system
market is approaching $4.5 billion.
SALES AND MARKETING
MULTIPURPOSE ROOM FURNITURE. The Company primarily markets its multipurpose
room products directly to end users in the educational, recreational, hotel
and hospitality, governmental, office products, healthcare, public assembly
and church markets. This strategy enables the Company to manage selling costs
more effectively and maintain direct contact with its customers. The Company
currently employs 57 full-time in-house sales and customer service employees.
The Company's sales and customer service personnel are compensated on a
commission basis and may qualify for other incentive bonuses based on
individual, sales team and Company performance. Each sales and customer
service employee receives training in product attributes, customer service,
use of the Company's computerized sales management system and all aspects of
the sales cycle.
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The Company typically markets its products by first identifying customers
through internal market research, referrals, trade shows, customer networking
and test marketing. Once a market has been identified, the Company's sales
and marketing staff will attempt to generate leads for prospective purchasers
in such markets by attending trade shows, performing mass mailings and using
lead-oriented advertising. The Company uses a proprietary, computer-based
sales management system to qualify, track and manage sales leads for
prospective and existing customers and to compile customer feedback. While
each sales and customer service employee maintains some in-person contact with
such employee's assigned customers, most of the Company's sales efforts are
pursued using the telephone, fax machine, e-mail, internet, videotapes and
overnight mail services. The Company also uses a reference list of customers
in each geographical sales territory to promote sales of its products. The
Company provides prospective purchasers with product samples for 30-day trial
periods. The Company does not extensively advertise its products in trade
publications.
The Company's plastic table and lectern products are sold with a twelve-year
pro-rata warranty covering materials and workmanship. The MityTuff is sold
with a seven-year warranty covering materials and workmanship. The MityStack
and SwiftSet are sold with a ten-year warranty covering materials and
workmanship. The MityHost is sold with a ten-year warranty covering the
structural integrity of the metal frame and a one-year warranty covering the
upholstery. The Summit lectern is sold with a twelve-year warranty covering
materials and workmanship.
HEALTHCARE SEATING. The Company markets its healthcare seating products to
end users and care givers in healthcare markets through its own sales
representatives and independent manufacturer's representatives, distributors
and retailers of durable medical equipment. The Company currently employs 20
full-time sales and customer service employees and 24 independent
manufacturing representatives and distributors. The Company's internal sales
and customer service employees are compensated with a base salary and may
qualify for commission, incentive or bonus pay. The Company promotes its
products through print advertising, trade shows, mass mailings and telephone
solicitations targeted to healthcare professionals. The Company has a
sampling program and provides prospective purchasers with product samples for
14-day trial periods. All of Broda's chairs carry a limited three-year
warranty on the steel frame and a limited one year warranty on the other
components for defects and failure in normal use.
SPECIALTY OFFICE SYSTEMS. The Company's specialty office systems are marketed
directly through an in-house sales force consisting of in-house sales
representatives, field sales representatives and telesales personnel, and
indirectly through General Services Administration (GSA) dealers, independent
office product dealers, independent representatives, and specialty dealers.
In-house sales personnel are compensated by a combination of salary and
commission. The Company also sells products directly and indirectly to state
governments and to the United States government through a GSA contract. Sales
to state and federal government agencies are on fixed terms and are not
subject to price renegotiation. The Company currently employs two field sales
representatives and various independent representatives and dealers. The
Company promotes its specialty office systems products through print
advertising, trade shows, mass mailings, internet sites and telephone
solicitations targeted to specific niche markets. All DO Group and CenterCore
products carry a five-year warranty covering materials and workmanship. One
customer represented 68 percent of this segment's net sales in fiscal 2002.
The loss of this customer would likely have a material adverse effect on this
segment.
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INTERNATIONAL SALES
Since its inception in 1987, the Company has focused its marketing efforts
primarily on domestic markets. The Company has, however, sold its products in
Canada, South America, Europe, Asia, Middle East and Australia. For the
fiscal years ended March 31, 2000, 2001, and 2002, the Company's international
sales accounted for 12.3 percent, 11.1 percent and 12.6 percent of the
Company's total net sales, respectively. The Company has been successful in
establishing distributor relationships in Canada, Australia, Mexico, Costa
Rica, Puerto Rico, Dominican Republic, Bermuda, Brazil, Venezuela, England,
France, Germany, Spain, Netherlands, Jordan, United Arab Emirates, Saudi
Arabia, Egypt, South Korea, Hong Kong, China, Taiwan, Singapore and Malaysia.
Approximately 44 percent of healthcare seating sales are in Canada with all
but six percent of the remaining sales in the United States.
MANUFACTURING AND MATERIALS
MULTIPURPOSE ROOM FURNITURE. The Company's manufacturing process for its
plastic table products consists principally of bonding a thermoformed ABS
plastic shell to a wood core frame. Metal legs, which are manufactured and
painted in-house, and edge trim are then attached to the table to complete the
process. Since its inception, the Company has implemented a number of changes
to its manufacturing process and product design which have resulted in
increased production volumes, improved production quality and increased on-
time shipping performance. The Company has designed and manufactured certain
proprietary equipment used in its manufacturing process. The Company believes
that its manufacturing innovations give it a competitive advantage, allowing
the Company to reduce production costs and increase productivity. The
Company's typical order to delivery lead time is between three and five weeks.
The Company's manufacturing process for its multipurpose chair products
consists principally of the manufacturing and painting of legs and frames,
upholstering seat and back cushions for the MityHost chair, injection molding
the seat and back for the SwiftSet chair, and final assembly of the
components. The MityTuff and MityStack chairs are distributed by the Company
under original equipment manufacturer (OEM) arrangements with the chair
manufacturers. The MityHost stacking chair and SwiftSet folding chair are
manufactured in-house at the Company's facility in Orem, Utah. The Company's
manufacturing process for its lectern products consists primarily of
assembling electronic components, attaching the laminated insert to the shell,
and final assembly of the components.
HEALTHCARE SEATING. The Company's manufacturing process for its healthcare
seating products includes such metal fabricating processes as welding,
bending, punching, drilling and polishing. The Company also performs cut and
sew operations to produce its chair cushions and accessories. Metal
components are typically chrome plated, zinc plated or painted for corrosion
protection by outside suppliers. Components purchased for assembly into
chairs includes casters, gas springs, cables and plastic parts.
SPECIALTY OFFICE SYSTEMS. The Company's manufacturing process for office
systems products consists primarily of painting and assembling panels, storage
bins, and pedestals and manufacturing laminated work surfaces and center
cores. The primary raw materials consist of formed metal, particle board,
laminate and fabric. The manufacturing process is driven by an in-house CAD
drawing system that indicates the components required.
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Raw materials used in all of the Company's products such as plastic, wood,
metal and fabric are generally available from a number of suppliers. The
plastic used in the Company's multipurpose room products and tubing used in
the metal legs are manufactured according to the Company's specifications.
The multipurpose room operations operate without a substantial raw materials
inventory by depending on certain key suppliers to provide raw materials on a
"just-in-time" basis. Component parts are provided by a number of suppliers
to the Company's specifications. The Company's other raw materials such as
wood, formed metal, laminate, fabric and certain welding compounds are
commodity items. The Company believes that most of its raw materials are
available from alternative suppliers. However, any significant interruption
in delivery of such items could have a material adverse effect on the
Company's operations.
COMPETITION
The markets in which the Company participates are highly competitive. The
institutional furniture industry consists of a fragmented group of large
manufacturers and a host of smaller manufacturers. The healthcare chair
industry also includes a fragmented group of major medical device
manufacturers and many small manufacturers.
MULTIPURPOSE ROOM FURNITURE. Management believes that customers purchase the
Company's plastic tables primarily because of product performance, reputation,
on-time delivery, warranty service and value. The Company markets its table
products based primarily on product performance (lightweight and durable) and
reputation, not price. The Company's average table price is generally higher
than the average price of competing particle board, plywood or metal table
products of its competitors. The Company believes that it has a respected
reputation for product quality, convenience and customer service and that for
these reasons, end users often choose its table products over competitors'
lower cost table products. Because only certain elements of the Company's
table design are patented, the Company's tables may be reverse engineered and
duplicated by competitors who are able to develop the manufacturing equipment
and processes to do so. In the past few years, several competitors have
introduced other thermoformed plastic tables with many similar characteristics
to the Company's products. More recently, other competitors have introduced
blow molded plastic tables that, although not currently as durable, are
cheaper than the Company's table products. These introductions have increased
price and profit margin pressures on the Company's products. Further
improvements in these products or introductions of new competing products by
lower cost producers would put additional price and profit margin pressure on
the Company which could have a material adverse effect on the Company's
results of operations. Among the Company's primary competitors in the table
market are Palmer-Snyder, Inc., McCourt Manufacturing, Inc., Midwest Folding
Products, Alltrista Coporation, Krueger International, Inc., Falcon Products,
Inc., SICO and Virco Manufacturing Corporation which market a thermoformed
plastic table; Southern Aluminum, Inc., which produces an aluminum table;
Lifetime Products which markets a blow molded plastic table, Krueger
International, Inc., Bevis Custom Furniture, Inc., Globe Business Furniture
and Virco Manufacturing Corporation, Inc. which produce particle board tables;
and Falcon Products, Inc., Midwest Folding Products, and Palmer-Snyder, Inc.,
which produce plywood tables.
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Management believes that customers purchase the Company's multipurpose room
chair products primarily because of product performance, reputation, warranty
service and convenience. The market for institutional chairs is highly
competitive and fragmented. The Company believes that its new folding chair
line has technological and performance advantages over its competitors.
Although the Company's other chair lines do not offer the same advances as
the Company's table and folding chair products, the Company believes they do
have distinct selling features. Among the Company's primary competitors in
the multipurpose chair market are Steelcase Inc., Falcon Products, Inc., Virco
Manufacturing Corporation, Artco-Bell Corporation, Globe Business Furniture,
Shelby Williams Industries, Inc., MTS Seating, Krueger International, Inc.,
U.S. Industries (Samsonite), Clarin, a division of Greenwich Industries, and
Meco Corporation.
HEALTHCARE SEATING. Management believes that customers purchase the Company's
healthcare seating products primarily because of product performance,
reputation and service, not price. The Company's average healthcare chair
price is generally higher than the average price of competing chairs. The
Company's chairs generally offer significantly more performance in terms of
function and durability and for these reasons are chosen over lower cost
competitors' products. Among the Company's primary competitors in the
healthcare seating market are Invacare Corp., L.P.A. Medical Inc., Graham-
Field Inc., Maple Leaf Wheelchair Manufacturing Inc., Sunrise Medical Inc.,
Hillenbrand Industries Inc., Winco Inc., Dolomite and Homecrest Industries
Incorporated.
SPECIALTY OFFICE SYSTEMS. The specialty office systems furniture market is
part of the larger office furniture market. There are several major
manufacturers and a host of smaller manufacturers in this marketplace. The
Company generally markets its specialty office systems products on the basis
of product performance (more employees in comparable space than competitors,
and more easily reconfigurable), options and reputation, not price. Among the
Company's primary competitors in this market are Teknion Corporation, Interior
Concepts, Hamilton Sorter Company, Inc., Steelcase Inc., Haworth Furniture
Inc., Herman Miller, Inc., Knoll, Inc., Kimball International, Inc., HON
Industries, Inc., and US Prison Industries.
INTELLECTUAL PROPERTY
The Company has been granted two utility patents relating to the construction
of its table tops. A design patent and five utility patents have been granted
and one utility patent is pending on the SwiftSet chair. Except for the
SwiftSet, the Company does not own patent rights on any of its multipurpose
room chair products. The Company has chosen not to apply for international
patent protection for the two table concepts or the SwiftSet chair concepts.
The Company does not believe this will have a material adverse effect on the
Company.
With respect to its office systems furniture, the Company acquired the rights
to a patent on Airflow 2000, a temperature blending and breathing zone
filtration system, that helps facility managers address indoor environmental
concerns resulting in increased employee performance levels.
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Utility patents relating to the function of its newest most functional
healthcare chair model have been granted to the Company in the United States
and Canada. A utility patent on its flipdown footrest has been granted in the
United States and is pending in Canada. Utility patents on the Company's new
mobility oriented healthcare chair and commode chair are pending in the United
States and Canada. The Company does have international patents pending on
healthcare chairs in Canada, Japan, Germany, United Kingdom, and France. The
Company has been granted design patents on its geriatric accessory tray,
healthcare chair back, flipdown footrest, and healthcare chair for Canada and
the United States. A design patent has also been granted in the United States
for the Company's commode chair and is pending in Canada. The stylized word
BRODA has been trademarked for Canada and the United States and trademark
registration has been applied for in Europe. Broda's Comfort Tension Seating
has been trademarked in Canada and the U.S. The Pedal Chair trademark has
been applied for in the U.S. and Canada.
The Company believes that aspects of its manufacturing processes are trade
secrets of the Company. The Company relies on trade secret law and
nondisclosure agreements to protect its trade secrets. The Company believes
that its patents and trade secrets provide competitive advantages.
REGULATION AND ENVIRONMENTAL COMPLIANCE
The Company is subject to various local, state, provincial and federal laws
and regulations including, without limitation, regulations promulgated by
federal, state and provincial environmental and health agencies, the Federal
Occupational Safety and Health Administration, the Food and Drug
Administration, North American Free Trade Agreement, and laws pertaining to
the hiring, treatment, safety and discharge of employees. The Company's
manufacturing operations must also meet federal, state, provincial and local
regulatory standards in the areas of labor, safety and health. Historically,
the cost of regulatory compliance has not had a material adverse effect on the
Company's sales or operations. The Company believes it is in material
compliance with applicable laws including laws related to the handling and use
of environmentally hazardous materials.
EMPLOYEES
As of March 31, 2002, the Company had approximately 381 full-time and 18 part-
time employees. Approximately 59 employees at the Company's Marked Tree,
Arkansas facility are represented by the Carpenters Union. No other employees
have union representation. The Company believes that its relationship with
its employees is good.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATIONS
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DOWN-TURN IN FURNITURE INDUSTRY. In fiscal 2002, the Company faced one of the
most significant down-turns ever in the global furniture industry. Industry
experts had projected a decline in the U.S. office furniture market of 18% for
the calendar year for 2001 and expected further declines of approximately 13%
in calendar year 2002. Companies throughout the world reduced their spending
across many capital goods categories, including furniture. Revenue and order
rates across the industry fell throughout calendar 2001 as customers delayed
and canceled orders. Demand for furniture products has continued to soften as
corporate profits have remained under pressure in calendar 2001 and 2002.
Demand for the Company's products was also adversely impacted by declines
after September 11, 2001 in the hospitality and recreational markets. The
near term outlook for the institutional furniture industry remains uncertain.
Though some economic indicators show evidence that the U.S. economy is
starting to recover, it is uncertain when the recovery will be reflected in
increased orders for institutional furniture products. If demand for the
Company's products does not increase, the Company will become subject to
increased price competition and the Company's margins will decline if it is
unable to reduce costs. The Company is likely not going to be able to off-set
the effects of price competition solely through cost reductions. The effects
of the events of September 11, 2001, and the military actions that followed on
the institutional furniture market will likely be magnified if any further
acts of terrorism or war occur.
COMPETITION. The Company is facing increased competition because of
innovations in competitors' products and lower pricing brought on by the
general down-turn in the furniture industry. More of the Company's
competitors have begun introducing high quality products that directly compete
with the products offered by the Company. The Company's products are
sometimes more expensive than products sold by the Company's competitors in
the same markets. The Company believes that competition for its products is
generally based on product quality and characteristics, service and price.
Unless the Company adapts and responds to these competitive threats, the
Company will face margin pressure from low cost producers. Only certain
elements of the Company's products are patented so unpatented elements could
be reverse engineered and duplicated by competitors who are able to develop
the manufacturing equipment and processes to do so. The Company is not as
well known nor does it have the depth of financial resources as some of its
competitors. The Company's continued success will depend upon, among other
things, its ability to continue to manufacture and market high quality, high
performance products at prices competitive in the markets served by the
Company.
PRODUCT LINE EXPANSION STRATEGIES; ENTRY INTO NEW MARKETS. The Company's
expansion of its current product lines is contingent, among other things, upon
the Company's ability to develop and/or acquire additional lines of
complementary institutional furniture which can be purchased or manufactured
in a cost efficient manner and sold at competitive prices in the Company's
markets.
POTENTIAL DECREASE IN DEMAND FOR HEALTHCARE SEATING PRODUCTS. During fiscal
2002, our Broda operations became a more significant part of our consolidated
results of operations and contributed more significantly than in years past to
our net income. Sales of our healthcare seating products will decline if
insurance funding for the purchase of such products is limited or eliminated
or if regulatory changes occur that adversely affect the funding or demand for
such products. In addition, the Company may be unable to expand its
geographic markets for healthcare seating products.
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DISCONTINUED OPERATIONS. If the Company experiences delays in exiting or
selling its discontinued operations and if such operations begin to incur
losses, the Company may be unable to fund such losses and the actual amount of
such losses may exceed the amount estimated. While the Company's discontinued
operations have recently been a major contributor to the growing cash position
of the Company, these recent operating results are not necessarily indicative
of what can be expected for the future, prior to full disposal of the
discontinued operations. Actual losses may be less than or greater than those
originally estimated. The Company may not be able to profitably dispose of
such discontinued operations.
LOSS OF KEY CUSTOMERS. The loss of any key customers of the Company would
decrease the Company's revenue. Given the current environment in the
furniture industry, the Company cannot assure that it would be able to replace
such revenue or reduce its costs and therefore, the Company's profitably would
be adversely impacted.
RAW MATERIAL PRICES AND SOURCES. Both the plastic used in the Company's
products and the tubing used in the Company's table and chair legs are
manufactured according to Company specifications. The Company's multipurpose
room operations operates without substantial inventory levels of raw materials
by depending on certain key suppliers to provide raw materials on a "just-in-
time" basis. The Company believes that necessary materials are generally
available from alternate suppliers. However, any shortages or significant
interruptions in the delivery of raw materials could have a material adverse
effect on the Company's production schedule and operations. Price increases
for raw materials used in the Company's products and increases in labor costs
would put pressure on the Company's profit margins if the Company were unable
to pass such price increases through to customers.
WARRANTY SERVICE COSTSS The Company's warranty service costs for fiscal years
ended March 31, 2000, 2001, and 2002 totaled 1.2 percent of net sales or
$481,000, 1.4 percent of net sales or $590,000 and 1.4 percent of net sales or
$525,000, respectively. The Company intends to continue to offer warranties
covering materials and workmanship on its existing products and anticipates
providing a warranty covering materials and workmanship for all complementary
product lines developed or acquired by the Company. While the Company has
implemented improved quality control measures that it expects will reduce
warranty claims, it is possible that warranty servicing costs will increase in
future periods. Furthermore, the Company is not in a position to anticipate
the additional warranty service costs that may be incurred as a result of the
Company's expansion into new or complementary product lines. The Company also
cannot predict what the future warranty costs will be with respect to product
lines from recent acquisitions.
FUTURE VARIATIONS IN OPERATING RESULTS. The Company's short-term
profitability could be adversely affected by its decision to develop or
acquire complementary product lines, hire additional sales staff, pursue
additional acquisitions, and continue to integrate existing acquisitions.
Various factors, including acquisition related expenses, amortization of
goodwill, the ability to find and train qualified personnel, operational
transitions, timing of new product introductions and the cost of penetrating
new markets and changes in product mix, may have an adverse effect on the
Company's results of operations. While the Company believes that the addition
of new product lines will increase the Company's long term profitability,
there can be no assurance that the Company will continue to experience
profitability at historical rates. No assurances can be or are made that the
Company will not experience temporary fluctuations in operations and quarterly
variations in the future.
13
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS. Forward-looking statements contained herein include plans and
objectives of management for future operations, including plans and objectives
relating to the products, marketing, customers, product line expansions, cost
reductions to preserve margins, the planned exit or sale of the discontinued
DO Group and CenterCore operations. These forward-looking statements involve
risks and uncertainties and are based on certain assumptions that may not be
realized. Actual results and outcomes may differ materially from those
discussed or anticipated.
All forward-looking statements involve predictions and are subject to known
and unknown risks and uncertainties, including, without limitation, those
discussed below as well as general economic and business conditions, that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. Readers should not place undue
reliance on any such forward-looking statements, which speak only as of the
date made. The considerations listed below and elsewhere in this filing could
affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any views or
statements expressed with respect to future periods. Important factors and
risks that might cause such differences, include, but are not limited to those
factors referenced in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Forward Looking Statements and
Factors That May Affect Future Operating Results."
Item 2. Properties
The Company's corporate headquarters and multipurpose room furniture
manufacturing facility are located in Orem, Utah (approximately 40 miles south
of Salt Lake City). This facility consists of approximately 71,000 square
feet of leased manufacturing, office, research and development and storage
space located on approximately four acres of leased land. The facility and
related real estate are leased from a trust, of which Gregory L. Wilson's
uncle is one of the trustees, under a lease agreement for a five-year term
expiring in the year 2005. The base monthly lease payment is $17,100. The
Company pays all maintenance costs, taxes and insurance. In addition, the
Company purchased approximately nine acres of land across the street from its
leased facility. The Company used a portion of the property to construct a
57,000 square foot office and manufacturing facility to house its sales force
and multipurpose room chair operations. The Company estimates the new
property includes enough real estate to build approximately an additional
200,000 square feet of facility to support the future growth of the Company.
The Company also purchased an adjacent 2,400 square foot building that sits on
approximately one acre of land. The Company believes that by adding
additional equipment and production shifts, its existing facilities will serve
its current product lines for the term of the lease. However, if the
operation adds additional product lines and/or significantly modifies its
existing products lines, additional facilities may need to be constructed on
the Company's existing land.
14
The Company's healthcare seating manufacturing facilities are located in
Waterloo, Ontario, Canada (approximately 60 miles west of Toronto). These
facilities consist of two adjacent buildings with approximately 30,000 square
feet of leased manufacturing, office, research and development and storage
space. The facilities and related real estate are leased under an agreement
for a two-year term expiring in July 2002. The Company will then have the
option of renewing the lease for two years upon the same terms and conditions
for an amount mutually agreed upon. The base monthly lease payment is
approximately $9,000. The Company pays all maintenance costs, taxes and
insurance. The Company believes that these facilities will serve its
healthcare seating manufacturing needs for the term of the lease.
The Company's DO Group and CenterCore subsidiaries have a shared facility with
approximately 160,000 square feet of manufacturing, office, research and
development and storage space. Their headquarters and manufacturing
operations are located in Marked Tree, Arkansas. This facility is owned by DO
Group and includes its panel and systems manufacturing operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company maintains
insurance coverage against potential claims in an amount which it believes to
be adequate. There are no material pending legal proceedings, other than
routine litigation incidental to the business, to which the Company is a party
or of which any of the Company's property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2002.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market System
under the symbol "MITY". The Company's common stock first began trading on
April 29, 1994.
High Low
Fiscal Year Ended March 31, 2002:
First Quarter . . . . . . . . . . . . . . . . $ 9.84 $ 7.51
Second Quarter . . . . . . . . . . . . . . . . 8.70 7.00
Third Quarter . . . . . . . . . . . . . . . . 8.40 7.25
Fourth Quarter . . . . . . . . . . . . . . . . 14.99 8.00
Fiscal Year Ended March 31, 2001:
First Quarter . . . . . . . . . . . . . . . . $18.00 $11.63
Second Quarter . . . . . . . . . . . . . . . . 14.38 9.50
Third Quarter . . . . . . . . . . . . . . . . 10.56 4.88
Fourth Quarter . . . . . . . . . . . . . . . . 9.38 5.56
There were 146 security holders of record as of May 28, 2002. In addition,
management estimates that there were approximately 2,200 beneficial
shareholders. Since the closing of its public offering, the Company has not
declared dividends and intends to retain earnings for use in the business.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and the Notes thereto included in this Annual Report to
Shareholders. The statement of income data set forth below with respect to
the fiscal years ended March 31, 2002, 2001 and 2000 and the balance sheet
data at March 31, 2002 and 2001 are derived from, and should be read in
conjunction with the audited Financial Statements included in this Form 10-K.
The statement of income data set forth below with respect to the fiscal year
ended March 31, 1999 and 1998 and the balance sheet data at March 31, 2000,
1999 and 1998 are derived from audited financial statements not included in
this Form 10-K. Certain reclassifications have been made to the 1999 and 1998
balances to be consistent with the 2002 presentation including the
reclassifications of discontinued operations.
STATEMENT OF INCOME DATA
Year Ended March 31, 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
Net sales $40,094 $42,203 $37,395 $29,468 $25,337
Cost of products sold 23,738 25,504 22,286 18,122 15,988
-------- -------- -------- -------- --------
Gross profit 16,356 16,699 15,109 11,346 9,349
Expenses:
Selling 6,363 6,595 5,547 4,234 3,782
General and administrative 2,028 1,960 1,781 1,333 843
Research and development 1,158 874 799 549 488
-------- -------- -------- -------- --------
Income from continuing
operations 6,807 7,270 6,982 5,230 4,236
Interest and other, net 368 117 231 394 367
-------- -------- -------- -------- --------
Income before provision for
income taxes 7,175 7,387 7,213 5,624 4,603
Provision for income taxes 2,772 2,836 2,667 1,996 1,637
-------- -------- -------- -------- --------
Net income from continuing
operations 4,403 4,551 4,546 3,628 2,966
Earnings (loss) from
discontinued operations,
net of income tax (271) (4,547) 154 302 223
Estimated loss on disposal,
net of applicable income
tax (3,256) -- -- -- --
-------- -------- -------- -------- --------
Net income $ 876 $ 4 $4,700 $3,930 $3,189
17
Basic earnings per share
from continuing operations* $0.86 $0.90 $0.95 $0.75 $0.61
Basic earnings (loss) per
share from discontinued
operations* (0.05) (0.90) 0.03 0.06 0.05
Basic loss per share on
disposal of discontinued
operations* (0.64) -- -- -- --
-------- -------- -------- -------- --------
Basic earnings per share* $0.17 $0.00 $0.98 $0.81 $0.66
Weighted average common
shares outstanding
basic* 5,071,125 5,076,456 4,812,610 4,868,375 4,841,775
Diluted earnings per share
from continuing operations* $0.85 $0.87 $0.89 $0.72 $0.58
Diluted earnings (loss) per
share from discontinued
operations* (0.05) (0.87) 0.03 0.06 0.05
Diluted loss per share on
disposal of discontinued
operations* (0.63) -- -- -- --
-------- -------- -------- -------- --------
Diluted earnings per share* $0.17 $0.00 $0.92 $0.78 $0.63
Weighted average common
and common equivalent
shares outstanding
diluted* 5,208,924 5,216,604 5,120,247 5,037,680 5,084,180
* Retroactively restated for the 3-for-2 stock split distributed September 23,
1999.
BALANCE SHEET DATA
March 31, 2002 2001 2000 1999 1998
(in thousands)
Total assets $33,369 $32,287 $29,432 $23,463 $18,556
Working capital 18,365 16,300 13,574 14,374 12,895
Current portion of long-term debt -- -- -- 45 --
Long-term debt less current portion -- -- -- 97 --
Stockholders' equity 27,319 27,469 24,385 19,918 16,819
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company designs, manufactures, and markets institutional furniture. The
Company's current ongoing product lines consist of multipurpose room furniture
and healthcare seating. In addition, the Company continues to pursue
development of new products and the acquisitions of product lines or companies
that will be complementary to the Company's businesses.
MULTIPURPOSE ROOM FURNITURE. The Company's multipurpose room furniture line
consists of lightweight, durable, folding leg tables, stacking chairs, folding
chairs, lecterns, and other related products. These products are used in
multipurpose rooms of educational, recreational, hotel and hospitality,
government, office, healthcare, religious and other public assembly
facilities. Historically, growth in this segment has come from an expanding
base of new customers, from increasing sales to existing customers and from
expansion of the Company's multipurpose room product line. The current and
future growth of the Company's multipurpose room furniture operations is
largely dependent upon its ability to successfully introduce and market new
product lines of multipurpose room furniture and its ability to profitably
increase its market penetration into existing and new markets.
MULTIPURPOSE ROOM FURNITURE OUTLOOK. The downturn in the domestic and
international economy, particularly the downturn in the furniture industry and
some of the Company's target markets such as hospitality and recreation
industries, has negatively impacted the Company's historical sales growth
rates in fiscal 2002 and 2001. The events of September 11 have also
negatively impacted many of the Company's markets, particularly travel related
markets such as the hotel and hospitality, recreational and public assembly
markets. Industry experts predicted a decline in the U.S. office furniture
market of 18% for calendar year 2001 and further declines of 13% in calendar
year 2002. The Company has also seen significant competitive pressure in its
multipurpose room table markets from lower-priced thermo-formed and blow-
molded tables and expects this pressure to continue. Although the Company's
multipurpose room operations performed better through December 31, 2001 than
industry estimates, during the quarter ending March 31, 2002, sales volumes
were 24 percent lower compared to the prior year's fourth quarter. The
Company anticipates that weakness in furniture demand will continue until
overall business conditions improve. Recently, order rates have improved and
the Company anticipates that sales volumes during the quarter ending June 30,
2002 will be only slightly below the prior year's first quarter. Still, the
Company has been reducing costs to preserve margins and maintain its ability
to generate high levels of positive cash flow. Despite these efforts, the
Company may not be successful in achieving this sales level in the first
quarter or increasing its margins and generating high levels of positive cash
flow.
HEALTHCARE SEATING. Through its wholly-owned subsidiary, Broda Enterprises,
Inc., the Company markets a line of healthcare seating products to customers
in Canada and the United States. Broda's operations are based in Waterloo,
Ontario, Canada. Broda focuses on providing products which assist patients
with advanced needs due to a debilitating condition or disease, and has
developed a line of premium-priced geriatric seating products. Broda chairs
are serving a very specific niche in the healthcare market and thus are not
competing in the commodity-oriented general healthcare seating market.
19
HEALTHCARE SEATING OUTLOOK. The Company believes that the specialty
healthcare seating market is less subject to economic pressures than the
Company's multipurpose room furniture operations. For the year ended March
31, 2002, the Company's healthcare seating operations had not been negatively
impacted by the downturn in the U.S. economy. However, the medical and
healthcare industry is more subject to regulatory changes that could affect
the demand for Broda's products. The Company is not aware of any regulatory
changes in the near future that would have a substantial and negative impact
on this business. The Company's healthcare seating operation's future growth
is largely dependent upon increasing its market penetration into the U.S.
market and other foreign markets.
DISCONTINUED OPERATIONS. On March 31, 1997, the Company acquired a 49.9
percent equity interest in DO Group, Inc., a privately-held manufacturer of
office seating and office panel systems headquartered in Elkhart, Indiana. DO
Group marketed its products under the Domore , DO3, JG and Corel trade names
and had manufacturing facilities in Elkhart, Indiana and Marked Tree,
Arkansas. MITY Enterprises purchased its 49.9 percent equity interest for
$750,000 in cash and the payment of certain closing and due diligence costs
totaling $118,000.
On April 1, 2000, MITY Enterprises acquired the remaining 50.1 percent
interest in the DO Group, Inc. MITY Enterprises exchanged $2,127,000 in cash
and 40,905 shares of MITY Enterprises common stock valued at $678,000 for the
remaining 50.1 percent of DO Group stock from the DO Group shareholders. In
addition, MITY Enterprise assumed approximately $1,000,000 in long term debt
and another $2,510,000 in a revolving credit line. The acquisition was
treated for accounting purposes as a step purchase. DO Group, Inc. is now a
wholly-owned subsidiary of MITY Enterprises, Inc. Cash from the Company's
general working capital was used to fund the purchase.
On April 9, 1999, the Company acquired certain assets and obligations of The
CenterCore Group, Inc., a privately-owned designer, manufacturer and marketer
of call center furniture.
In July 2000, product manufacturing for CenterCore was transitioned to DO
Group, Inc., which was then a 49.9 percent-owned affiliate of the Company.
During the fiscal year ended March 31, 2000, C Core purchased finished goods
from DO Group, Inc. at an agreed upon percentage in excess of cost at the time
of shipment to the customer. Effective April 1, 2000, DO Group became a
wholly owned subsidiary of the Company.
During the consolidation of the Company's CenterCore and DO Group
manufacturing operations in Marked Tree, Arkansas, and until approximately
June 2001, the CenterCore and DO Group operations, particularly the office
systems operations located in Marked Tree, Arkansas, experienced various
operational challenges. Material and labor costs each increased as a percent
of sales. Overhead costs also increased both as a percentage of sales and in
the aggregate. The average sales prices of the Company's products declined a
result of discounting on a few large orders and offering customer service
discounts. In addition, there were delays in implementing management
information systems to fully support the operations. The operational
inefficiencies, information system problems, and their related costs
significantly and adversely impacted the Company's gross margin and customer
service levels and eroded the DO Group and CenterCore sales base. Because of
these problems, DO Group's and CenterCore's sales declined and cumulative
losses grew.
20
After acquiring and taking over the direct management of DO Group, the Company
worked to identify and resolve operational and other problems. The Company
took action to reduce the amount of losses incurred at DO Group and CenterCore
by reducing personnel costs through layoffs and implementing revised business
practices. The Company devoted additional management as well as outside
consulting resources to the resolution of these problems. DO Group and
CenterCore continued to sustain losses through June 2001. Beginning in July
2001, the operation was once again profitable and most of the operational
inefficiencies and information system problems had been resolved.
In December 2000, the Company announced it was seeking a buyer for the
CenterCore product line. In February 2001, the Company announced that it had
retained McDonald Investments, Inc. to investigate strategic alternatives for
the Company including the sale of all or parts of the Company. The Company
has since decided not to pursue a sale of the entire Company. However, during
the quarter ended June 30, 2001, the Company developed a plan for exiting and
selling the CenterCore and DO Group businesses. On June 29, 2001, the
Company's Board of Directors approved a plan for exiting and selling the
assets of the CenterCore and DO Group businesses.
As a result of these actions and in accordance with Accounting Principles
Board Opinion No. 30, Reporting the Results of Operations Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and
Infrequently Occurring Events and Transactions ("APB 30"), the Company is
treating the DO Group and CenterCore segment of its operations as a
discontinued operation. The net losses from operations for the discontinued
DO Group and CenterCore segment of the Company were $271,000 for the three
months ended June 30, 2001, net of applicable income taxes. An additional
estimated $3,256,000 loss was accrued for the three months ended June 30, 2001
to account for the expected losses on disposal and estimated operating losses
through the disposal date. For the nine months ended March 31, 2002, the
estimated operating loss, net of applicable taxes and transition costs, for
the discontinued segment was $316,000. The actual operating income, net of
applicable taxes and transition costs, for the same period was $681,000, or
$997,000 higher than estimated. Also, for the year ended March 31, 2002, the
net current assets of discontinued operations has decreased from $5.7 million
to $1.6 million as receivables have been collected and segments of the
business have been sold. This has resulted in the discontinued operations
becoming a major contributor to the growing cash position of the Company.
However, these results are not necessarily indicative of what can be expected
for future periods prior to full disposal of the remainder of the discontinued
operations. Actual losses may be less than or greater than those estimated.
On September 12, 2001, the Company completed the sale of its JG auditorium
seating line. The Company sold its inventory, intellectual property, tooling,
and limited machinery and equipment related to this product line for $88,000.
The book value of these assets at the time of sale was approximately $20,000.
21
On October 2, 2001, the Company completed the sale of its Domore seating line.
The Company sold inventory, intellectual property, tooling, machinery and
equipment, and limited furniture and fixtures related to this product line and
its Elkhart headquarters for $150,000 in cash and $350,000 of notes
receivable from the buyer. The first note receivable, totaling $100,000,
which bears interest at the prime rate (adjusted monthly) as published by the
Wall Street Journal, requires monthly payments of interest only. The
principal amount of this note receivable is due in April 2003. The second
note receivable, totaling $250,000, which also bears interest at the prime
rate, requires monthly payments of interest only from November 2001 through
January 2002 and monthly principal and interest payments beginning in February
2002. This note is being amortized over a five year period with a balloon
payment for the remaining unpaid principal balance due at the end of three
years in January 2005. The notes are secured by a subordinated security
interest in all of the assets of the buyer. Both of these notes were
discounted using a 20% interest rate and are valued on the balance sheet at
$82,000 and $185,000 respectively. Due to the uncertainty of the
collectability of the notes, the Company has established a reserve for the
entire notes receivable balance and any accrued interest receivable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of financial condition and results of operations
is based upon the Company's consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. These principles require the use of estimates and assumptions
that affect amounts reported and disclosed in the financial statements and
footnotes. The critical accounting policies for the Company which require
management to make assumptions about matters that are uncertain at the time of
the estimate include the allowance for doubtful accounts receivable, the
reserve for obsolete inventory, accruals for warranty expense, values for the
discontinued operations, intangible assets, notes receivable, and income
taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE: The Company exercises considerable
judgment in determining the ultimate collectability of its accounts
receivable. Several factors are used in making these judgments including the
customer credit quality, historical write-off experience and current economic
trends. The Company reviews these factors quarterly, and the allowance is
adjusted accordingly. If the financial condition of the Company's customers
were to deteriorate, an additional allowance may be required.
RESERVE FOR OBSOLETE INVENTORY: Inventories are stated at the lower of cost,
on a first in, first out basis, or market. Additionally, the Company
evaluates its inventory reserves in terms of excess and obsolete exposures.
This evaluation includes such factors as anticipated usage, inventory turnover
and ultimate product sales value.
ACCRUALS FOR WARRANTY EXPENSE: The Company provides for the estimated cost of
product warranties at the time revenue is recognized. This warranty
obligation is affected by failure rates, the introduction of new products, and
the costs of material and labor to repair or replace the product. The Company
regularly assesses the adequacy of its accrual for warranty expense based upon
historical warranty rates and anticipated future warranty rates.
22
VALUES FOR THE DISCONTINUED OPERATIONS: During the quarter ended June 30,
2001, the Company developed and approved a plan for exiting and selling the
specialty office seating and systems furniture segment of its operations. As
a result of these actions, the Company is treating this segment as a
discontinued operation. In the quarter ended June 30, 2001, an additional
estimated $3,256,000 loss was accrued to account for the expected loss on
disposal of this business segment and estimated operating losses through the
disposal date. Considerable judgment was used to make this estimate based on
many factors including the net realizable value of the accounts receivable and
inventory, the selling value of the fixed assets, the realization of tax
benefits, the likelihood of finding a buyer within a reasonable period of
time, likely asset purchase structures, and the ability to continue to run the
business while searching for a buyer without sustaining continued losses. Due
to the high level of uncertainty in this process, actual gains or losses may
be less than or greater than those estimated.
INTANGIBLE ASSETS: The Company periodically reviews the carrying value of its
intangible assets which represents goodwill that arose on the Broda
acquisition. This review is performed using estimates of future cash flows.
If the carrying value of the intangible asset is considered impaired, an
impairment charge is recorded for the amount by which the carrying value of
the intangible asset exceeds its fair value. No impairment charges have been
recorded related to Broda goodwill.
NOTES RECEIVABLE: The Company currently has two notes receivable with startup
development companies. The Company reviews these notes to determine likely
collectability. Since the notes are with startup development companies
without a history of an ability to create future cash flows, the Company bases
its belief in their collectability upon its understanding of the potential
future success of the products being developed. At this time, the Company has
chosen not to create any reserve on these notes receivable. Due to the high
level of uncertainty in the success of these products, these notes receivable
may not be ultimately realized. The Company also has a note receivable with a
dealer in Australia. The Company has created a reserve for a portion of this
note receivable based upon what the Company believes the liquidation value of
this operation to be.
INCOME TAXES: The Company has not provided a valuation allowance against the
deferred tax assets recorded in the financial statements. The Company
evaluates quarterly the realizability of its deferred tax assets based upon
expected future taxable income. Management believes that it is more likely
than not that future earnings will be sufficient to recover deferred tax
assets.
RESULTS OF OPERATIONS
The following discussion of the results of operations for prior years
including the comparison of fiscal years 2001 and 2000 and the accompanying
tables have been changed to reflect reclassifications due to the discontinued
operations.
23
The following table sets forth, for the periods indicated, the percentage of
net sales represented by items included in or derived from the Company's
Statements of Income.
Year Ended March 31, 2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold 59.2 60.4 59.6 61.5 63.1
------ ------ ------ ------ ------
Gross profit 40.8 39.6 40.4 38.5 36.9
Operating expenses:
Selling 15.8 15.6 14.8 14.4 14.9
General and administrative 5.1 4.7 4.8 4.5 3.3
Research and development 2.9 2.1 2.1 1.8 1.9
------ ------ ------ ------ ------
Income from continuing
operations 17.0 17.2 18.7 17.8 16.8
Interest and other, net 0.9 0.3 0.6 1.3 1.4
------ ------ ------ ------ ------
Income before tax 17.9 17.5 19.3 19.1 18.2
Provision for income taxes 6.9 6.7 7.1 6.8 6.5
------ ------ ------ ------ ------
Net income from continuing
operations 11.0% 10.8% 12.2% 12.3% 11.7%
====== ====== ====== ====== ======
COMPARISON OF FISCAL YEARS 2002, 2001 AND 2000
NET SALES
The Company's fiscal 2002 net sales of $40.1 million decreased 5 percent
compared to net sales in fiscal 2001. The decrease in sales in the current
year resulted primarily from the downturn in the domestic and international
economy and significant competitive pressures in the Company's multipurpose
room table markets. This decrease was partially offset by increased sales in
the Company's healthcare seating segment. For fiscal 2002, the multipurpose
room furniture segment experienced a sales decrease of 7 percent and the
healthcare seating segment experienced sales growth of 9 percent.
International sales for all product lines represented 13 percent and 11
percent of net sales for fiscal 2002 and 2001, respectively.
The Company's fiscal 2001 net sales of $42.2 million increased 13 percent
compared to net sales in fiscal 2000. This sales increase resulted primarily
from increased penetration into the multipurpose room and healthcare seating
markets. For fiscal 2001, the multipurpose room furniture and healthcare
seating segments reflected sales growth of 12 percent and 26 percent,
respectively. International sales for all product lines represented 11 and
12 percent of net sales for fiscal 2001 and 2000, respectively.
24
GROSS PROFIT
For the fiscal year ended March 31, 2002, gross profit as a percentage of net
sales increased 1 percentage point to 41 percent from 40 percent, as compared
to the prior year. The Company experienced increasing gross profit margins in
both the multipurpose room and the healthcare seating segments of the
business. The gross profit margin on multipurpose room furniture sales
increased by one percentage point due primarily to a higher average sales
price on the Company's table products as well as lower material costs,
partially offset by higher overhead costs on the Company's table and chair
products. The gross profit margin on healthcare seating and accessories sales
increased by two percentage points mainly due to lower material costs.
For the fiscal year ended March 31, 2001, gross profit as a percentage of net
sales remained constant at 40 percent as compared to the prior year.
Increasing gross profit margins in the healthcare seating businesses were
offset by lower gross profit margins in the Company's multipurpose room
operations. The gross profit margin on multipurpose room furniture sales
decreased by one percentage point due to slightly higher material, labor and
overhead costs on the Company's table products and increasing chair sales
which historically have carried lower gross profit margins. The gross profit
margin on healthcare seating and accessories sales increased by two percentage
points mainly due to increasing labor efficiencies.
OPERATING EXPENSES
For fiscal 2002, selling expenses were 16 percent of net sales as compared to
16 percent in the prior year. Actual expenses decreased by $0.23 million, or
4 percent. Multipurpose room furniture selling costs decreased by $0.47
million compared to the prior fiscal year. This decrease resulted primarily
from decreased personnel and commission costs resulting from lower sales and
lower trade show costs. Selling expenses in the healthcare seating
operations increased by $0.24 million compared to the prior fiscal year due
primarily to increased personnel costs. For fiscal 2001, selling expenses
were 16 percent of net sales as compared to 15 percent in the prior year.
Actual expenses increased by $1.05 million, or 19 percent. The increase as a
percentage of sales was primarily due to increases in the multipurpose room
business segment's selling expenses. Multipurpose room furniture selling
costs increased by $1.02 million over the prior fiscal year. This increase
resulted primarily from increased personnel and commission costs, additional
advertising expenditures, and higher trade show costs.
General and administrative expenses were 5 percent of net sales in fiscal
2002, 2001 and 2000. Actual expenses increased by 3 percent, or $0.07
million in fiscal 2002 over fiscal 2001 mainly due to increases in the
allowance for bad debt on receivables of $0.14 million for the multipurpose
room operations. This increase was partially offset by lower travel costs and
professional fees. Actual expenses increased $0.18 million in fiscal 2001
over fiscal 2000, or 10 percent, mainly from increased travel costs and
professional fees.
25
Research and development expenses were 3 percent of net sales in fiscal 2002
and 2 percent of net sales in fiscal 2001, and 2000. For fiscal 2002, actual
spending increased by 33 percent, or $0.28 million, as compared to fiscal
2001. This increase in actual spending resulted mainly from increased
research and development expenses related to new products in the Company's
multipurpose room and healthcare seating segments. For fiscal 2001, actual
spending increased by 9 percent, or $0.08 million, as compared to fiscal 2000.
This increase in actual spending resulted mainly from increasing expenditures
related to new products in the Company's multipurpose room business segment.
OTHER INCOME/EXPENSE
Other income and expenses netted to $0.37 million in fiscal 2002. Investment
income was $0.35 million, an increase of $0.25 million from the prior fiscal
year due to a higher average balance of cash and cash equivalents and
available-for-sale securities in the current fiscal year resulting from cash
flow from operations and liquidating assets related to the discontinued
operations. The Company incurred no interest expense for the year ended March
31, 2002 as compared to $0.02 million in the prior fiscal year. Other income
in fiscal 2002, which totaled $0.02 million, consisted of $0.04 million of
other income offset by net loss on asset disposal and realized foreign
currency exchange losses of $0.02 million.
Other income and expenses netted to $0.12 million in fiscal 2001. Investment
income was $0.09 million, a decrease of $0.18 million from the prior fiscal
year due to a lower average balance of cash and cash equivalents and
available-for-sale securities in fiscal 2001 resulting from acquisitions.
Interest expense was $0.02 million and other income, primarily resulting from
foreign currency gains, was $0.05 million.
NET INCOME FROM CONTINUING OPERATIONS
For reasons stated above, the Company's net income from continuing operations
for fiscal 2002 was $4.40 million, a decrease of $0.15 million or 3 percent
compared to fiscal 2001. For fiscal 2001, net income from continuing
operations was $4.55 million, an increase of $0.01 million compared to net
income in fiscal 2000.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial data for
the most recent twelve quarters. This quarterly financial data reflects, in
the opinion of Management, all adjustments necessary to present fairly the
results of operations for such periods. The operating results for any
quarter are not necessarily indicative of results for any future period. The
Company anticipates that operating results may fluctuate on a quarterly basis
depending upon a number of factors. Earnings per share information may not
add to match annual earnings per share information due to rounding.
26
UNAUDITED QUARTERLY FINANCIAL INFORMATION:
(in thousands, except per share amounts)
Q1 2000 Q2 2000 Q3 2000 Q4 2000
--------- --------- --------- ---------
Net sales $9,431 $9,173 $9,157 $9,634
Gross profit 3,863 3,868 3,680 3,698
Income before provision
for income tax 1,884 1,934 1,700 1,695
Net income from
continuing operations 1,182 1,213 1,075 1,076
Basic earnings per share* 0.25 0.25 0.22 0.22
Diluted earnings per share* 0.24 0.24 0.21 0.21
Q1 2001 Q2 2001 Q3 2001 Q4 2001
--------- --------- --------- ---------
Net sales $10,931 $10,815 $ 9,322 $11,135
Gross profit 4,243 4,191 3,772 4,493
Income before provision
for income tax 2,021 1,785 1,541 2,040
Net income from continuing
operations 1,249 1,106 953 1,243
Basic earnings per share* 0.25 0.22 0.19 0.24
Diluted earnings per share* 0.24 0.21 0.18 0.24
Q1 2002 Q2 2002 Q3 2002 Q4 2002
--------- --------- --------- ---------
Net sales $11,050 $10,132 $10,094 $ 8,818
Gross profit 4,623 4,072 4,131 3,530
Income before provision
for income tax 2,079 1,762 1,812 1,522
Net income from continuing
operations 1,275 1,087 1,108 933
Basic earnings per share* 0.25 0.21 0.22 0.19
Diluted earnings per share* 0.24 0.21 0.21 0.18
*Basic and diluted earnings per share information are for earnings from
continuing operations.
The Company's quarterly operating results can fluctuate significantly
depending on factors such as timing of new product introductions, market
acceptance of new products, increased competitive pressures, growth in the
institutional furniture market, acquisitions, expansion of international
operations, timing and expansion into complementary products such as chairs,
changes in raw material sources and costs, and adverse changes in general
economic conditions in any of the countries in which the Company does
business. The Company may experience quarterly variations in operating
results in the future.
27
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, which consist primarily of high-quality commercial
paper and repurchase agreements collateralized with U.S. Treasury securities,
totaled $8.93 million at March 31, 2002 which compared to $4.86 million at
March 31, 2001. In addition, the Company held available-for-sale securities
which totaled $4.59 million at March 31, 2002 as compared to $1.18 million at
March 31, 2001.
The following table highlights certain key cash flow and capital information
pertinent to the discussion that follows:
Year Ended March 31, 2002 2001
---------- ----------
Net cash provided by continuing operations $ 7,000,000 $ 740,000
Net cash provided by discontinued operations 3,217,000 5,349,000
Net purchases of available-for-sale securities (3,432,000) (1,179,000)
Purchases of property and equipment (1,198,000) (2,990,000)
Decrease (increase) in notes receivable (486,000) 19,000
Purchase of DO Group (net of cash acquired) -- (2,127,000)
Net proceeds from exercise of stock options
and issuance of shares to the 401(k) plan 418,000 2,418,000
Purchase and retirement of common stock (1,419,000) (450,000)
Increase decrease in bank line of credit -- (313,000)
Net cash used in financing activities
(discontinued operations) -- (2,563,000)
The increase in cash and cash equivalents for fiscal 2002 as compared to
fiscal 2001 was due primarily to cash generated from continuing operations
($7.00 million), cash generated from discontinued operations ($3.22 million),
and net proceeds related to the exercise of stock options ($0.42 million).
This increase was partially offset by cash used in the purchases of property,
plant and equipment ($1.20 million), net purchase of available-for-sale
securities ($3.43 million), buying back shares of the Company's common stock
($1.42 million), and an increase in note receivable ($0.49 million).
The decrease in cash and cash equivalents for fiscal 2001 as compared to
fiscal 2000 was due primarily to the purchase of the remaining 50.1% of DO
Group ($2.13 million), purchases of property, plant and equipment ($2.99
million), the reduction in the line of credit and long-term debt related to
the discontinued operations ($2.88 million), net purchase of available-for-
sale securities ($1.18 million) and buying back shares of the Company's common
stock ($0.45 million). This decrease was partially offset by cash generated
from operations ($6.09 million) and net proceeds related to the exercise of
stock options ($2.42 million).
Historically, the Company has financed its growth primarily through cash from
operations. The Company's subsidiary, Broda Enterprises, has a line of
credit. The limit on this facility is $0.63 million. As of March 31, 2002,
no amount was drawn under this facility. Among other restrictions, this
credit facility requires the maintenance of certain financial ratios and
levels of working capital. As of March 31, 2002, the Company was in full
compliance with the loan covenants related to this credit facility. The
Company's liquidity is partially dependent upon the availability of this
credit facility.
28
The Company currently believes that cash flow from its current operations
together with existing cash reserves and available lines of credit will be
sufficient to support its working capital requirements for its existing
operations for at least the next 12 months. During the last nine months, the
Company's discontinued Arkansas operations have no longer been a drain on the
Company's cash resources but have been a major contributor to the growing cash
position. However, if sales decrease and costs do not decline at the same
rate, or if the discontinued Arkansas operations again generate negative cash
flows, the Company's cash flow may be impeded. The Company cannot guarantee
that its working capital will be sufficient to support the Company's
operations. If the existing cash reserves, cash flow from operations and debt
financing are insufficient or if working capital requirements are greater than
currently estimated, the Company could be required to raise additional
capital. There can be no assurance the Company will be capable of raising
additional capital or that the terms upon which such capital will be available
to the Company will be acceptable. Additional sources of equity capital are
available to the Company through the exercise by holders of outstanding
options. At March 31, 2002, the proceeds which would have been received by
the Company upon exercise of outstanding options which were exercisable on
that date were approximately $2.86 million. There is no assurance that such
options will be exercised.
The Company's material cash commitments at March 31, 2002 consisted primarily
of current liabilities of $6.05 million to be paid from funds generated from
operations. Current liabilities consisted of the following:
Year Ended March 31, 2002 2001
---------- ----------
Accounts payable $1,649,000 $2,420,000
Accrued payroll 1,044,000 1,367,000
Accrued warranty expense 375,000 511,000
Reserve for loss at discontinued operation 2,534,000 --
Other accruals 448,000 520,000
---------- ----------
Total current liabilities $6,050,000 $4,818,000
========== ==========
The Company has also entered into a lease agreement with a related party for
its Orem production and office facility under which it is obligated to pay
$17,100 per month through March 2005. The Company has also entered into two
lease agreements for Broda's production and office facilities under which it
is obligated to pay $14,000 Canadian (approximately US $9,000) per month
through August 2002. As of March 31, 2002, future minimum payments under
noncancellable operating leases with terms in excess of one year are
approximately as follows:
Year Ended March 31,
2003 $ 241,000
2004 205,000
2005 205,000
2006 51,000
-------------------
Total $ 702,000
===================
29
During the quarter ended December 31, 2001, the Company invested $250,000 in
the form of a note receivable to a startup development company. In April
2002, the Company invested an additional $250,000 in the form of a note
receivable. The Company may, at its discretion, invest an additional $500,000
in notes in two increments over the next nine months. After this investment,
the Company has the option to convert these notes into common stock
representing approximately 51% of the outstanding stock of the startup
development company. In addition, the Company has an option to acquire the
remaining 49% of the outstanding stock. At this time, the Company believes
that this $500,000 will be fully realized. The Company anticipates using cash
from operations to fund these notes and the exercise of the option.
During the quarter ended March 31, 2002, the Company paid $50,000 as a good
faith deposit in a separate startup development company to investigate the
commercial development of a new technology. If the Company chooses to close
the transaction, the good faith deposit will be converted into 18.9 percent of
the equity of the startup development company. The Company has a further
option to purchase an additional 31.1 percent equity for an additional
$82,000. If the Company chooses not to close the transaction, the Company can
use the good faith deposit for the purchase of product from the startup
development company. The Company anticipates using cash from operations to
fund these notes and the exercise of the option, if executed.
On September 24, 2001, the Company announced its intention to repurchase up to
125,000 shares of the Company's common stock. On February 14, 2002, the
Company announced its intention to repurchase up to an additional 150,000
shares, bringing the total number of shares approved for repurchase to
275,000. As of March 31, 2002, approximately 155,000 shares had been
repurchased. Additional repurchases will reduce the Company's liquidity.
The Company is in the process of developing new products including a new
generation of multipurpose room tables. The Company anticipates additional
research and development expenditures in the next fiscal year, and that if
such product development efforts are successful, capital expenditures of
approximately $6 million may be required over the next twelve to eighteen
months. The Company anticipates funding this capital expenditures using
existing capital reserves as well as using cash from operations. However,
there is no assurance that such resources will be sufficient and that the
Company will not need to raise additional capital.
IMPACT OF INFLATION AND ENVIRONMENTAL REGULATIONS
The Company believes that inflation has not had a material effect on its
operating results. However, significant increases in the price of raw
materials could have a material adverse impact on the Company's results of
operations. In addition, compliance with environmental laws or regulations
has not had a material effect on the Company's operations.
30
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS
Certain statements made above in this filing that are not historical facts are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). In addition, when used in
this filing, the words or phrases "may," "will," "Management believes,"
"Company believes," "Company intends," "estimates," "projects," "anticipates,"
"expects" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Reform Act.
Forward-looking statements contained in this Annual Report on Form 10-K
include plans and objectives of management for future operations, including
plans and objectives relating to the products, marketing, customers, product
line expansions, cost reductions to preserve margins, the planned exit or sale
of the discontinued DO Group and CenterCore operations. These forward-looking
statements involve risks and uncertainties and are based on certain
assumptions that may not be realized. Actual results and outcomes may differ
materially from those discussed or anticipated. The forward-looking
statements and associated risks set forth herein and elsewhere in this filing
relate to:
- references to predicted declines in the institutional furniture and
U.S. office furniture markets and the Company's belief that
weakness in furniture demand will continue;
- statements that the Company anticipates that its sales volumes
during the first quarter of fiscal 2003 may be only slightly below
sales levels of the prior year's first quarter;
- references to anticipated continued competitive pressure in
multipurpose room table markets;
- references to the Company's efforts to reduce costs to preserve
margins and continue generating high levels of positive cash flows;
- the statement that the Company's healthcare seating operations are
less subject to economic pressures than its multipurpose room
furniture operations but more subject to changes in the regulatory
environment;
- statements that the Company believes the exit and sale of the DO
Group and CenterCore businesses will be completed by the end of the
first quarter of fiscal 2003;
- references to the estimated loss to be incurred from the exit or
sale of the DO Group and CenterCore businesses;
- statements related to the Company's expectation that increased
research and development costs in developing new products will
continue during at least the next fiscal year, and that if
such product development efforts are successful, capital
expenditures of approximately $6 million may be required over the
next twelve to eighteen months;
- statements relating to the Company's belief that cash flow from its
current operations, existing cash reserves, and available line of
credit will be sufficient to support its working capital
requirements to fund existing operations for at least the next
twelve months;
- statements relating to the Company's possible need to raise
additional capital if its cash flow from operations and debt
financing are insufficient to fund the Company's working capital
requirements; and
- statements related to anticipated capital expenditures.
31
All forward-looking statements involve predictions and are subject to known
and unknown risks and uncertainties, including, without limitation, those
discussed below as well as general economic and business conditions, that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. Readers should not place undue
reliance on any such forward-looking statements, which speak only as of the
date made. The considerations listed below and elsewhere in this filing could
affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any views or
statements expressed with respect to future periods. Important factors and
risks that might cause such differences, include, but are not limited to:
- a continued downturn in domestic and international economies and
business conditions specifically in the institutional furniture
industry;
- continued global tension related to the events of September 11,
2001 and U.S. military actions related thereto;
- increased competition in the Company's core businesses;
- the Company's inability for any reason to exit or sell the
CenterCore and DO Group businesses in a timely manner and find
buyers for the assets of such operations on acceptable terms;
- a downturn in the Company's discontinued operations and the
Company's inability to fund losses if they occur in the Company's
DO Group and CenterCore operations;
- loss of important customer contracts through increased price-based
and product quality competition especially in the Company's
multipurpose room furniture segment;
- limited management and key employee resources;
- declines in sales volumes and profit margins in the Company's core
businesses;
- lower than expected revenue, revenue growth, cash flow and gross
margins from the multipurpose room and healthcare seating
operations, higher materials and labor costs, or the Company's
inability, for any reason, to profitably introduce new products or
implement its marketing strategies in the healthcare seating and
multipurpose room markets;
- management's inability for any reason to manage effectively the
Company's operations;
- the Company's inability for any reason to develop new products and
expand successfully into new markets;
- the market's acceptance of products currently being developed by
the Company;
- the Company's ability to manufacture and market at current margins
high quality, high performance products at competitive prices;
- import restrictions and economic conditions in the Company's
foreign markets and foreign currency risks associated therewith;
- the Company's ability to maintain relatively low cost labor rates;
- the Company's ability to source a sufficient volume of acceptable
raw materials at current prices;
- increased product warranty service costs if warranty claims
increase as a result of the Company's new product introductions or
acquisitions or for any other reason;
- the Company's ability to refine and enhance the quality and
productivity of its manufacturing process;
- the Company's ability to locate and successfully consummate and
integrate acquisitions, if any, of complementary product lines or
companies on terms acceptable to the Company;
32
- the Company's ability to retain and maintain relationships with key
customers;
- the Company's ability to raise capital, if needed;
- the availability of insurance funding for the Company's healthcare
seating products;
- regulatory developments that adversely affect demand for the
Company's products, particularly the Company's healthcare seating
products; and
- other factors noted in "Item 1. Business-Risk Factors That May
Affect Future Results of Operations."
In light of the significant uncertainties inherent in forward-looking
statements, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company disclaims any obligation or
intent to update any such factors or forward-looking statements to reflect
future events or developments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manufacturers its products in the United States and Canada and
sells its products in those markets as well as in other countries. The
majority of the Company's sales and expenses are transacted in U.S. dollars
with limited transactions occurring in Canadian dollars or other foreign
currencies. For the year ended March 31, 2002, approximately 5.9 percent of
the Company's net sales, 6.8 percent of the Company's cost of products sold,
and 10.4 percent of the Company's operating expenses were denominated in
currencies other than the U.S. dollar. Foreign currency exchange rate
fluctuations did not have a material impact on the financial results of the
Company during fiscal 2002. The Company's healthcare chair operations have
occasionally entered into forward contracts for specific US$ denominated
accounts receivable. As of March 31, 2002, no forward contracts were
outstanding.
The economic impact of foreign exchange rate movements on the Company is
complex because such changes are often linked to variability in real growth,
inflation, interest rates, governmental actions and other factors. The
Company estimates that a 10 percent adverse change in foreign exchange rates
could have reduced operating profit by as much as $30,000 and $75,000 for the
fiscal years ended March 31, 2002 and 2001. As mentioned above, this
quantitative measure has inherent limitations and the sensitivity analysis
disregards the possibility of other effects that may offset such adverse
change.
33
MANAGEMENT'S STATEMENT
The Company's financial statements were prepared by management. Management is
responsible for the integrity and objectivity of the financial information
presented, including amounts that must necessarily be based on judgments and
estimates. The Company's financial statements were prepared in accordance
with accounting principles generally accepted in the United States.
The Company's independent auditors, Deloitte & Touche LLP, have audited these
financial statements. They have examined, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. They have
also assessed the accounting principles used and significant estimates made by
management, as well as evaluated the overall financial statement presentation
in order to arrive at an opinion on the fairness of the financial statements.
The Audit Committee of the Board of Directors is composed of directors who are
free of any relationship or personal interest that, in the opinion of the
Board of Directors, would interfere with their ability to exercise sound
judgment as a committee member. The purpose of the Audit Committee is to
provide assistance to the overall Board of Directors in fulfilling the Board's
responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting, reporting practices of the
corporation, and the quality and integrity of the financial reports of the
corporation. In so doing, it is the responsibility of the Audit Committee to
establish and maintain free and open means of communication between the
directors, the independent auditor, and the financial management of the
Company.
Based on a review and discussions of the Company's 2002 audited consolidated
financial statements with management and discussions with the independent
auditors, the Audit Committee recommended to the Board of Directors that the
Company's fiscal 2002 audited financial statements be included in the
Company's annual report on Form 10-K. The Board of Directors concurred.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of MITY Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of MITY
Enterprises, Inc. (formerly Mity-Lite, Inc.) and subsidiaries as of March 31,
2002 and 2001, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 2002. These financial statements are the responsibility of
MITY Enterprises' management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
financial statements of DO Group, Inc. for the year ended March 31, 2000, MITY
Enterprises' investment in which is accounted for by use of the equity method.
MITY Enterprises' equity of $368,000 in DO Groups's net income for the year
ended March 31, 2000, are included in the accompanying financial statements.
The financial statements of DO Group, Inc. for the year ended March 31, 2000
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such company, is
based solely on the report of such other auditors.
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 and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statements present fairly, in all material respects,
the financial position of MITY Enterprises, Inc. and subsidiaries at March 31,
2002 and 2001, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
May 20, 2002
35
CONSOLIDATED BALANCE SHEETS
March 31, 2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,926,000 $ 4,857,000
Available for sale securities 4,593,000 1,180,000
Accounts receivable, less allowances
of $346,000 at March 31, 2002 and
$302,000 at March 31, 2001 4,382,000 4,860,000
Inventories 1,235,000 1,525,000
Prepaid expenses and other current
assets 599,000 1,244,000
Deferred income tax assets 3,117,000 1,698,000
Net current assets of discontinued
operations 1,563,000 5,754,000
-------------- --------------
Total current assets 24,415,000 21,118,000
Property and equipment, net 6,286,000 6,207,000
Deferred income tax assets 405,000 590,000
Intangible assets, net 932,000 1,010,000
Notes receivable, net 486,000 -
Net noncurrent assets of discontinued
operations 845,000 3,362,000
-------------- --------------
$33,369,000 $32,287,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,649,000 $ 2,420,000
Accrued expenses and other current
liabilities 4,401,000 2,398,000
-------------- --------------
Total current liabilities 6,050,000 4,818,000
-------------- --------------
Total liabilities 6,050,000 4,818,000
Commitments and Contingencies (Note 11) - -
Stockholders' equity:
Preferred stock, par value $.10 per
share; authorized 3,000,000 shares;
no shares issued and outstanding - -
Common stock, par value $.01 per
share; authorized 10,000,000 shares;
issued and outstanding 5,000,343
shares at March 31, 2002 and
5,083,796 shares at March 31, 2001 50,000 51,000
Additional paid-in capital 11,755,000 11,686,000
Retained earnings 15,615,000 15,796,000
Accumulated other comprehensive loss (101,000) (64,000)
-------------- --------------
Total stockholders' equity 27,319,000 27,469,000
$33,369,000 $32,287,000
============== ==============
(See accompanying notes to consolidated financial statements)
36
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31, 2002 2001 2000
----------- ----------- -----------
Net sales $40,094,000 $42,203,000 $37,395,000
Cost of products sold 23,738,000 25,504,000 22,286,000
----------- ----------- -----------
Gross profit 16,356,000 16,699,000 15,109,000
----------- ----------- -----------
Operating expenses:
Selling 6,363,000 6,595,000 5,547,000
General and administrative 2,028,000 1,960,000 1,781,000
Research and development 1,158,000 874,000 799,000
----------- ----------- -----------
Total operating expenses 9,549,000 9,429,000 8,127,000
----------- ----------- -----------
Income from continuing operations 6,807,000 7,270,000 6,982,000
Other income (expense):
Interest expense - (24,000) (30,000)
Investment income 348,000 94,000 276,000
Other 20,000 47,000 (15,000)
----------- ----------- -----------
Total other income, net 368,000 117,000 231,000
----------- ----------- -----------
Income before provision for
income taxes 7,175,000 7,387,000 7,213,000
Provision for income taxes 2,772,000 2,836,000 2,667,000
----------- ----------- -----------
Net income from continuing
operations 4,403,000 4,551,000 4,546,000
Discontinued operations (Note 4):
Income (loss) from discontinued
operations (net of applicable
income tax benefit (expense)
of $166,000, $2,750,000, and
($84,000) for the periods
ended March 31, 2002, 2001,
and 2000, respectively) (271,000) (4,547,000) 154,000
Estimated loss on disposal (net
of applicable income tax
benefit of $1,545,000) (3,256,000) - -
----------- ----------- -----------
Net income $ 876,000 $ 4,000 $4,700,000
=========== =========== ===========
37
Basic earnings per share from
continuing operations $0.86 $0.90 $0.95
Basic earnings (loss) per share
from discontinued operations (0.05) (0.90) 0.03
Basic loss per share on disposal
of discontinued operations (0.64) - -
----------- ----------- -----------
Basic earnings per share $0.17 $0.00 $0.98
=========== =========== ===========
Weighted average number of
common shares basic 5,071,125 5,076,456 4,812,610
=========== =========== ===========
Diluted earnings per share from
continuing operations $0.85 $0.87 $0.89
Diluted earnings (loss) per share
from discontinued operations (0.05) (0.87) 0.03
Diluted loss per share on
disposal of discontinued
operations (0.63) - -
----------- ----------- -----------
Diluted earnings per share $0.17 $0.00 $0.92
=========== =========== ===========
Weighted average number of
common and common equivalent
shares diluted 5,208,924 5,216,604 5,120,247
=========== =========== ===========
(See accompanying notes to consolidated financial statements)
38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Additional Other Total
Stock Paid-In Retained Comprehensive Stockholders'
Par-Value Capital Earnings Income (Loss) Equity
- -----------------------------------------------------------------------------------------------------
Balance at April 1, 1999 $48,000 $7,806,000 $12,009,000 $55,000 $19,918,000
Comprehensive income:
Net income 4,700,000
Unrealized losses on available-
for-sale securities (5,000)
Foreign currency translation 85,000
-----------
Total comprehensive income 4,780,000
Issuance of 25,450 shares of common
stock from the exercise of options 128,000 128,000
Issuance of 12,198 shares of common
stock to the Company's 401(k) plan 119,000 119,000
Purchase and retirement of 48,750
shares of common stock (79,000) (522,000) (601,000)
Tax benefit of employee stock options 41,000 41,000
- -----------------------------------------------------------------------------------------------------
Balance at March 31, 2000 48,000 8,015,000 16,187,000 135,000 24,385,000
Comprehensive income (loss):
Net income 4,000
Unrealized gains on available-
for-sale securities 2,000
Foreign currency translation (201,000)
----------
Total comprehensive loss (195,000)
Issuance of 40,905 shares used to
acquire DO Group, Inc. 1,000 677,000 678,000
Issuance of 220,324 shares of common
stock from the exercise of options 2,000 2,126,000 2,128,000
Issuance of 26,765 shares of common
stock to the Company's 401(k) plan 290,000 290,000
Purchase and retirement of 27,780
shares of common stock (55,000) (395,000) (450,000)
Tax benefit of employee stock options 633,000 633,000
- -----------------------------------------------------------------------------------------------------
Balance at March 31, 2001 51,000 11,686,000 15,796,000 (64,000) 27,469,000
39
Comprehensive income:
Net income 876,000
Unrealized losses on available-
for-sale securities (19,000)
Foreign currency translation (18,000)
----------
Total comprehensive income 839,000
Issuance of 32,192 shares of common
stock from the exercise of options 195,000 195,000
Issuance of 38,955 shares of common
stock to the Company's 401(k) plan 223,000 223,000
Purchase and retirement of 154,600
shares of common stock (1,000) (361,000) (1,057,000) (1,419,000)
Tax benefit of employee stock options 12,000 12,000
- -----------------------------------------------------------------------------------------------------
Balance at March 31, 2002 $50,000 $11,755,000 $15,615,000 ($101,000) $27,319,000
=====================================================================================================
(See accompanying notes to consolidated financial statements)
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31, 2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 876,000 $ 4,000 $4,700,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Net loss (earnings) from discontinued
operations 3,527,000 4,547,000 (154,000)
Depreciation and amortization 1,178,000 965,000 804,000
Deferred taxes (1,234,000) (875,000) 36,000
Loss (gain) on disposal of property
and equipment 4,000 (2,000) (1,000)
Tax benefit from exercise of stock
options 12,000 633,000 41,000
Changes in assets and liabilities
(net of effects from purchase of DO
Group and CenterCore):
Accounts receivable 469,000 (466,000) (848,000)
Inventories 285,000 (156,000) 161,000
Prepaid expenses and other current
assets 644,000 (228,000) (293,000)
Accounts payable (768,000) (2,026,000) 536,000
Accrued expenses and other current
liabilities 2,007,000 (1,656,000) 155,000
---------- ---------- ----------
Net cash provided by continuing operations 7,000,000 740,000 5,137,000
Net cash provided by (used in)
discontinued operations 3,217,000 5,349,000 (2,923,000)
---------- ---------- ----------
Net cash provided by operating activities 10,217,000 6,089,000 2,214,000
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (10,673,000) (1,200,000) (3,057,000)
Sales and maturities of available-for-
sale securities 7,241,000 21,000 6,950,000
Proceeds from sale of property and
equipment 4,000 17,000 1,000
Purchases of property and equipment (1,198,000) (2,990,000) (2,695,000)
Decrease (increase) in notes receivable (486,000) 19,000 199,000
Cash received from affiliate - - 179,000
Increase in acquisition advances - - (158,000)
Purchase of CenterCore (net of cash
acquired) - - (5,342,000)
Purchase of DO Group (net of cash acquired) - (2,127,000) -
---------- ---------- ----------
Net cash used in continuing operations (5,112,000) (6,260,000) (3,923,000)
Net cash provided by (used in)
discontinued operations (36,000) (198,000) 299,000
---------- ---------- ----------
Net cash used in investing activities (5,148,000) (6,458,000) (3,624,000)
---------- ---------- ----------
41
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock
options and issuance of shares to the
401(k) plan 418,000 2,418,000 247,000
Purchase and retirement of common stock (1,419,000) (450,000) (601,000)
Increase (decrease) in bank line of credit - (313,000) 21,000
Decrease in long term debt - - (146,000)
---------- ---------- ----------
Net cash provided by (used in) continuing
operations (1,001,000) 1,665,000 (479,000)
Net cash used in discontinued operations - (2,563,000) -
---------- ---------- ----------
Net cash used in financing activities (1,001,000) (908,000) (479,000)
---------- ---------- ----------
Effect of exchange rate changes on cash 1,000 (7,000) 1,000
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 4,069,000 (1,284,000) (1,888,000)
Cash and cash equivalents at beginning of
year 4,857,000 6,141,000 8,029,000
---------- ---------- ----------
Cash and cash equivalents at end of year $8,926,000 $4,857,000 $6,141,000
========== ========== ==========
(See accompanying notes to consolidated financial statements)
42
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDED MARCH 31, 2002 2001 2000
---------- ---------- ----------
Cash paid during the year for income taxes $1,693,000 $1,247,000 $2,770,000
Cash paid for interest - 24,000 30,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
DO Group Acquisition:
In April of 2000, the Company acquired the remaining 50.1 percent interest in
DO Group, Inc. for $2,127,000 in cash and 40,905 shares of the Company's
common stock valued at the date of purchase at $678,000. These amounts, when
added to its previous net investment of $1,412,000, brought the Company's
total investment to $4,217,000. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 12,101,000
Cost in excess of fair value of assets 1,376,000
Cash and stock paid for the capital stock (4,217,000)
-------------
Liabilities assumed $ 9,260,000
=============
CenterCore Acquisition:
In April of 1999, the Company acquired certain assets and obligations of The
CenterCore Group, Inc. for $5,342,000. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 3,767,000
Cost in excess of fair value of assets 2,063,000
Cash paid for the assets (5,342,000)
-------------
Liabilities assumed $ 488,000
(See accompanying notes to financial statements)
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for each of the three years in the period ended March 31, 2002
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MITY Enterprises, Inc. (formerly Mity-Lite, Inc. and referred to as the
"Company") designs and manufactures multipurpose room furniture, healthcare
seating, and specialty systems furniture and markets these products in niche
markets. In addition, the Company continues to pursue acquisitions of product
lines or companies that will be complementary to the Company's businesses.
The Company markets its products throughout the United States, Canada and in
certain foreign countries. In August of 2000, the Company changed its name
from Mity-Lite, Inc. to MITY Enterprises, Inc.
DISCONTINUED OPERATIONS
During the quarter ended June 30, 2001, the Company developed and approved a
plan for exiting and selling the specialty office seating and systems
furniture segment of its operations. This segment consists of the CenterCore
and DO Group businesses. As a result of these actions, the Company is
treating DO Group and CenterCore as a discontinued operation (See Note 4.
Discontinued Operations).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
MITY Enterprises, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments which have a term
maturity not greater than three months.
AVAILABLE-FOR-SALE SECURITIES
Debt securities, which consist of municipal bonds, corporate bonds and
government agency securities, are classified as available-for-sale. When the
fair value of available-for-sale securities differs from the amortized cost,
the resulting unrealized gain or loss is recorded as a component of
comprehensive income (loss). The amortization of premiums and discounts on
debt securities in this category are included in investment income and
reflected in the amortized cost of the debt securities. The cost of
securities sold during the period is based on the specific identification
method. Interest on securities in this category are included in investment
income. For the years ended March 31, 2002, 2001, and 2000 the Company had
holding gains (losses) on available-for-sale securities of ($19,000), $2,000,
and ($5,000), respectively.
44
The contractual maturities of the available-for-sale securities held at March
31, 2002 and 2001 are summarized below:
Fiscal Year Ended March 31, 2002 2001
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Due in one year or less $1,011,000 $1,007,000 $ 178,000 $ 178,000
Due after one through two
years 3,612,000 3,586,000 - -
Due after three through four
years - - 1,000,000 1,002,000
---------- ---------- ---------- ----------
$4,623,000 $4,593,000 $1,178,000 $1,180,000
========== ========== ========== ==========
INVENTORIES
Inventories are stated at the lower of cost, on a first in, first out basis,
or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred, whereas major replacements and improvements
are capitalized and subsequently depreciated. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the lease term.
Depreciation and amortization on the Company's property and equipment are
provided on a straight-line basis over the estimated useful lives of the
related assets as follows:
Estimated Useful
Life (in years)
----------------
Machinery and equipment 5 to 10
Furniture and fixtures 3 to 5
Leasehold improvements 5 to 15
Buildings and improvements 30
INTANGIBLE ASSETS
Intangible assets represent goodwill that arose on the Broda acquisition. As
of March 31, 2002 and 2001, accumulated amortization totaled $230,000 and
$162,000, respectively.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables and cash equivalents.
In the normal course of business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing credit evaluations of
its customers and maintains allowances for possible losses which, when
realized, have been within the range of management's expectations.
45
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the notes receivable approximates its book value at March
31, 2002. The amortized cost of available-for-sale securities exceeds fair
value by $20,000 as of March 31, 2002. The fair value of available-for-sale
securities exceeds amortized cost by $2,000 as of March 31, 2001. The
carrying amount reported in the balance sheets for cash and cash equivalents,
accounts receivable, and accounts payable approximates fair value because of
the immediate or short-term maturity of these financial instruments.
INCOME TAXES (SEE NOTE 10. INCOME TAXES)
The Company uses an asset and liability approach for financial accounting and
reporting for income taxes. Deferred income taxes are provided for temporary
differences in the bases of assets and liabilities as reported for financial
statement purposes and income tax purposes.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for
Stock-Based Compensation" requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Since the Company has decided to continue applying
Accounting Principles Board (APB) Statement No. 25 (as permitted by SFAS No.
123), the required disclosure of the effects of SFAS No. 123 are included in
Note 8.
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
include the allowance for doubtful accounts receivable, the reserve for
obsolete inventory, accruals for warranty expense, and values for the
discontinued operations. Actual results could differ from these estimates.
LONG-LIVED ASSETS
Impairment of long-lived assets is determined in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets
to be Disposed Of." The Company evaluates the carrying value of long-term
assets based on current and anticipated undiscounted cash flows and recognizes
an impairment when such estimated cash flows will be less than the carrying
value of the asset. Measurement of the amount of impairment, if any, is based
upon the difference between carrying value and fair value.
During the year ended March 31, 2001, the Company announced it was seeking a
potential buyer of its CenterCore product line and determined that goodwill
was impaired. As a result, the Company incurred a $1,882,000 charge during
the prior year to write off all of the goodwill related to its CenterCore
operations. Since the Company is currently treating the DO Group and
CenterCore segments as discontinued operations, this impairment charge has
been reclassified to income (loss) from discontinued operations (See Note 4.)
COMPREHENSIVE INCOME (LOSS)
In accordance with SFAS 130, "Reporting Comprehensive Income," the Company's
comprehensive income (loss) consists of foreign currency adjustments and
unrealized holding gains and losses on available-for-sale securities.
46
RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 balances to be
consistent with the 2002 presentation including the reclassification of
discontinued operations as discussed in footnote 4.
2. INVENTORIES
Inventories consisted of the following:
March 31, 2002 2001
------------ ------------
Materials and supplies $ 747,000 $ 924,000
Work-in-progress 174,000 169,000
Finished goods 314,000 432,000
------------ ------------
$1,235,000 $1,525,000
============ ============
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, 2002 2001
------------ ------------
Machinery and equipment $4,985,000 $4,170,000
Furniture and fixtures 1,865,000 1,788,000
Leasehold improvements 700,000 670,000
Building and improvements 1,925,000 1,870,000
Land and improvements 1,306,000 1,298,000
------------ ------------
10,781,000 9,796,000
Less accumulated depreciation and amortization (4,495,000) (3,589,000)
------------ ------------
$6,286,000 $6,207,000
============ ============
4. DISCONTINUED OPERATIONS
On March 31, 1997, the Company acquired a 49.9 percent equity interest in DO
Group, Inc. ("Do Group"), a privately-held manufacturer of office seating and
office panel systems headquartered in Elkhart, Indiana. DO Group markets its
products under the Domore, DO3, JG and Corel trade names and has manufacturing
facilities in Elkhart, Indiana and Marked Tree, Arkansas. The Company
purchased its 49.9 percent equity interest for $750,000 in cash and the
payment of certain closing and due diligence costs totaling $118,000.
47
As part of the initial acquisition, the Company loaned $1,000,000 in a senior
subordinated note to a wholly-owned subsidiary of DO Group. As of March 31,
2000, the outstanding balance of the note had increased to $1,052,000 and was
included in note receivable from affiliate. The note, which was subordinated
to a financial institution's interest, was secured by inventories,
receivables, machinery and equipment, furniture and fixtures, real property,
and all other assets of DO Group. The note matured on April 30, 2000 and bore
interest at 10 percent payable quarterly. The Company believes the interest
rate approximated the market rate of interest for similar debt instruments
negotiated at arms length.
Until April 1, 2000, when the Company acquired the remaining 50.1 percent, the
Company utilized the equity method of accounting for its investment. Under
the equity method, the Company recognized its proportionate share of the
earnings of DO Group as incurred. For the year ended March 31, 2000, DO Group
contributed $368,000 to the Company's pretax profit.
On April 1, 2000, the Company acquired the remaining 50.1 percent interest in
the DO Group, Inc. the Company exchanged $2,127,000 in cash and 40,905 shares
of the Company's common stock valued at $678,000 for the remaining 50.1
percent of DO Group stock from the DO Group shareholders. In addition, the
Company assumed approximately $1,000,000 in long term debt and another
$2,510,000 in a revolving credit line. The acquisition was treated for
accounting purposes as a step purchase. DO Group is now a wholly-owned
subsidiary of the Company. Cash from the Company's general working capital
was used to fund the purchase.
On April 9, 1999, the Company acquired certain assets and obligations of The
CenterCore Group, Inc. ("CenterCore"), a privately-owned designer,
manufacturer and marketer of call center furniture.
Two wholly-owned subsidiaries of the Company completed the transactions. C
Core, Inc.("C Core"), a Utah corporation, purchased the accounts receivable,
inventory, machinery and equipment, intellectual property and certain other
assets of The CenterCore Group, Inc. for approximately $5,342,000.
BOCCC, Inc., also a Utah corporation and wholly-owned subsidiary of the
Company, purchased the outstanding subordinated debt obligations of CenterCore
for $500,000. The outstanding subordinated debt obligations of CenterCore
totaled approximately $2,000,000 at closing. Cash from the Company's general
working capital was used to fund the purchases. The allocation of the
purchase price resulted in approximately $2,063,000 of goodwill.
In July 2000, product manufacturing for CenterCore was transitioned to DO
Group, which was then a 49.9 percent-owned affiliate of the Company. During
the fiscal year ended March 31, 2000, C Core purchased finished goods from DO
Group, at an agreed upon percentage in excess of cost at the time of shipment
to the customer. Effective April 1, 2000, DO Group became a wholly owned
subsidiary of the Company.
48
During the consolidation of the Company's CenterCore and DO Group
manufacturing operations in Marked Tree, Arkansas, and until approximately
June 2001, the CenterCore and DO Group operations, particularly the office
systems operations located in Marked Tree, Arkansas, experienced various
operational challenges. Material and labor costs each increased as a percent
of sales. Overhead costs also increased both as a percentage of sales and in
the aggregate. The average sales prices of the Company's products declined as
a result of discounting on a few large orders and offering customer service
discounts. In addition, there were delays in implementing management
information systems to fully support the operations. The operational
inefficiencies, information system problems, and their related costs
significantly and adversely impacted the Company's gross margin and customer
service levels and eroded the DO Group and CenterCore sales base. Because of
these problems, DO Group's and CenterCore's sales declined and cumulative
losses grew.
After acquiring and taking over the direct management of DO Group, the Company
worked to identify and resolve operational and other problems. The Company
took action to reduce the amount of losses incurred at DO Group and CenterCore
by reducing personnel costs through layoffs and implementing revised business
practices. The Company devoted additional management as well as outside
consulting resources to the resolution of these problems. DO Group and
CenterCore continued to sustain losses through June 2001. Beginning in July
2001, the operation was once again profitable and most of the operational
inefficiencies and information system problems had been resolved.
In December 2000, the Company announced it was seeking a buyer for the
CenterCore product line. In February 2001, the Company announced that it had
retained McDonald Investments, Inc. to investigate strategic alternatives for
the Company including the sale of all or parts of the Company. The Company
has since decided not to pursue a sale of the entire Company. However, during
the quarter ended June 30, 2001, the Company developed a plan for exiting and
selling the CenterCore and DO Group businesses. On June 29, 2001, the
Company's Board of Directors approved a plan for exiting and selling the
assets of the CenterCore and DO Group businesses within a year's period of
time.
49
As a result of these actions and in accordance with APB Opinion No. 30,
Reporting the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary Unusual and Infrequently Occurring
Events and Transactions ("APB 30"), the Company is treating the DO Group and
CenterCore segment of its operations as a discontinued operation. The net
losses from operations for the discontinued DO Group and CenterCore segment of
the Company were $271,000 for the three months ended June 30, 2001, net of
applicable income taxes. An additional estimated $3,256,000 loss was accrued
for the three months ended June 30, 2001 to account for the expected losses on
disposal and estimated operating losses through the disposal date. For the
nine months ended March 31, 2002, the estimated operating loss, net of
applicable taxes and transition costs, for the discontinued segment was
$316,000. The actual operating income, net of applicable taxes and transition
costs, for the same period was $681,000, or $997,000 higher than estimated.
Also, for the year ended March 31, 2002, the net current assets of
discontinued operations has decreased from $5.7 million to $1.6 million as
receivables have been collected and segments of the business have been sold.
This has resulted in the discontinued operations becoming a major contributor
to the growing cash position of the Company. However, these results are not
necessarily indicative of what can be expected for future periods prior to
full disposal of the remainder of the discontinued operations. Actual losses
may be less than or greater than those estimated.
On September 12, 2001, the Company completed the sale of its JG auditorium
seating line. The Company sold its inventory, intellectual property, tooling,
and limited machinery and equipment related to this product line for $88,000.
The book value of these assets at the time of sale was approximately $20,000.
On October 2, 2001, the Company completed the sale of its Domore seating line.
The Company sold inventory, intellectual property, tooling, machinery and
equipment, and limited furniture and fixtures related to this product line and
its Elkhart headquarters for $150,000 in cash and $350,000 of notes receivable
from the buyer. The first note receivable, totaling $100,000, which bears
interest at the prime rate (adjusted monthly) as published by the Wall Street
Journal, requires monthly payments of interest only. The principal amount of
this note receivable is due in April 2003. The second note receivable,
totaling $250,000, which also bears interest at the prime rate, requires
monthly payments of interest only from November 2001 through January 2002 and
monthly principal and interest payments beginning in February 2002. This note
is being amortized over a five year period with a balloon payment for the
remaining unpaid principal balance due at the end of three years in January
2005. The notes are secured by a subordinated security interest in all of the
assets of the buyer. Both of these notes were discounted using a 20% interest
rate and are valued on the balance sheet at $82,000 and $185,000,
respectively. Due to the uncertainty of the collectability of the notes, the
Company has established a reserve for the entire notes receivable balance and
any accrued interest receivable.
50
Summarized financial information of the discontinued DO Group and CenterCore
segment consist of the following:
March 31, 2002 2001
------------ ------------
Current assets:
Accounts receivable $ 1,478,000 $ 3,211,000
Inventories 85,000 2,375,000
Prepaid expenses and other current assets - 168,000
------------ ------------
Total current assets $ 1,563,000 $ 5,754,000
============ ============
Non-current assets:
Property and equipment, net $ 845,000 $ 2,145,000
Intangibles and other assets, net - 1,217,000
------------ ------------
Total non-current assets $ 845,000 $ 3,362,000
============ ============
Net sales for this discontinued operation for the years ended March 31, 2002,
2001, and 2000 are as follows:
Year Ended March 31, 2002 2001 2000
---------- ---------- ----------
Net sales $13,553,000 $17,442,000 $10,102,000
5. NOTES RECEIVABLE
During the quarter ended December 31, 2001, the Company invested $250,000 in
the form of a note receivable to a startup development company. In April
2002, the Company invested an additional $250,000 in the form of a note
receivable. The Company may, at its discretion, invest an additional $500,000
in notes in two increments over the next nine months. After this investment,
the Company has the option to convert these notes into common stock
representing approximately 51% of the outstanding stock of the startup
development company. In addition, the Company has an option to acquire the
remaining 49% of the outstanding stock.
During the quarter ended March 31, 2002, the Company paid $50,000 as a good
faith deposit in a separate startup development company to investigate the
commercial development of a new technology. If the Company chooses to close
the transaction, the good faith deposit will be converted into 18.9 percent of
the equity of the startup development company. The Company has a further
option to purchase an additional 31.1 percent equity for an additional
$82,000. If the Company chooses not to close the transaction, the Company can
use the good faith deposit for the purchase of product from the startup
development company.
51
During the quarter ended March 31, 2002, the Company also set up a dealer for
the Company's multipurpose room furniture in Australia and created a note
receivable for $365,000. This note, which bears interest at the prime rate,
requires monthly payments of interest and principal in the amount of $6,000
and is being amortized over a six and one half year period. The note is
secured by all of the assets of the dealership and by personal guarantees from
the principals of the dealership. The Company has created a reserve of
$110,000 for this note receivable. At March 31, 2002, $68,000 was the current
portion of this note receivable which is included in prepaid expenses and
other current assets.
6. DEBT
The Company's wholly-owned subsidiary, Broda Enterprises had a line of credit,
bearing interest at Canadian prime (3.75 percent at March 31, 2002) which is
secured by a General Security Agreement, an assignment of insurance and
guarantees by the Company. The limit on this loan is $630,000. At March 31,
2002 and 2001, no balance was outstanding. Among other restrictions, this
credit facility requires the maintenance of certain financial ratios and
levels of working capital. As of March 31, 2002, the Company was in full
compliance with the loan covenants related to this credit facility.
7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
March 31, 2002 2001
------------ ------------
Accrued payroll and payroll taxes $ 1,044,000 $ 1,367,000
Accrued warranty 375,000 511,000
Reserve for discontinued operation 2,534,000 -
Other 448,000 520,000
------------ ------------
$ 4,401,000 $ 2,398,000
============ ============
8. COMMON STOCK OPTIONS
At March 31, 2002, the Company has two stock incentive plans, the 1990 Stock
Option Plan (the "1990 Plan") and the 1997 Stock Incentive Plan (the "1997
Plan"). The Company authorized and reserved 750,000 shares of common stock
for issuance under the 1990 Plan and 900,000 shares of common stock for
issuance under the 1997 Plan. Of this amount, 150,000 shares are subject to
shareholder approval. The purchase price for the shares under the Plans is
equal to the fair value of the common stock at the date the options are
granted as determined by the closing price listed on The Nasdaq Stock Market
except for shareholders holding more than ten percent of the outstanding
stock, whose options are issued at a ten percent premium to the then current
market value. A table of stock option activity is shown below:
52
Number Weighted Average
of Options Exercise Price
---------- ----------------
Outstanding at April 1, 1999 710,853 $ 8.28
Granted 51,653 14.91
Exercised (25,450) 5.35
Forfeited (10,150) 9.74
---------- ----------------
Outstanding at March 31, 2000 726,906 8.84
Granted 229,435 7.63
Exercised (220,324) 9.66
Forfeited (46,875) 9.93
---------- ----------------
Outstanding at March 31, 2001 689,142 8.10
Granted 122,850 8.62
Exercised (32,192) 6.07
Forfeited (50,227) 10.72
---------- ----------------
Outstanding at March 31, 2002 729,573 $ 8.09
========== ================
Options exercisable at March 31, 2002, 2001 and 2000 were 432,053, 366,294,
and 269,423, respectively. Options vest over a one- to four-year period and
are generally exercisable over ten-years.
The following table summarizes the combined information from the 1990 and 1997
Plans' options outstanding at March 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Out- Contractual Exercise Exercis- Exercise
Prices standing Life (in years) Price able Price
- ------------ -------- -------------- -------- -------- --------
$1.82-$2.33 75,701 2.05 $ 2.05 75,701 $ 2.05
4.08-5.75 64,500 3.92 4.86 64,500 4.86
6.08-7.75 195,719 8.63 6.91 66,018 7.07
8.15-8.20 74,000 9.99 8.15 0 N/A
9.67-11.75 272,453 7.08 10.22 199,478 10.30
12.96-15.50 47,200 8.00 14.76 26,356 14.75
- ------------ -------- -------------- -------- -------- --------
$1.82-$15.50 729,573 7.05 $ 8.09 432,053 $ 7.82
============ ======== ============== ======== ======== ========
The Company has applied APB Opinion 25 and related Interpretations in
accounting for its Plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost of the Company's
two stock-based compensation plans been determined based on the fair value at
the grant dates for awards under those plans consistent with SFAS No. 123, the
Company's net income and earnings per share would have changed to the pro
forma amounts indicated below:
53
Year Ended March 31, 2002 2001 2000
---------- ---------- ----------
Net income (loss):
As reported $ 876,000 $ 4,000 $4,700,000
Pro forma 624,000 (187,000) 4,413,000
Earnings (loss) per share - basic:
As reported $0.17 $0.00 $0.98
Pro forma $0.12 ($0.04) $0.91
Earnings (loss) per share - diluted:
As reported $0.17 $0.00 $0.92
Pro forma $0.12 ($0.04) $0.86
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000, respectively: expected
volatility of 44 percent, 44 percent, and 32 percent, risk free interest rates
of 3.62 percent, 5.53 percent and 6.18 percent, and expected lives of one to
four years. Under SFAS No. 123, the weighted average fair value per share of
options issued during the years ended March 31, 2002, 2001 and 2000 was $2.96,
$2.75, and $4.37, respectively.
9. EMPLOYEE BENEFIT PLANS
In January 1995, the Company established a defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting minimum age and service
requirements. Participants may contribute up to 20 percent of their gross
wages, subject to certain limitations. The plan provides for discretionary
matching contributions by the Company, as determined by the Board of
Directors. The discretionary amounts contributed to the plan for the years
ended March 31, 2002, 2001 and 2000 were $88,000, $87,000, and $75,000,
respectively.
In October 1996, the Board of Directors reserved up to 37,500 shares of MITY
Enterprises common stock to be issued under the provisions of the 401(k) plan.
An additional 50,000 shares of common stock were reserved in January 2000 and
an additional 100,000 shares of common stock were reserved in March 2002.
Shares are issued to the plan on a quarterly basis. The amounts issued to the
plan in MITY Enterprises common stock for the years ended March 31, 2002, 2001
and 2000 were $223,000, $290,000, and $119,000, respectively. As of March 31,
2002, 94,060 shares had been issued under the provisions of the plan.
Substantially all of the Arkansas union shop employees are covered under a
multi-employer pension plan. The current contribution rate is 22.5 cents for
each hour compensated. Pension expense for the years ended March 31, 2002,
2001, and 2000 were $32,000, $33,000, and none respectively.
54
10. INCOME TAXES
Income tax expense (benefit) from continuing operations consisted of the
following components:
Year Ended March 31, 2002 2001 2000
---------- ---------- ----------
Current:
Federal $2,121,000 $2,204,000 $2,150,000
State 330,000 345,000 338,000
Foreign 460,000 340,000 143,000
---------- ---------- ----------
Total current 2,911,000 2,889,000 2,631,000
---------- ---------- ----------
Deferred:
Federal (101,000) (31,000) 45,000
State (10,000) (3,000) 4,000
Foreign (28,000) (19,000) (13,000)
---------- ---------- ----------
Total deferred (139,000) (53,000) 36,000
---------- ---------- ----------
$2,772,000 $2,836,000 $2,667,000
========== ========== ==========
The tax provisions for continuing operations were at effective rates as
follows:
Year Ended March 31, 2002 2001 2000
---------- ---------- ----------
Federal statutory tax rates 34.0% 34.0% 34.0%
State / provincial income taxes,
net of federal benefit 3.3 3.3 3.3
Foreign tax 0.6 0.6 0.3
Goodwill amortization 0.6 0.6 -
Meals and entertainment 0.2 0.2 0.1
Foreign sale corporation (0.7) (0.5) (0.4)
Tax exempt interest - - (0.4)
Other 0.6 0.2 0.1
---------- ---------- ----------
38.6% 38.4% 37.0%
========== ========== ==========
55
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
March 31, 2002 2001
Current Long Term Current Long Term
Deferred tax assets:
Allowance for doubtful accounts $105,000 $137,000
Inventory 374,000 381,000
Vacation accrual 49,000 85,000
Warranty reserve and accrual 219,000 259,000
Discontinued operations 2,097,000 $128,000 667,000
Net operating loss carryforward 121,000 352,000 121,000 $714,000
AMT credit 30,000 31,000
Other accruals 152,000 1,000 48,000
--------- --------- --------- ---------
Total 3,117,000 511,000 1,698,000 745,000
Deferred tax liabilities:
Depreciation and amortization (34,000) (155,000)
Other accruals (72,000)
--------- --------- --------- ---------
Net deferred tax asset $3,117,000 $405,000 $1,698,000 $590,000
========= ========= ========= =========
At March 31, 2002, the Company had a net operating loss carryforward of
$1,253,000 which, if unused, expires in 2011.
11. COMMITMENTS
The Company leases a facility in Orem, Utah from a related party under an
operating lease which expires in March 2005 and is renewable at the then
current market rates for an additional five years. The agreement requires
minimum lease payments of $205,000 per year until expiration.
The Company leases two buildings in its Waterloo, Ontario, Canada location
under an operating lease which expires in July 2002. The Company will then
have the option of renewing the lease for two years upon the same terms and
conditions for an amount mutually agreed upon. The current agreement requires
lease payments of $36,000 for the first four months of fiscal year 2003.
As of March 31, 2002, future minimum payments under noncancellable operating
leases with terms in excess of one year are approximately as follows:
Year ending March 31:
2003 $ 241,000
2004 205,000
2005 205,000
2006 51,000
---------
Total $ 702,000
=========
The Company rents delivery vehicles on an as needed basis. The Company also
has other month to month lease agreements.
Total rent expense was $477,000, $564,000, and $264,000 for the years ended
March 31, 2002, 2001 and 2000, respectively. At March 31, 2002, the Company
has committed to purchasing $217,000 in raw materials inventory.
56
12. BUSINESS SEGMENT INFORMATION
In accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," management views the Company as being two continuing
business segments: multipurpose room furniture and healthcare seating. The
Company also has a discontinued segment consisting of specialty office systems
furniture. The multipurpose room furniture business segment manufactures and
markets lightweight, durable, folding leg tables, folding chairs, stacking
chairs, lecterns, and other related products. The Company's healthcare
seating segment manufactures and markets healthcare chairs and related
products. The discontinued specialty office systems furniture business
segment manufactures and markets open plan systems panel furniture, computer
free standing furniture, panel clusters and other related products. The
Company's healthcare seating segment represents all of the Company's foreign-
based sales.
Reportable segment data reconciled to the consolidated financial statements
for the fiscal year ended March 31, 2002, 2001 and 2000 are as follows:
Fiscal Year Ended March 31, 2002 2001 2000
----------- ----------- -----------
Net sales:
Multipurpose room furniture $35,334,000 $37,837,000 $33,923,000
Healthcare seating 4,760,000 4,366,000 3,472,000
----------- ----------- -----------
$40,094,000 $42,203,000 $37,395,000
=========== =========== ===========
Income from continuing operations:
Multipurpose room furniture $ 5,708,000 $ 6,351,000 $ 6,475,000
Healthcare seating 1,099,000 919,000 507,000
----------- ----------- -----------
$ 6,807,000 $ 7,270,000 $ 6,982,000
=========== =========== ===========
Depreciation & amortization expense:
Multipurpose room furniture $ 1,027,000 $ 799,000 $ 636,000
Healthcare seating 151,000 166,000 168,000
----------- ----------- -----------
$ 1,178,000 $ 965,000 $ 804,000
=========== =========== ===========
Capital expenditures, net:
Multipurpose room furniture $ 1,070,000 $ 2,910,000 $ 2,672,000
Healthcare seating 128,000 80,000 23,000
----------- ----------- -----------
$ 1,198,000 $ 2,990,000 $ 2,695,000
=========== =========== ===========
Fiscal Year Ended March 31, 2002 2001
------------ ------------
Total assets:
Multipurpose room furniture $28,215,000 $20,456,000
Healthcare seating 2,746,000 2,715,000
Discontinued operations (Specialty office
systems segment) 2,408,000 9,116,000
----------- -----------
$33,369,000 $32,287,000
=========== ===========
57
13. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
On July 7, 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133," an amendment of
FASB Statement No. 133, which establishes accounting and reporting standards
for derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133,
as amended, is effective for all quarterly and annual financial statements of
fiscal years beginning after June 15, 2000. The adoption of SFAS 133 by the
Company on April 1, 2001 did not have a significant impact on the Company.
On June 29, 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 establishes accounting and reporting standards for
business combinations. SFAS No. 141 is not anticipated to have a material
effect on the Company's financial results. SFAS No. 142 establishes
accounting and reporting standards for goodwill and intangible assets,
requiring impairment testing for goodwill and intangible assets, and the
elimination of periodic amortization of goodwill and certain intangibles. The
Company intends to adopt the provisions of SFAS No. 142 during the Company's
fiscal year 2003. At March 31, 2002, the Company had goodwill of $932,000
related to its healthcare seating operation and amortization for the year of
$68,000. The impact of this pronouncement on the Company's financial results
is currently being evaluated.
14. STOCK SPLIT
In August 1999, the Company's board of directors approved a 3-for-2 stock
split to be effected as a stock dividend. One additional share of common
stock was distributed on September 23, 1999 for every two shares held by
stockholders of record as of September 9, 1999. Fractional shares created as
a result of the stock split were paid in cash based upon the average of the
bid and ask price per share at the close of trading on September 9, 1999.
The effect of the stock split has been retroactively reflected in all common
shares and per share amounts in the financial statements and notes as if the
stock split had occurred prior to fiscal 1999.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table for fiscal years 2001 and 2000 has been changed to reflect
reclassifications due to the discontinued operations. Quarterly data
(unaudited) for the years ended March 31, 2002, 2001 and 2000 is as follows:
Unaudited Quarterly Financial Information:
(in thousands, except per share amounts)
Q1 2000 Q2 2000 Q3 2000 Q4 2000
------- ------- ------- -------
Net sales $9,431 $9,173 $9,157 $9,634
Gross profit 3,863 3,868 3,680 3,698
Income before provision for income tax 1,884 1,934 1,700 1,695
Net income from continuing operations 1,182 1,213 1,075 1,076
Basic earnings per share* 0.25 0.25 0.22 0.22
Diluted earnings per share* 0.24 0.24 0.21 0.21
58
Q1 2001 Q2 2001 Q3 2001 Q4 2001
------- ------- ------- -------
Net sales $10,931 $10,815 $ 9,322 $11,135
Gross profit 4,243 4,191 3,772 4,493
Income before provision for income tax 2,021 1,785 1,541 2,040
Net income from continuing operations 1,249 1,106 953 1,243
Basic earnings per share* 0.25 0.22 0.19 0.24
Diluted earnings per share* 0.24 0.21 0.18 0.24
Q1 2002 Q2 2002 Q3 2002 Q4 2002
------- ------- ------- -------
Net sales $11,050 $10,132 $10,094 $ 8,818
Gross profit 4,623 4,072 4,131 3,530
Income before provision for income tax 2,079 1,762 1,812 1,522
Net income from continuing operations 1,275 1,087 1,108 933
Basic earnings per share* 0.25 0.21 0.22 0.19
Diluted earnings per share* 0.24 0.21 0.21 0.18
* Basic and diluted earnings per share information are for earnings from
continuing operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None to report.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
sections of the Company's Proxy Statement filed in connection with its 2002
Annual Meeting of Stockholders entitled "Nominees" and "Directors and
Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section of the Company's Proxy Statement filed in connection with its 2002
Annual Meeting of Stockholders entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section of the Company's Proxy Statement filed in connection with its 2002
Annual Meeting of Stockholders entitled "Security Ownership of Management and
Others."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections of the Company's Proxy Statement filed in connection with its 2002
Annual Meeting of Stockholders entitled "Executive Compensation" and "Certain
Transactions."
60
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Exhibits
Index to Exhibits
Exhibit No. Description
2.1 Contribution Agreement dated as of March 24, 1997 by and among Estate
of Chester E. Dekko, David Kebrdle, Dennis and Mary M. Kebrdle,
Domenic and Martha S. Federico, ChiCol Group, Inc., DO Group, Inc.,
Sican Corp., Sican II Corp., DO Group Holding, Inc. and Mity-Lite,
Inc. incorporated by reference to the referenced exhibit number to the
Company's Form 8-K dated March 31, 1997.
2.2 Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite,
Inc. and Xaio, Inc. incorporated by reference to the referenced
exhibit number to the Company's Form 8-K dated March 31, 1997.
2.3 Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite,
Inc. and Ellman Equities, Inc. incorporated by reference to the
referenced exhibit number to the Company's Form 8-K dated March 31,
1997.
2.4 Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite,
Inc. and Key Equity Capital Corporation incorporated by reference to
the referenced exhibit number to the Company's Form 8-K dated March
31, 1997.
2.5 Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite,
Inc. and National City Capital Corporation incorporated by reference
to the referenced exhibit number to the Company's Form 8-K dated March
31, 1997.
2.6 Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite,
Inc. and Cardinal Development Capital Fund I incorporated by reference
to the referenced exhibit number to the Company's Form 8-K dated March
31, 1997.
2.7 Term Loan Agreement dated as of March 24, 1997 between Mity-Lite, Inc.
and Sican Corp. incorporated by reference to the referenced exhibit
number to the Company's Form 8-K dated March 31, 1997.
2.8 Put Agreement dated as of March 24, 1997 by and among Mity-Lite, Inc.
and Dennis Kebrdle, David Kebrdle, Domenic Federico, ChiCol Group,
Inc., Sican II Corp., and DO Group, Inc. incorporated by reference to
the referenced exhibit number to the Company's Form 8-K dated March
31, 1997.
2.9 Stock Purchase Agreement dated as of November 20, 1998, by and among
Mity-Lite Acquisition Corp. and Stephen E. Brotherston, Glenn C.
Brotherston, Ian D. Brotherston, Margaret E. Brotherston and Sandra L.
Brotherston incorporated by reference to the referenced exhibit number
to the Company's Form 8-K dated November 25, 1998.
2.10 Asset Purchase Agreement dated as of April 9, 1999, by and among The
CenterCore Group, Inc., a Delaware Corporation, Fleet Capital
Corporation, a Rhode Island Corporation, and C Core, Inc., a Utah
Corporation and wholly owned subsidiary of Mity-Lite, Inc.
incorporated by reference to the referenced exhibit number to the
Company's Form 8-K dated April 9, 1999.
61
2.11 Form of Assignment Agreement by and among BOCCC, Inc., a Utah
Corporation and wholly owned subsidiary of Mity-Lite, Inc., and
various parties holding subordinated debt instruments of The
CenterCore Group, Inc. This form of Assignment Agreement is
substantially the same agreement that was signed by BOCCC, Inc. and
nine different subordinated debt holders incorporated by reference to
the referenced exhibit number to the Company's Form 8-K dated April 9,
1999.
2.12 Stock Purchase Agreement, By and Among DO Group Holding, Inc., David
Kebrdle, Mary M. Kebrdle, Martha S. Federico, Estate of Chester E.
Dekko, Dennis Kebrdle, Domenic Federico and Mity-Lite, Inc. dated
March 17, 2000 incorporated by reference to the referenced exhibit
number to the Company's Form 8-K dated April 1, 2000.
3.1 Amended and Restated Articles of Incorporation of the Registrant
incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
3.2 Amended and Restated Bylaws of the Registrant incorporated by
reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
3.3 First Amendment to the Amended and Restated Bylaws of Registrant
incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
4.1 Form of Stock Certificate incorporated by reference to the referenced
exhibit number to the Company's Registration Statement on Form SB-2,
Reg. No. 33-76758-D.
10.1 Revolving Note dated March 16, 1992 and Revolving Loan Agreement dated
March 16, 1992 between the Registrant and First Security Bank of Utah,
N.A. incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.2 Modification Agreement dated March 16, 1993 between the Registrant and
First Security Bank of Utah, N.A. incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on
Form SB-2, Reg. No. 33-76758-D.
10.3 Lease Agreement dated November 1, 1993 between the Registrant and the
Walter M. and Orpha M. Lewis Family Trust incorporated by reference to
the referenced exhibit number to the Company's Registration Statement
on Form SB-2, Reg. No. 33-76758-D.
10.4 Trademark License dated November 23, 1993 between the Registrant and
R.D. Werner Co., Inc. incorporated by reference to the referenced
exhibit number to the Company's Registration Statement on Form SB-2,
Reg. No. 33-76758-D.
10.5 Solicitation, Offer and Award Contract between the Registrant and the
General Services Administration Federal Supply Service dated January
27, 1992 (issued March 6, 1990) and Amendments thereto dated January
27, 1992 (effective July 16, 1990), January 27, 1992 (effective
December 1, 1990), January 27, 1992 (effective December 28, 1991) and
the Revision of August 24, 1992 incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on
Form SB-2, Reg. No. 33-76758-D.
10.6 Notice of Contract Award dated June 23, 1993 between the Registrant
and the Commonwealth of Virginia, Department of General Services
Division of Purchases and Supply incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on
Form SB-2, Reg. No. 33-76758-D.
10.7 Agreement dated July 26, 1990 between the Registrant and the State of
Utah, Department of Administrative Services and Revisions thereto
dated March 8, 1991, June 5, 1991, and May 19, 1992 and March 10, 1993
incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
62
10.8 Agreement dated December 17, 1991 between the Registrant and the Air
Force Nonappropriated Fund Purchasing Office incorporated by reference
to the referenced exhibit number to the Company's Registration
Statement on Form SB-2, Reg. No. 33-76758-D.
10.9 Purchasing Contract effective October 1, 1993 between the Registrant
and The Corporation of the Presiding Bishop of The Church of Jesus
Christ of Latter-Day Saints incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on
Form SB-2, Reg. No. 33-76758-D.
10.10 Employment Agreement with attached Proprietary Information Agreement
dated effective as of May 21, 1993 between Registrant and Gregory L.
Wilson incorporated by reference to the referenced exhibit number to
the Company's Registration Statement on Form SB-2, Reg. No. 33-76758-
D.
10.11 Employment Agreement with attached Proprietary Information Agreement
dated effective as of May 21, 1993 between Registrant and Stanley L.
Pool incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.12 Employment Agreement with attached Proprietary Information Agreement
dated effective as of May 21, 1993 between Registrant and Kenneth A.
Law incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.13 Employment Agreement with attached Proprietary Information Agreement
dated effective as of February 16, 1994 between Registrant and Brent
Bonham incorporated by reference to the referenced exhibit number to
the Company's Registration Statement on Form SB-2, Reg. No. 33-76758-
D.
10.14 Employment Agreement with attached Proprietary Information Agreement
dated effective as of February 16, 1994 between Registrant and Bradley
T Nielson incorporated by reference to the referenced exhibit number
to the Company's Registration Statement on Form SB-2, Reg. No. 33-
76758-D.
10.15 1990 Stock Option Plan, as amended and Form of Stock Option Agreements
incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.16 Form of Indemnification Agreements between Registrant and officers and
directors of Registrant incorporated by reference to the referenced
exhibit number to the Company's Registration Statement on Form SB-2,
Reg. No. 33-76758-D.
10.17 Form of Lock-up Agreements with Shareholders incorporated by reference
to the referenced exhibit number to the Company's Registration
Statement on Form SB-2, Reg. No. 33-76758-D.
10.18 Form of Confidentiality Agreement entered into with employees of the
Registrant incorporated by reference to the referenced exhibit number
to the Company's Registration Statement on Form SB-2, Reg. No. 33-
76758-D.
10.19 Key-Man Insurance Policy between the Company and Chubb Sovereign Life
Insurance Company incorporated by reference to the referenced exhibit
number to the Company's Registration Statement on Form SB-2, Reg. No.
33-76758-D.
10.20 Distributor Agreement between the Company and Sebel Furniture Limited
dated February 14, 1994 incorporated by reference to the referenced
exhibit number to the Company's Form 10-KSB for the year ended March
31, 1994.
10.21 Lease Agreement dated March 31, 1995 between the Company and the
Walter M. and Orpha M. Lewis Family Trust incorporated by reference to
the referenced exhibit number to the Company's Form 10-KSB for the
year ended March 31, 1995.
63
10.22 Exclusive Distributor Agreement between the Company and Mobilite
International Limited (aka Mity-Lite (Europe) Limited) incorporated by
reference to the referenced exhibit number to the Company's Form 10-
KSB for the year ended March 31, 1995.
10.23 Purchasing Contract effective October 1, 1995 between the Registrant
and The Corporation of the Presiding Bishop of The Church of Jesus
Christ of Latter-Day Saints incorporated by reference to the
referenced exhibit number to the Company's Form 10-QSB for the quarter
ended December 31, 1995.
10.24 Promissory Note dated December 6, 1995 between the Registrant and
Zions First National Bank incorporated by reference to the referenced
exhibit number to the Company's Form 10-QSB for the quarter ended
December 31, 1995.
10.25 Promissory Note dated October 27, 1995 between Registrant and First
Security Bank incorporated by reference to the referenced exhibit to
the Company's Form 10-KSB for the year ended March 31, 1996.
10.26 Summary Plan Description and Basic Plan Document for the 1995 Mity-
Lite,Inc. Employee Retirement Plan incorporated by reference to the
referenced exhibit number to the Company's Form 10-KSB for the year
ended March 31, 1996.
10.27 Promissory Note dated January 23, 1997 between the Registrant and
Zions First National Bank incorporated by reference to the referenced
exhibit number to the Company's Form 10-KSB for the year ended March
31, 1997.
10.28 Modification Agreement (dated October 27, 1996) to Promissory Note
dated October 27, 1995 between the Registrant and First Security Bank
incorporated by reference to the referenced exhibit number to the
Company's Form 10-KSB for the year ended March 31, 1997.
10.29 Lease Agreement Amendment dated October 31, 1996 between the Company
and the Walter M. and Orpha M. Lewis Family Trust incorporated by
reference to the referenced exhibit number to the Company's Form 10-
KSB for the year ended March 31, 1997.
10.30 Promissory Note dated December 15, 1997 between the Registrant and
Zions First National Bank incorporated by reference to the referenced
exhibit number to the Company's Form 10-KSB for the year ended March
31, 1998.
10.31 Modification Agreement (dated October 25, 1997) to Promissory Note
dated October 27, 1995 between the Registrant and First Security Bank
incorporated by reference to the referenced exhibit number to the
Company's Form 10-KSB for the year ended March 31, 1998.
10.32 1997 Stock Incentive Plan and Form of Agreements incorporated by
reference to the referenced exhibit number to the Company's Form 10-
KSB for the year ended March 31, 1998.
10.33 Promissory Note dated November 18, 1998 between the Registrant and
Zions First National Bank incorporated by reference to the referenced
exhibit number to the Company's Form 10-K for the year ended March 31,
1999.
10.34 Promissory Note dated May 26, 2000 between the Registrant and Zions
First National Bank incorporated by reference to the referenced
exhibit number to the Company's Form 10-K for the year ended March 31,
2000.
10.35 Form of Employment Agreement between the Company and its Executive
Officers incorporated by reference to the referenced exhibit number
to the Company's Form 10-K for the year ended March 31, 2001.
11.1 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Crowe, Chizek and Company LLP.
99 Independent Auditors' Report to the Directors of DO Group, Inc.
64
(B) Reports on Form 8-K
Form 8-K filed on February 6, 2002 to report Company's third quarter
financial results.
Form 8-K filed on February 15, 2002 to report Company's increasing
of stock repurchase program.
(C) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required,
not applicable, or the information is otherwise set forth in the
financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of MITY Enterprises, Inc.:
We have audited the consolidated financial statements of MITY Enterprises,
Inc. and subsidiaries (the Company) as of March 31, 2002 and 2001, and for
each of the three years in the period ended March 31, 2002, and have issued
our report thereon dated May 20, 2002; such financial statements and report
are included elsewhere in this Form 10-K. Our audits also included the
financial statement schedule of the Company, listed in Item 14. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
Salt Lake City, Utah
May 20, 2002
65
MITY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2002, 2001 AND 2000
Additions
Balance Charged Acquisitions
at to Costs from Deductions Balance
Beginning and Acquired from at End
of Period Expenses Companies Reserves of Period
--------- --------- ------------ ---------- ---------
ACCOUNTS RECEIVABLE ALLOWANCE:
Year ended:
March 31, 2002 $302,000 $ 73,000 - $ 29,000 $346,000
March 31, 2001 287,000 128,000 - 113,000 302,000
March 31, 2000 395,000 51,000 - 159,000 287,000
INVENTORY RESERVES:
Year ended:
March 31, 2002 $25,000 $25,000 - - $50,000
March 31, 2001 5,000 20,000 - - 25,000
March 31, 2000 5,000 - - - 5,000
RESERVE ON NOTE RECEIVABLE
Year Ended:
March 31, 2002 - $110,000 - - $110,000
March 31, 2001 - - - - -
March 31, 2000 - - - - -
These amounts do not include reserves and allowances related to the
discontinued operations. As of March 31, 2002, the discontinued operations
had an accounts receivable allowance of $104,000, inventory reserves of
$972,000, and a reserve on note receivable of $342,000.
66
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Orem, State of Utah, on the 29th of
May, 2002.
MITY ENTERPRISES, INC.
By:/s/ Gregory L. Wilson
Gregory L. Wilson, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
/s/ Gregory L. Wilson Chairman of the Board, President, May 29, 2002
Gregory L. Wilson Chief Executive Officer, and
Director
(Principal Executive Officer)
/s/ Bradley T Nielson Chief Finanacial Officer and May 29, 2002
Bradley T Nielson Chief Operating Officer
(Principal Financial and Accounting
Officer)
/s/ Ralph E. Crump Director May 29, 2002
Ralph E. Crump
/s/ Peter Najar Director May 29, 2002
Peter Najar
/s/ C. Lewis Wilson Director May 29, 2002
C. Lewis Wilson
/s/ Hal B. Heaton Director May 29, 2002
Hal B. Heaton