1
U.S. Securities and Exchange Commission
Washington, D.C. 20549
------------------------------------------------------------
Form 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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)
Registrant's telephone number: (801) 224-0589
N/A
(Former name, former address and former fiscal year, if changed since last
report)
------------------------------------------------------------
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
There were 4,139,233 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on October 28, 2002.
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
ASSETS 2002 2002
Current assets: ------------ ------------
Cash and cash equivalents. . . . . . . . . . $ 2,254,000 $ 8,926,000
Available-for-sale securities. . . . . . . . 1,742,000 4,593,000
Accounts receivable, less allowances of
$344,000 at September 30, 2002 and
$346,000 at March 31, 2002 . . . . . . . . 5,015,000 4,382,000
Inventories. . . . . . . . . . . . . . . . . 1,391,000 1,235,000
Prepaid expenses and other current assets. . 348,000 599,000
Deferred income taxes, current . . . . . . . 2,769,000 3,117,000
Net current assets of discontinued
operations . . . . . . . . . . . . . . . . 511,000 1,563,000
------------ ------------
Total current assets . . . . . . . . . . . . . 14,030,000 24,415,000
Property and equipment, net. . . . . . . . . . 8,554,000 6,286,000
Deferred income taxes. . . . . . . . . . . . . 700,000 405,000
Goodwill, net. . . . . . . . . . . . . . . . . 942,000 932,000
Notes receivable . . . . . . . . . . . . . . . 211,000 486,000
Net noncurrent assets of discontinued
operations . . . . . . . . . . . . . . . . . 869,000 845,000
------------ ------------
Total assets . . . . . . . . . . . . . . . . . $25,306,000 $33,369,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 1,875,000 1,649,000
Accrued expenses and other current
liabilities. . . . . . . . . . . . . . . . 4,488,000 4,401,000
------------ ------------
Total current liabilities. . . . . . . . . . . 6,363,000 6,050,000
COMMITMENTS AND CONTINGENCIES. . . . . . . . . -- --
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 4,136,070 at Sept. 30,
2002 and 5,000,343 at March 31, 2002 . . 41,000 50,000
Additional paid-in capital . . . . . . . . 9,827,000 11,755,000
Retained earnings. . . . . . . . . . . . . 9,150,000 15,615,000
Accumulated other comprehensive loss . . . (75,000) (101,000)
------------ ------------
Total stockholders' equity . . . . . . . . . 18,943,000 27,319,000
------------ ------------
Total liabilities and stockholders' equity . . $25,306,000 $33,369,000
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
3
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED SEPT. 30,
2002 2001
------------ ------------
Net sales . . . . . . . . . . . . . . . . . . . . $10,777,000 $10,132,000
Cost of products sold . . . . . . . . . . . . . . 6,272,000 6,060,000
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . 4,505,000 4,072,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 1,530,000 1,629,000
General and administrative. . . . . . . . . . . 707,000 503,000
Research and development. . . . . . . . . . . . 397,000 305,000
------------ ------------
Total expenses. . . . . . . . . . . . . . . . . . 2,634,000 2,437,000
------------ ------------
Income from operations. . . . . . . . . . . . . . 1,871,000 1,635,000
Other income:
Interest income . . . . . . . . . . . . . . . . 74,000 93,000
Other . . . . . . . . . . . . . . . . . . . . . 33,000 34,000
------------ ------------
Total other income, net . . . . . . . . . . . . . 107,000 127,000
------------ ------------
Income from operations before provision for
income taxes . . . . . . . . . . . . . . . . . . 1,978,000 1,762,000
Income tax expense. . . . . . . . . . . . . . . . 775,000 675,000
------------ ------------
Net income. . . . . . . . . . . . . . . . . . . . $ 1,203,000 $ 1,087,000
============ ============
Basic earnings per share. . . . . . . . . . . . . $ 0.25 $ 0.21
============ ============
Weighted average number of common shares - basic. 4,753,685 5,104,282
============ ============
Diluted earnings per share. . . . . . . . . . . . $ 0.24 $ 0.21
============ ============
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 4,972,268 5,221,120
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
4
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
SIX MONTHS ENDED SEPT. 30,
2002 2001
------------ ------------
Net sales . . . . . . . . . . . . . . . . . . . . $21,336,000 $21,182,000
Cost of products sold . . . . . . . . . . . . . . 12,340,000 12,487,000
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . 8,996,000 8,695,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 3,127,000 3,375,000
General and administrative. . . . . . . . . . . 1,714,000 1,072,000
Research and development. . . . . . . . . . . . 692,000 597,000
------------ ------------
Total expenses. . . . . . . . . . . . . . . . . . 5,533,000 5,044,000
------------ ------------
Income from continuing operations . . . . . . . . 3,463,000 3,651,000
Other income (expense):
Interest income . . . . . . . . . . . . . . . . 174,000 163,000
Other . . . . . . . . . . . . . . . . . . . . . (10,000) 27,000
------------ ------------
Total other income, net . . . . . . . . . . . . . 164,000 190,000
------------ ------------
Income from continuing operations before
provision for income taxes. . . . . . . . . . . 3,627,000 3,841,000
Income tax expense. . . . . . . . . . . . . . . . 1,419,000 1,479,000
------------ ------------
Net income from continuing operations . . . . . . 2,208,000 2,362,000
Discontinued operations (Note 7):
Loss from discontinued operations (net of
applicable income taxes of $166,000 for the
period ended September 30, 2001). . . . . . . -- (271,000)
Estimated loss on disposal (net of applicable
income taxes of $1,996,000) . . . . . . . . . -- (3,256,000)
------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . $ 2,208,000 $(1,165,000)
============ ============
Basic earnings per share from continuing
operations. . . . . . . . . . . . . . . . . . $ 0.45 $ 0.46
Basic loss per share from discontinued operations -- (0.05)
Basic loss per share on disposal of discontinued
operations. . . . . . . . . . . . . . . . . . -- (0.64)
------------ ------------
Basic earnings (loss) per share . . . . . . . . . $ 0.45 $ (0.23)
============ ============
Weighted average number of common shares - basic. 4,880,238 5,106,560
============ ============
5
Diluted earnings per share from continuing
operations. . . . . . . . . . . . . . . . . . $ 0.43 $ 0.45
Diluted loss per share from discontinued
operations. . . . . . . . . . . . . . . . . . -- (0.05)
Diluted loss per share on disposal of
discontinued operations . . . . . . . . . . . -- (0.62)
------------ ------------
Diluted earnings (loss) per share . . . . . . . . $ 0.43 $ (0.22)
============ ============
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 5,111,367 5,224,747
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
6
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED SEPT. 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . $ 2,208,000 $(1,165,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Net loss from discontinued operations. . . . -- 3,527,000
Depreciation and amortization. . . . . . . . 578,000 575,000
Deferred taxes . . . . . . . . . . . . . . . 52,000 (1,453,000)
Net loss on disposal of equipment. . . . . . 3,000 --
Tax benefit from exercise of stock options . 11,000 --
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . (624,000) 44,000
Inventories. . . . . . . . . . . . . . . . (153,000) 48,000
Prepaid expenses and other current assets. 106,000 773,000
Accounts payable . . . . . . . . . . . . . 224,000 (333,000)
Accrued expenses and other current
liabilities . . . . . . . . . . . . . . . 229,000 1,191,000
------------ ------------
Net cash provided by continuing operations . . . 2,634,000 3,207,000
Net cash provided by discontinued operations . . 1,129,000 1,995,000
------------ ------------
Net cash provided by operating activities. . . . 3,763,000 5,202,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities . . . (1,657,000) (6,204,000)
Sales and maturities of available-for-sale
securities . . . . . . . . . . . . . . . . . . 4,509,000 2,459,000
Proceeds from sales of property & equipment. . . 6,000 --
Decrease in notes receivable . . . . . . . . . . 277,000 --
Purchases of property and equipment. . . . . . . (2,853,000) (814,000)
------------ ------------
Net cash provided by (used in) continuing
operations . . . . . . . . . . . . . . . . . . 282,000 (4,559,000)
Net cash used in discontinued operations . . . . (101,000) --
------------ ------------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . 181,000 (4,559,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options. . . 205,000 166,000
Purchase and retirement of common stock. . . . . (10,824,000) (74,000)
------------ ------------
Net cash provided by (used in) continuing
operations . . . . . . . . . . . . . . . . . . (10,619,000) 92,000
Net cash used in discontinued operations . . . . -- --
------------ ------------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . (10,619,000) 92,000
------------ ------------
7
Effect of exchange rate changes on cash. . . . . 3,000 (6,000)
------------ ------------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . (6,672,000) 729,000
Cash and cash equivalents at beginning of period 8,926,000 4,857,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . $ 2,254,000 $ 5,586,000
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes . . $ 1,131,000 $ 263,000
See accompanying notes to unaudited condensed consolidated
financial statements.
8
MITY ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESNETATION
Interim Period Accounting Policies
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements contain all normal recurring
adjustments necessary to present fairly the Company's financial position and
results of operations for the interim period. Results of operations for the
three months and six months ended September 30, 2002 are not necessarily
indicative of results to be expected for the full fiscal year ending March 31,
2003.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial statements. Although
the Company believes that the disclosures in these unaudited condensed
consolidated financial statements are adequate to make the information
presented for the interim periods not misleading, certain information and
footnote information normally included in annual consolidated financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission, and these financial statements should be read in conjunction with
the Company's audited consolidated financial statements included in the
Company's annual report to shareholders for the fiscal year ended March 31,
2002. Certain amounts in prior period financial statements have been
reclassified to conform with current period presentations including the
reclassification of discontinued operations as discussed in footnote 7.
2. INVENTORIES
Inventories consisted of the following (excluding discontinued
operations):
SEPTEMBER 30, MARCH 31,
2002 2002
------------ -------------
Materials and supplies . . . . $ 927,000 $ 747,000
Work-in-progress . . . . . . . 242,000 174,000
Finished goods . . . . . . . . 222,000 314,000
------------ ------------
$ 1,391,000 $ 1,235,000
============ ============
9
3. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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 annual impairment testing for goodwill and intangible
assets, and the elimination of periodic amortization of goodwill and certain
intangibles. The Company adopted the provisions of SFAS No. 142 for the
Company's fiscal year 2003 beginning April 1, 2002. Application of the
nonamortization provisions of the Statement is expected to result in an
increase in net income of $42,000 for fiscal 2003. The Company performed the
first of the required impairment tests of goodwill of $932,000 related to its
healthcare seating operation according to the provisions of SFAS No. 142 and
has determined that this goodwill is not impaired.
Effective June 1, 2002, the Company adopted SFAS No. 144, "Accounting for
the Impairment on Disposal of Long-Lived Assets," which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 144 removes goodwill from its scope and
retains the requirements of SFAS No. 121 regarding the recognition of
impairment losses on long-lived assets held for use. SFAS No. 144 also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. The
adoption of SFAS No. 144 did not impact our consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities," which requires that a liability
for a cost associated with an exit or disposal activity be recognized when the
liability is incurred and nullifies EITF No. 94-3. SFAS No. 146 is effective
for any exit or disposal activities occurring after December 31, 2002. The
Company has not determined the impact, if any, SFAS No. 146 will have on our
consolidated financial statements.
4. COMPREHENSIVE INCOME
In accordance with SFAS No. 130, "Reporting Comprehensive Income," the
Company's comprehensive income consists of foreign currency adjustments and
unrealized gains and losses on available-for-sale securities. For the six
months ended September 30, 2002, comprehensive income exceeded net income by
$25,000 related to $24,000 in foreign currency translation gains and $1,000 in
unrealized gains on available for sale securities. For the six months ended
September 30, 2001, comprehensive income exceeded net income by $15,000
related to a $17,000 unrealized gain on available-for-sale securities and a
$2,000 foreign currency translation loss.
10
5. 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, with multipurpose room furniture being the principal business
segment. 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 of continuing operations reconciled to the
consolidated financial statements for the six months ended September 30, 2002
and 2001 is as follows:
SIX MONTHS ENDED SEPTEMBER 30,
2002 2001
------------ ------------
Net sales:
Multipurpose room furniture. . . . . . . . $18,871,000 $18,848,000
Healthcare seating . . . . . . . . . . . . 2,465,000 2,334,000
----------- -----------
$21,336,000 $21,182,000
=========== ===========
Income from continuing operations:
Multipurpose room furniture. . . . . . . . $ 2,910,000 $ 3,129,000
Healthcare seating . . . . . . . . . . . . 553,000 522,000
----------- -----------
$ 3,463,000 $ 3,651,000
=========== ===========
Depreciation and amortization expense:
Multipurpose room furniture. . . . . . . . $ 538,000 $ 495,000
Healthcare seating . . . . . . . . . . . . 40,000 80,000
----------- -----------
$ 578,000 $ 575,000
=========== ===========
Capital expenditures, net:
Multipurpose room furniture. . . . . . . . $ 2,794,000 $ 792,000
Healthcare seating . . . . . . . . . . . . 59,000 22,000
----------- -----------
$ 2,853,000 $ 814,000
=========== ===========
11
SEPTEMBER 30, MARCH 31,
2002 2002
------------ ------------
Total assets:
Multipurpose room furniture. . . . . . . . $21,152,000 $28,215,000
Healthcare seating . . . . . . . . . . . . 2,774,000 2,746,000
Discontinued operations (Specialty office
systems segment) . . . . . . . . . . . . 1,380,000 2,408,000
----------- -----------
$25,306,000 $33,369,000
=========== ===========
6. COMPUTATION OF NET INCOME (LOSS) PER SHARE
The following is the Company's reconciliation of basic and diluted net
income per share for the three months and six months ended September 30, 2002
and 2001 respectively.
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income from continuing
operations . . . . . . . . .$ 1,203,000 $ 1,087,000 $ 2,208,000 $ 2,362,000
Discontinued operations:
Net loss from discontinued
operations. . . . . . . . . -- -- -- (271,000)
Estimated loss on disposal . -- -- -- (3,256,000)
----------- ----------- ----------- -----------
Net income (loss) as
reported . . . . . . . . . .$ 1,203,000 $ 1,087,000 $ 2,208,000 $(1,165,000)
=========== =========== =========== ===========
Basic:
Weighted average number of
common shares outstanding . 4,753,685 5,104,282 4,880,238 5,106,560
=========== =========== =========== ===========
Basic net income per share
from continuing operations $ 0.25 $0.21 $ 0.45 $0.46
Basic net loss per share
from discontinued
operations. . . . . . . . . -- -- -- (0.05)
Basic net loss per share on
disposal of discontinued
operations. . . . . . . . . -- -- -- (0.64)
----------- ----------- ----------- -----------
Basic net income (loss) per
share . . . . . . . . . . . $ 0.25 $ 0.21 $ 0.45 $(0.23)
=========== =========== =========== ===========
12
Diluted:
Common and common equivalent
shares outstanding:
Weighted average number of
common shares outstanding . 4,753,685 5,104,282 4,880,238 5,106,560
Common stock equivalents
from options computed on
the treasury-stock method
using the average fair
market value of common
stock outstanding during
the period . . . . . . . 218,583 116,838 231,129 118,187
----------- ----------- ----------- -----------
Shares used in the
computation . . . . . . . 4,972,268 5,221,120 5,111,367 5,224,747
=========== =========== =========== ===========
Diluted net income per share
from continuing operations. $ 0.24 $0.21 $ 0.43 $0.45
Diluted net loss per share
from discontinued operations -- -- -- (0.05)
Diluted net loss per share on
disposal of discontinued
operations. . . . . . . . . -- -- -- (0.62)
----------- ----------- ----------- -----------
Diluted net income (loss) per
share . . . . . . . . . . . $ 0.24 $ 0.21 $ 0.43 $(0.22)
=========== =========== =========== ===========
7. DISCONTINUED OPERATIONS
On June 29, 2001, the Company's Board of Directors approved the plan for
exiting and selling the assets of the specialty office seating and systems
segment of its business (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. The Company currently anticipates that this exit
will be completed by the end of the third quarter of fiscal 2003. For the
quarter ended September 30, 2002, the Company estimated operating loss, net of
applicable taxes, for the discontinued segment would be $269,000. The actual
operating loss, net of applicable taxes, for the same period was $288,000, or
$19,000 more than estimated. Also, for the six months ended September 30,
2002, the net current assets of discontinued operations has decreased from
$1.6 million to $0.5 million as receivables have been collected.
13
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 from
the buyer. The first note, 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
is due in April 2003. The second note, totaling $250,000, which also bears
interest at the prime rate, required monthly payments of interest only from
November 2001 through January 2002 and has required monthly principal and
interest payments since 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 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. As of
September 30, 2002, the buyer is current on both of these notes.
Summarized financial information of the discontinued DO Group and
CenterCore segment consist of the following:
September 30, March 31,
2002 2002
---------- ----------
Current assets:
Accounts receivable. . . . . . . . . . . . . $ 436,000 $1,478,000
Inventories. . . . . . . . . . . . . . . . . 75,000 85,000
---------- ----------
Total current assets. . . . . . . . . . . . . . $ 511,000 $1,563,000
========== ==========
Non-current assets:
Property and equipment, net. . . . . . . . . $ 869,000 $ 845,000
---------- ----------
Total non-current assets. . . . . . . . . . . . $ 869,000 $ 845,000
========== ==========
14
8. NOTES RECEIVABLE
During the quarter ended December 31, 2001, the Company invested $250,000
in the form of a note receivable in a startup development company that
designs, manufactures and markets caskets for the death care industry. The
caskets are made of thermoformed ABS, the same process and material used for
making the Company's tables, and give the appearance of polished marble or a
deep laquer finished wood. During the quarter ended June 30, 2002, the
Company invested an additional $250,000 in the form of a note receivable.
During the quarter ended September 30, 2002, the Company invested an
additional $183,000 in the form of a note receivable. Subsequent to the end
of the quarter ended September 30, 2002, the Company invested an additional
$20,000 in the form of a note receivable. After review of the collectability
of the notes receivable, the Company decided to reserve $500,000 of the notes
as of June 30, 2002 and the remaining outstanding balance of $183,000 in the
September 2002 quarter. This resulted in a non-recurring charge to general
and administrative expenses of $500,000 for the first quarter and $183,000 for
the second quarter of fiscal 2002. The Company may, at its discretion, invest
an additional $297,000 in notes receivable over the next six 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 of this startup development company.
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 of the equity of this
startup development company for $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.
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 September 30, 2002, the gross value of
this note receivable was $340,000. At September 30, 2002, $68,000 was the
current portion of this note receivable, which is included in prepaid expenses
and other current assets. As of September 30, 2002, the dealer was current on
payments on this note receivable.
9. RELATED PARTY TRANSACTIONS
On June 3, 2002, the Company announced that it had purchased from a
related party its table and cart manufacturing facility, corporate
headquarters and related real estate located in Orem, Utah. The facility and
real estate were previously owned by the uncle of Gregory L. Wilson, the
Company's Chairman. For the last 15 years, this facility has been leased. The
transaction was valued at $2.0 million and was based on a previously performed
independent appraisal. The Company believes that this purchase will increase
its pretax profit margin by approximately $70,000 per year.
15
On September 3, 2002, the Company repurchased 845,373 shares of its
outstanding common stock held by certain directors and affiliates of the
Company. The repurchase was completed through privately negotiated
transactions at a purchase price of $12.00 per share and was approved by the
Company's independent director. This amount was a discount from the publicly
traded share price as the Company's stock closed at $12.21 on September 3,
2002. The Company repurchased shares from the following directors and
affiliates:
Number of Shares Ownership before Ownership after
Director/Affiliate Repurchased Repurchase Repurchase
- ------------------ ----------------- ---------------- ---------------
Gregory L. Wilson,
Chairman 410,000 23.6% 19.1%
Constance Crump,
Affiliate 197,287 7.7% 4.7%
Ralph Crump, Director 140,000 8.5% 7.1%
Peter Najar, Director 75,000 5.5% 5.0%
C. Lewis Wilson,
Director 23,086 1.0% 0.7%
- ------------------ ----------------- ---------------- ---------------
Total as a group 845,373 46.3% 36.6%
(1) Constance Crump is the daughter of Ralph Crump and the spouse of Peter
Najar.
16
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the attached
consolidated financial statements and the notes thereto and with MITY
Enterprises, Inc.'s (the "Company's") Annual Report on Form 10-K for the
fiscal year ended March 31, 2002.
The Company designs and manufactures institutional furniture and markets
its products in niche markets. 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
acquisition of product lines or companies that will be complementary to the
Company's businesses.
MULTIPURPOSE ROOM FURNITURE. The Company's multipurpose room furniture
is marketed under the Mity-Lite trade name. It 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 multipurpose
room product line. The current and future growth of the multipurpose room
furniture operations depends largely upon its ability to successfully
introduce and market new product lines of multipurpose room furniture, its
ability to profitably increase its market penetration into existing and new
markets, and the strength of a recovering economy, particularly in the
institutional furniture industry.
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. The events of September 11, 2001 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. The U.S. office
furniture market declined by 17 percent in calendar year 2001. Industry
experts have expected further declines during calendar year 2002, recently
lowering their expectation to a 20 percent decline. However, industry experts
also predict improvements in calendar year 2003 with an 8 percent increase.
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. The Company anticipates that weakness in
furniture demand will continue until overall business and economic conditions
improve. Beginning in the fourth quarter of fiscal 2002, and continuing in
the first quarter of fiscal 2003, order rates improved. During the quarter
ending September 30, 2002, sales volumes were 6 percent higher compared to the
prior year's second quarter. However, toward the end of the second fiscal
quarter, order rates began to soften. Consequently, the Company currently
anticipates that sales volumes during the quarter ending December 31, 2002
will be 5 to 10 percent lower than the prior year's third quarter. However,
the Company may not be successful in achieving this sales level in the third
quarter.
17
HEALTHCARE SEATING. Through its wholly-owned subsidiary, Broda
Enterprises, Inc., the Company markets a line of healthcare seating products
to customers mostly 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.
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 quarter ended
September 30, 2002, the Company's healthcare seating operations had not been
negatively impacted by the downturn in the U.S. and world economies. 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 depends largely upon increasing its market
penetration into the U.S. and other foreign markets and introducing new
products.
DISCONTINUED OPERATIONS. The Company's specialty office systems
operations located in Marked Tree, Arkansas and known as CenterCore and DO
Group, have experienced various operational challenges. Since acquiring and
taking over the direct management of DO Group, the Company has 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 more sound business
practices. The Company devoted additional management as well as outside
consulting resources to the resolution of these problems. In spite of these
cutbacks and other management initiatives, DO Group and CenterCore continued
to sustain losses through June 2001. Beginning in July 2001 and through the
end of fiscal 2002, these operations were once again profitable and most of
the operational inefficiencies and information system problems were resolved.
Since that time, mainly due to economic conditions, sales volumes have
decreased and the operation has once again begun to be in a loss position. On
June 29, 2001, the Company's Board of Directors approved the plan for exiting
and selling the assets of the CenterCore and DO Group businesses. The Company
currently anticipates that this exit will be completed by the end of the third
quarter of fiscal 2003.
18
As a result of these actions and in accordance with 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. The Company currently anticipates that this exit
will be completed by the end of the third quarter of fiscal 2003. For the
quarter ended September 30, 2002, the Company estimated its operating loss,
net of applicable taxes, for the discontinued segment would be $269,000. The
actual operating loss, net of applicable taxes, for the same period was
$287,000, or $19,000 more than estimated. Also, for the three months ended
September 30, 2002, the net current assets of discontinued operations has
decreased from $1.6 million to $0.5 million as receivables have been
collected.
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, Indiana headquarters for $150,000 in cash and $350,000 of
notes from the buyer. The book value of these assets at the time of sale was
approximately $315,000. The first note, 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 is due in April 2003. The second note, totaling $250,000, which
also bears interest at the prime rate, required monthly payments of interest
only from November 2001 through January 2002 and has required monthly
principal and interest payments since 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 will be discounted using a 20% interest rate
and will be 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. As of September 30, 2002, the buyer is current on both
of these notes.
19
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.
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 expected 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.
20
INTANGIBLE ASSETS: The Company periodically reviews the carrying value of its
intangible assets which represents goodwill that arose upon its acquisition of
Broda Enterprises. 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 notes receivable from 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
reserved $683,000 on one of 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.
COMPARISON OF CONTINUING OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
NET SALES. The Company's second quarter fiscal 2003 net sales of
$10,777,000 were up 6 percent as compared with the second quarter net sales in
the prior fiscal year. For the quarter ended September 30, 2002, the increase
reflects sales increases, as compared to the quarter ended September 30, 2001,
of 17 percent in the Company's healthcare chair operations and 5 percent in
the Company's multipurpose room operations. The Company's total international
sales represented 10 percent of net sales for the quarter ended September 30,
2002 as compared to 11 percent in the second quarter of fiscal 2002. The
Company attributes most of the increase in sales in the multipurpose room
operations to increases in chair sales which was partially offset by slightly
lower table sales. The increased sales related to the Company's healthcare
chair operations were due primarily to increased sales in the U.S.
marketplace. For the upcoming quarter, the Company expects that its sales in
the third quarter of fiscal 2003 will be 5 to 10 percent lower than the third
quarter of fiscal 2002.
21
For the six months ended September 30, 2002, the Company's net sales of
$21,336,000 represented an increase of 1 percent over the same period in the
prior fiscal year. For the six months ended September 30, 2002, the increase
reflects sales increases, as compared to the six months ended September 30,
2001, of 6 percent in the Company's healthcare chair operations and flat sales
in the Company's multipurpose room operations. The Company's total
international sales represented 10 percent of net sales for the six months
ended September 30, 2002 as compared to 12 percent in the prior year's period.
The flat sales in the Company's is attributed to increases in chair sales
offset by declines in table sales.
GROSS PROFIT. Gross profit as a percentage of net sales in the quarter
ended September 30, 2002 increased by 2 percentage points over the same
quarter in the prior fiscal year to 42 percent. This increase was due to
lower material costs at the Company's multipurpose room furniture operation as
well as a higher gross margin at the Company's healthcare seating operations.
This increase was partially offset by a lower average sales price on the
Company's table products as well as higher overhead costs as a percentage of
sales at the Company's multipurpose room furniture operations.
Gross profit as a percentage of net sales in the six months ended
September 30, 2002 increased by 1 percentage point over the same period in the
prior fiscal year to 42 percent. This increase was due to lower material and
labor costs at the Company's multipurpose room furniture operation as well as
a slightly higher gross margin at the Company's healthcare seating operations.
This increase was partially offset by a lower average sales price on the
Company's table products as well as higher overhead costs as a percentage of
sales at the Company's multipurpose room furniture operations.
SELLING EXPENSES. Selling expenses were 14 percent of net sales in the
second quarter of fiscal 2003 as compared to 16 percent for the same quarter
of the prior fiscal year. Actual expenses decreased by $99,000. Multipurpose
room furniture selling costs decreased by $187,000 over the prior fiscal year.
This decrease resulted from lower costs for sales literature, trade shows, and
personnel partially offset by higher costs for advertising. Selling expenses
at the healthcare seating operations increased by $88,000 over the prior
fiscal year due primarily to increased personnel and travel costs.
Selling expenses were 15 percent of net sales in the six months ended
September 30, 2002 as compared to 16 percent for the same period of the prior
fiscal year. Actual expenses decreased by $248,000. Multipurpose room
furniture selling costs decreased by $399,000 over the prior fiscal year.
This decrease resulted from lower costs for sales literature, trade shows, and
personnel. Selling expenses at the healthcare seating operations increased by
$151,000 over the prior fiscal year due primarily to increased personnel and
travel costs partially offset by lower costs for commissions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were 7 percent of net sales for the second quarter of fiscal 2003 as compared
to 5 percent for the same quarter of the prior fiscal year. Actual spending
increased by 41 percent or $204,000. The increase was primarily due to higher
professional fees as well as a non-recurring charge of $183,000 that fully
reserved the September 30, 2002 balance in a note receivable to a startup
development company. The reserve was made due to concerns about the
collectability of the note. This startup development company designs,
manufactures and markets caskets made of thermoformed ABS.
22
General and administrative expenses were 8 percent of net sales for the
six months ended September 30, 2002 as compared to 5 percent for the same
period of the prior fiscal year. Actual spending increased by 60 percent or
$642,000. The increase was primarily due to a non-recurring charge of
$683,000 that fully reserved the September 30, 2002 balance in a note
receivable to a startup development company. The reserve was made due to
concerns about the collectability of the note.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were 4 percent of net sales for the second quarter of fiscal 2003 as compared
to 3 percent for the same quarter of the prior fiscal year. Actual spending
increased by $92,000. The increase was primarily due to higher expenditures
for personnel and outside services related to the Company's development of a
new generation of multipurpose room table.
Research and development expenses were 3 percent of net sales for the
second quarter of fiscal 2003 as compared to 3 percent for the same quarter of
the prior fiscal year. Actual spending increased by $95,000 primarily due to
higher expenditures for personnel and outside services related to the
Company's development of a new generation of multipurpose room table.
OTHER INCOME AND EXPENSE. Other income and expense netted to $107,000
for the quarter ended September 30, 2002. Second quarter interest income was
$74,000, a decrease of $19,000 from the same quarter of the prior fiscal year.
The decrease was due to less interest earned on the lower cash balance held in
the current fiscal quarter as well as lower rates of return. Other income,
which totaled $33,000 for the current quarter, consisted of $31,000 in
realized foreign currency exchange gains, and other income of $2,000.
Other income and expense netted to $164,000 for the six months ended
September 30, 2002. Interest income was $174,000, an increase of $11,000 from
the same period of the prior fiscal year. The increase was due to interest
earned on the higher cash balance held in the current fiscal year. Other
expenses, which totaled $10,000 for the period, consisted of $3,000 in
realized foreign currency exchange net losses, a $3,000 net loss on asset
disposal and other net losses of $4,000.
NET INCOME FROM CONTINUING OPERATIONS. For the reasons stated above, the
Company's net income from continuing operations for the quarter ended
September 30, 2002 of $1,203,000 increased $116,000 or 11 percent over the
second quarter net income from continuing operations in the prior fiscal year.
For the reasons stated above, net income from continuing operations for
the six months ended September 30, 2002 was $2,208,000, a decrease of $154,000
or 7 percent over the same period of the prior fiscal year.
23
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 $2.25 million at September 30, 2002 as compared to $8.93
million at March 31, 2002.
The following table highlights certain key cash flow and capital
information pertinent to the discussion that follows:
Six months ended
September 30, 2002
------------------
Net cash provided by operating activities. . . . $ 3,763,000
Net sales of available-for-sale securities . . . 2,852,000
Decrease in notes receivable . . . . . . . . . . 277,000
Purchases of property and equipment. . . . . . . (2,853,000)
Net proceeds from exercise of stock options. . . 205,000
Purchase and retirement of common stock. . . . . (10,824,000)
The decrease in cash and cash equivalents was due primarily to the
purchase and retirement of common stock ($10.82 million) described further
below, and purchases of property and equipment ($2.85 million). This decrease
was partially offset by cash provided by operating activities ($3.76 million),
the net sale of available-for-sale securities ($2.85 million), the net
decrease in notes receivable ($0.28 million) and net proceeds related to the
exercise of stock options ($0.21 million).
Historically, the Company has financed its growth primarily through cash
flow from its operations. The Company's subsidiary, Broda Enterprises, has a
line of credit. The limit on this facility is $0.63 million. As of September
30, 2002, no amount was drawn under this facility. This credit facility
requires the maintenance of certain financial ratios and levels of working
capital. As of September 30, 2002, the Company was in full compliance with
the loan covenants related to the Broda Enterprises' credit facility. The
Company's liquidity depends only partially upon the availability of the Broda
Enterprises credit facility.
The Company currently believes that cash flow from its current operations
together with existing cash reserves and available line 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 fiscal year, the
Company's discontinued Arkansas operations were no longer a drain on the
Company's cash resources but were a major contributor to the growing cash
position of the Company. However, during the six months ended September 30,
2002, the Arkansas operations lost $531,00 net of applicable tax benefit. If
sales decreases continue and costs do not decline at the same rate, or the
discontinued operations continue to generate negative cash flows, the
Company's cash flow and liquidity may be impeded. The Company currently
anticipates that this exit will be completed by the end of the third quarter
of fiscal 2003. No assurances can be given as to the sufficiency of the
Company's working capital 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
24
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 September
30, 2002, the proceeds which would have been received by the Company upon
exercise of outstanding options which were exercisable on that date were
approximately $2.57 million. There is no assurance that such options will be
exercised.
The Company's material cash commitments at September 30, 2002 included
current liabilities of $6.36 million to be repaid from funds generated from
operations. Current liabilities as of September 30, 2002 and March 31, 2002
consisted of the following:
SEPTEMBER 30, MARCH 31,
2002 2002
---------- ----------
Accounts payable. . . . . . . . . . . . . . . . $1,875,000 $1,649,000
Accrued payroll . . . . . . . . . . . . . . . . 1,348,000 1,044,000
Accrued warranty expense. . . . . . . . . . . . 413,000 375,000
Reserve for loss at discontinued operations . . 2,125,000 2,534,000
Other accruals. . . . . . . . . . . . . . . . . 602,000 448,000
---------- ----------
Total current liabilities . . . . . . . . . . . $6,363,000 $6,050,000
========== ==========
The Company has also entered into two lease agreements for Broda's production
and office facilities under which it is obligated to pay $16,000 Canadian
(approximately US $10,000) per month through August 2004.
During the quarter ended December 31, 2001, the Company invested $250,000
in the form of a note receivable in a startup development company that
designs, manufactures and markets caskets for the death care industry. The
caskets are made of thermoformed ABS, the same process and material used for
making the Company's tables, and give the appearance of polished marble or a
deep laquer finished wood. During the quarter ended June 30, 2002, the
Company invested an additional $250,000 in the form of a note receivable.
During the quarter ended September 30, 2002, the Company invested an
additional $183,000 in the form of a note receivable. Subsequent to the end
of the quarter ended September 30, 2002, the Company invested an additional
$20,000 in the form of a note receivable. After review of the collectability
of the notes receivable, the Company decided to reserve $500,000 of the notes
as of June 30, 2002 and the remaining outstanding balance of $183,000 in the
September 2002 quarter. This resulted in a non-recurring charge to general
and administrative expenses of $500,000 for the first quarter and $183,000 for
the second quarter of fiscal 2002. The Company may, at its discretion, invest
an additional $297,000 in notes receivable over the next six 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 of this startup development company.
25
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 of the equity of this
startup development company for $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.
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 September 30, 2002, approximately 211,000 shares had been
repurchased. Additional repurchases will reduce the Company's liquidity.
On September 4, 2002, the Company announced that it had repurchased
845,373 shares of its outstanding common stock held be certain directors and
affiliates of the Company. The transaction was completed through privately
negotiated transactions at a purchase price of $12.00 per share and was
approved by the Company's independent director. This amount was a discount
from the publicly traded share price as the Company's stock closed at $12.21
on September 3, 2002.
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 current fiscal year,
and that if such product development efforts are successful, capital
expenditures of approximately $6 million may be required over the next 6 to 12
months. The Company anticipates funding these capital expenditures using
existing capital reserves as well as 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.
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"). 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 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. The forward-looking statements and associated risks
set forth herein and elsewhere in this filing relate to:
26
- 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 third quarter of fiscal 2003 may be 5 to 10 percent lower than
sales levels of the third quarter of fiscal 2002;
- references to anticipated continued competitive pressure in
multipurpose room table markets;
- 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
third 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 that the Company believes the purchase of its table and
cart manufacturing facility, corporate headquarters and related real
estate will increase its profit margin by approximately $70,000 per
year;
- 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 6 to 12
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 12 months;
- statements relating to the Company's possible need to raise
additional capital if its cash reserves, cash flow from operations
and debt financing are insufficient to fund the Company's working
capital requirements; and
- statements related to anticipated capital expenditures.
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:
27
- 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 including terrorist attacks
and international unrest;
- 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;
28
- 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;
- 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; and
- regulatory developments that adversely affect demand for the
Company's products, particularly the Company's healthcare seating
products.
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 3. 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. Foreign currency exchange rate fluctuations did not have a
material impact on the financial results of the Company during the quarter
ended September 30, 2002. The Company's healthcare chair operations have
occasionally entered into forward contracts for specific US$ denominated
accounts receivable. As of September 30, 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.
29
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) under the
Exchange Act) as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, as of the Evaluation Date,
our disclosure controls and procedures were effective in timely alerting them
to the material information relating to us (or our consolidated subsidiaries)
required to be included in our periodic SEC filings.
(b) Changes in internal controls
There were no significant changes made in our internal controls during
the period covered by this report, or to out knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of the shareholders of MITY Enterprises, Inc. was held
on August 6, 2002. At the Annual Meeting, Gregory L. Wilson, Ralph E. Crump,
Peter Najar, C. Lewis Wilson, and Hal B. Heaton were elected to serve as
directors of the Company until the next annual meeting or until their
successors are elected. The results of the voting were as follows:
Shares Shares Shares
Voted in Favor Withheld Not Voted
Gregory L. Wilson 4,745,834 168,900 95,821
Ralph E. Crump 4,754,534 160,200 95,821
Peter Najar 4,753,319 161,415 95,821
C. Lewis Wilson 4,753,214 161,520 95,821
Hal B. Heaton 4,753,364 161,370 95,821
Also at the Annual Meeting, the shareholders approved an amendment to the
Company's 1997 Stock Incentive Plan increasing the number of shares reserved
for issuance upon exercise of stock options granted thereunder to 900,000.
The results of the voting were as follows:
Shares Voted in Favor 3,256,663
Shares Voted Against 292,067
Shares Abstained 123,829
Shares Not Voted 1,337,996
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.25 Bradley T Nielson Certification pursuant to 18 U.S.C. Section 1350
99.26 Paul R. Killpack Certiciation pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
On July 31, 2002 the Company filed a current report on Form 8-K
announcing its financial results for the first fiscal quarter of fiscal
year 2003.
On August 2, 2002 the Company filed a current report on Form 8-K
disclosing the Section 906 certification of its first fiscal quarter of
fiscal year 2003 financial results.
On August 27, 2002 the Company filed a current report on Form 8-K
announcing the Company's plan to explore a possible stock repurchase
from certain directors and affiliates of the Company.
On August 29, 2002 the Company filed a current report on Form 8-K
announcing the Company's plan to repurchase stock from certain
directors and affiliates of the Company.
On September 4, 2002 the Company filed a current report on Form 8-K
announcing the Company's repurchase of stock from certain directors
and affiliates of the Company.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MITY Enterprises, Inc.
Date: October 30, 2002 /s/ Bradley T Nielson
------------------------------------
Bradley T Nielson
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 30, 2002 /s/ Paul R. Killpack
------------------------------------
Paul R. Killpack
Chief Financial Officer
(Principal Financial and Accounting
Officer)
CERTIFICATIONS
I, Bradley T Nielson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MITY
Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
32
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 30, 2002 /s/ Bradley T Nielson
------------------------------------
Bradley T Nielson
Chief Executive Officer
I, Paul R. Killpack, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MITY
Enterprises, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
33
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 30, 2002 /s/ Paul R. Killpack
------------------------------------
Paul R. Killpack
Chief Financial Officer