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United States 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 December 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
------------------------------------------------------------
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, including area code: (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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No x
There were 4,113,808 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on January 27, 2002.
1
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
DECEMBER 31, MARCH 31,
ASSETS 2002 2002
------------ ------------
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 2,222,000 $ 8,926,000
Available-for-sale securities. . . . . . . . 1,816,000 4,593,000
Accounts receivable, less allowances of
$418,000 at December 31, 2002 and
$346,000 at March 31, 2002 . . . . . . . . 4,768,000 4,382,000
Inventories. . . . . . . . . . . . . . . . . 1,375,000 1,235,000
Prepaid expenses and other current assets. . 1,365,000 599,000
Deferred income taxes, current . . . . . . . 564,000 3,117,000
Net current assets of discontinued
operations . . . . . . . . . . . . . . . . -- 1,563,000
------------ ------------
Total current assets . . . . . . . . . . . . . 12,110,000 24,415,000
Property and equipment, net. . . . . . . . . . 10,007,000 6,286,000
Deferred income taxes. . . . . . . . . . . . . 781,000 405,000
Goodwill, net. . . . . . . . . . . . . . . . . 943,000 932,000
Notes receivable . . . . . . . . . . . . . . . 209,000 486,000
Investment in affiliate. . . . . . . . . . . . 132,000 --
Net noncurrent assets of discontinued
operations . . . . . . . . . . . . . . . . . -- 845,000
------------ ------------
Total assets . . . . . . . . . . . . . . . . . $24,182,000 $33,369,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 1,472,000 1,649,000
Accrued expenses and other current
liabilities. . . . . . . . . . . . . . . . 2,257,000 4,401,000
------------ ------------
Total current liabilities. . . . . . . . . . . 3,729,000 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 4,113,308 at Dec. 31,
2002 and 5,000,343 at March 31, 2002 . . 41,000 50,000
Additional paid-in capital . . . . . . . . 9,803,000 11,755,000
Retained earnings. . . . . . . . . . . . . 10,668,000 15,615,000
Accumulated other comprehensive loss . . . (59,000) (101,000)
------------ ------------
Total stockholders' equity . . . . . . . . . 20,453,000 27,319,000
------------ ------------
Total liabilities and stockholders' equity . . $24,182,000 $33,369,000
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
2
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED DEC. 31,
2002 2001
------------ ------------
Net sales . . . . . . . . . . . . . . . . . . . . $10,375,000 $10,094,000
Cost of products sold . . . . . . . . . . . . . . 6,132,000 5,963,000
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . 4,243,000 4,131,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 1,599,000 1,597,000
General and administrative. . . . . . . . . . . 603,000 529,000
Research and development. . . . . . . . . . . . 414,000 291,000
------------ ------------
Total expenses. . . . . . . . . . . . . . . . . . 2,616,000 2,417,000
------------ ------------
Income from continuing operations . . . . . . . . 1,627,000 1,714,000
Other income:
Interest income . . . . . . . . . . . . . . . . 19,000 96,000
Other . . . . . . . . . . . . . . . . . . . . . (19,000) 2,000
------------ ------------
Total other income, net . . . . . . . . . . . . . -- 98,000
------------ ------------
Income from continuing operations before
provision for income taxes . . . . . . . . . . . 1,627,000 1,812,000
Income tax expense. . . . . . . . . . . . . . . . 623,000 704,000
------------ ------------
Net income from continuing operations . . . . . . 1,004,000 1,108,000
Discontinued operations (Note 7):
Estimated gain on disposal (net of applicable
income taxes of $457,000) . . . . . . . . . . 745,000 --
------------ ------------
Net income. . . . . . . . . . . . . . . . . . . . $ 1,749,000 $ 1,108,000
============ ============
Basic earnings per share from continuing
operations. . . . . . . . . . . . . . . . . . $ 0.24 $ 0.22
Basic earnings per share on disposal of
discontinued operations . . . . . . . . . . . 0.18 --
------------ ------------
Basic earnings per share. . . . . . . . . . . . . $ 0.42 $ 0.22
============ ============
Weighted average number of common shares - basic. 4,124,200 5,071,033
============ ============
Diluted earnings per share from continuing
operations. . . . . . . . . . . . . . . . . . $ 0.23 $ 0.21
Diluted earnings per share on disposal of
discontinued operations . . . . . . . . . . . 0.18 --
------------ ------------
Diluted earnings per share. . . . . . . . . . . . $ 0.41 $ 0.21
============ ============
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 4,318,312 5,176,340
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
3
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
NINE MONTHS ENDED DEC. 31,
2002 2001
------------ ------------
Net sales . . . . . . . . . . . . . . . . . . . . $31,711,000 $31,276,000
Cost of products sold . . . . . . . . . . . . . . 18,472,000 18,450,000
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . 13,239,000 12,826,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 4,726,000 4,972,000
General and administrative. . . . . . . . . . . 2,317,000 1,601,000
Research and development. . . . . . . . . . . . 1,106,000 888,000
------------ ------------
Total expenses. . . . . . . . . . . . . . . . . . 8,149,000 7,461,000
------------ ------------
Income from continuing operations . . . . . . . . 5,090,000 5,365,000
Other income (expense):
Interest income . . . . . . . . . . . . . . . . 193,000 259,000
Other . . . . . . . . . . . . . . . . . . . . . (29,000) 29,000
------------ ------------
Total other income, net . . . . . . . . . . . . . 164,000 288,000
------------ ------------
Income from continuing operations before
provision for income taxes. . . . . . . . . . . 5,254,000 5,653,000
Income tax expense. . . . . . . . . . . . . . . . 2,042,000 2,183,000
------------ ------------
Net income from continuing operations . . . . . . 3,212,000 3,470,000
Discontinued operations (Note 7):
Loss from discontinued operations (net of
applicable income taxes of $166,000 for the
period ended December 31, 2001) . . . . . . . -- (271,000)
Estimated gain (loss) on disposal (net of
applicable income taxes of $457,000 and
$1,545,000 for the periods ended December 31,
2002 and 2001 respectively) . . . . . . . . . 745,000 (3,256,000)
------------ ------------
Net income (loss) . . . . . . . . . . . . . . . . $ 3,957,000 $ (57,000)
============ ============
Basic earnings per share from continuing
operations. . . . . . . . . . . . . . . . . . $ 0.69 $ 0.68
Basic loss per share from discontinued operations -- (0.05)
Basic earnings (loss) per share on disposal of
discontinued operations . . . . . . . . . . . 0.17 (0.64)
------------ ------------
Basic earnings (loss) per share . . . . . . . . . $ 0.86 $ (0.01)
============ ============
Weighted average number of common shares - basic. 4,626,849 5,094,719
============ ============
4
Diluted earnings per share from continuing
operations. . . . . . . . . . . . . . . . . . $ 0.66 $ 0.67
Diluted loss per share from discontinued
operations. . . . . . . . . . . . . . . . . . -- (0.05)
Diluted earnings (loss) per share on disposal of
discontinued operations . . . . . . . . . . . 0.16 (0.63)
------------ ------------
Diluted earnings (loss) per share . . . . . . . . $ 0.82 $ (0.01)
============ ============
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 4,845,623 5,208,601
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
5
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED DEC. 31,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss). . . . . . . . . . . . . . . . $ 3,957,000 $ (57,000)
Adjustments to reconcile net income to net cash
provided by operating activities:
Net loss (gain) from discontinued operations (745,000) 3,527,000
Depreciation and amortization. . . . . . . . 871,000 879,000
Deferred taxes . . . . . . . . . . . . . . . 2,177,000 (1,247,000)
Net loss on disposal of equipment. . . . . . 26,000 4,000
Tax benefit from exercise of stock options . 12,000 11,000
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . (376,000) 483,000
Inventories. . . . . . . . . . . . . . . . (135,000) 91,000
Prepaid expenses and other current assets. (911,000) 712,000
Accounts payable . . . . . . . . . . . . . (180,000) (808,000)
Accrued expenses and other current
liabilities . . . . . . . . . . . . . . . (2,001,000) 2,084,000
------------ ------------
Net cash provided by continuing operations . . . 2,695,000 5,679,000
Net cash provided by discontinued operations . . 2,902,000 3,151,000
------------ ------------
Net cash provided by operating activities. . . . 5,597,000 8,830,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities . . . (2,283,000) (9,700,000)
Sales and maturities of available-for-sale
securities . . . . . . . . . . . . . . . . . . 5,073,000 6,216,000
Proceeds from sales of property & equipment. . . 14,000 4,000
Decrease (increase) in notes receivable. . . . . 230,000 (250,000)
Investment in affiliate. . . . . . . . . . . . . (82,000) --
Purchases of property and equipment. . . . . . . (4,629,000) (1,018,000)
------------ ------------
Net cash used by continuing operations . . . . . (1,677,000) (4,748,000)
Net cash provided by discontinued operations . . 250,000 --
------------ ------------
Net cash used in investing activities. . . . . . (1,427,000) (4,748,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options. . . 244,000 352,000
Purchase and retirement of common stock. . . . . (11,121,000) (564,000)
------------ ------------
Net cash used in financing activities. . . . . . (10,877,000) (212,000)
------------ ------------
Effect of exchange rate changes on cash. . . . . 3,000 (4,000)
------------ ------------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . (6,704,000) 3,866,000
Cash and cash equivalents at beginning of period 8,926,000 4,857,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . $ 2,222,000 $ 8,723,000
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
6
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes . . $ 1,293,000 $ 1,144,000
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the quarter ended December 31, 2002, $50,000 of the notes receivable
was converted into investment in affiliate related to a startup development
company investigating the commercial development of a new technology (see
Footnote 8).
See accompanying notes to unaudited condensed consolidated
financial statements.
7
MITY ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Interim Period Accounting Policies
In the opinion of MITY Enterprises Inc.'s (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 nine months ended December 31, 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):
DECEMBER 31, MARCH 31,
2002 2002
------------ -------------
Materials and supplies . . . . $ 992,000 $ 747,000
Work-in-progress . . . . . . . 202,000 174,000
Finished goods . . . . . . . . 181,000 314,000
------------ ------------
$ 1,375,000 $ 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 $943,000 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 its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" which provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years ending after December 15,
2002 and for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The Company is evaluating what
impact this statement will have on its consolidated financial statements.
10
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 nine
months ended December 31, 2002, comprehensive income exceeded net income by
$42,000 related to $29,000 in foreign currency translation gains and $13,000
in unrealized gains on available for sale securities. For the nine months
ended December 31, 2001, net income exceeded comprehensive income by $19,000
related to foreign currency translation losses.
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 three months and nine months ended
December 31, 2002 and 2001 is as follows:
THREE MONTHS ENDED DECEMBER 31,
2002 2001
------------ ------------
Net sales:
Multipurpose room furniture. . . . . . . . $ 9,055,000 $ 8,939,000
Healthcare seating . . . . . . . . . . . . 1,320,000 1,155,000
------------ ------------
$10,375,000 $10,094,000
============ ============
Income from continuing operations:
Multipurpose room furniture. . . . . . . . $ 1,323,000 $ 1,453,000
Healthcare seating . . . . . . . . . . . . 304,000 261,000
------------ ------------
$ 1,627,000 $ 1,714,000
============ ============
11
NINE MONTHS ENDED DECEMBER 31,
2002 2001
------------ ------------
Net sales:
Multipurpose room furniture. . . . . . . . $27,926,000 $27,787,000
Healthcare seating . . . . . . . . . . . . 3,785,000 3,489,000
------------ ------------
$31,711,000 $31,276,000
============ ============
Income from continuing operations:
Multipurpose room furniture. . . . . . . . $ 4,232,000 $ 4,583,000
Healthcare seating . . . . . . . . . . . . 858,000 782,000
------------ ------------
$ 5,090,000 $ 5,365,000
============ ============
Depreciation and amortization expense:
Multipurpose room furniture. . . . . . . . $ 815,000 $ 760,000
Healthcare seating . . . . . . . . . . . . 56,000 119,000
------------ ------------
$ 871,000 $ 879,000
============ ============
Capital expenditures, net:
Multipurpose room furniture. . . . . . . . $ 4,550,000 $ 936,000
Healthcare seating . . . . . . . . . . . . 79,000 82,000
------------ ------------
$ 4,629,000 $ 1,018,000
============ ============
DECEMBER 31, MARCH 31,
2002 2002
------------ ------------
Total assets:
Multipurpose room furniture. . . . . . . . $21,343,000 $28,215,000
Healthcare seating . . . . . . . . . . . . 2,839,000 2,746,000
Discontinued operations (Specialty office
systems segment) . . . . . . . . . . . . -- 2,408,000
------------ ------------
$24,182,000 $33,369,000
============ ============
6. COMPUTATION OF NET INCOME (LOSS) PER SHARE
The following is the Company's reconciliation of basic and diluted net
income per share for the three months and nine months ended December 31, 2002
and 2001 respectively.
12
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
Net income from continuing
operations . . . . . . . . .$ 1,004,000 $ 1,108,000 $ 3,212,000 $ 3,470,000
Discontinued operations:
Net loss from discontinued
operations. . . . . . . . . -- -- -- (271,000)
Estimated gain (loss) on
disposal. . . . . . . . . . 745,000 -- 745,000 (3,256,000)
----------- ----------- ----------- -----------
Net income (loss) as
reported . . . . . . . . . .$ 1,749,000 $ 1,108,000 $ 3,957,000 $ (57,000)
=========== =========== =========== ===========
BASIC:
Weighted average number of
common shares outstanding . 4,124,200 5,071,033 4,626,849 5,094,719
=========== =========== =========== ===========
Basic net income per share
from continuing operations $ 0.24 $0.22 $ 0.69 $0.68
Basic net loss per share
from discontinued
operations. . . . . . . . . -- -- -- (0.05)
Basic net gain (loss) per
share on disposal of
discontinued operations . . 0.18 -- 0.17 (0.64)
----------- ----------- ----------- -----------
Basic net income (loss) per
share . . . . . . . . . . . $ 0.42 $ 0.22 $ 0.86 $(0.01)
=========== =========== =========== ===========
DILUTED:
Common and common equivalent
shares outstanding:
Weighted average number of
common shares outstanding . 4,124,200 5,071,033 4,626,849 5,094,719
Common stock equivalents
from options computed on
the treasury-stock method
using the average fair
market value of common
stock outstanding during
the period . . . . . . . 194,112 105,307 218,774 113,882
----------- ----------- ----------- -----------
Shares used in the
computation . . . . . . . 4,318,312 5,176,340 4,845,623 5,208,601
=========== =========== =========== ===========
Diluted net income per share
from continuing operations. $ 0.23 $0.21 $ 0.66 $0.67
Diluted net loss per share
from discontinued operations -- -- -- (0.05)
Diluted net gain (loss) per
share on disposal of
discontinued operations . . 0.18 -- 0.16 (0.63)
----------- ----------- ----------- -----------
Diluted net income (loss) per
share . . . . . . . . . . . $ 0.41 $ 0.21 $ 0.82 $(0.01)
=========== =========== =========== ===========
13
7. DISCONTINUED OPERATIONS
On November 8, 2002, the Company completed its plan for exiting and
selling the assets of the specialty office seating and systems segment of its
business (the CenterCore and DO Group businesses). This plan was originally
approved by the Company's Board of Directors on June 29, 2001. Since that
time 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 has treated the DO Group and
CenterCore segment of its operations as a discontinued operation. At the time
that the plan was originally formulated, an estimated $3,256,000 loss was
accrued for in the three months ended June 30, 2001 to account for the
expected losses on disposal and estimated operating losses through the
disposal date. After the completion of the plan, the actual net loss, after
tax has been determined to be $2,511,000. Since the amount of loss that was
originally estimated and accrued for in the June 2001 quarter of $3,256,000
was higher than this amount, the Company is recognizing a gain, net of tax, of
$745,000, in the three month period ended December 31, 2002. The sale of the
assets of this segment was completed in three transactions. The first two
transactions took place on September 12, and October 2, 2001. The final
transaction occurred on November 8, 2002. Further details on these individual
transactions are discussed below.
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
December 31, 2002, the buyer is current on both of these notes.
On November 8, 2002, the Company completed the sale of its specialty
office systems line. The Company sold inventory, property, plant, tooling,
machinery, equipment, and intellectual property related to the systems line
for a net $250,000 in cash. The Company retained existing accounts
receivable, deferred tax assets and certain liabilities.
14
Summarized financial information of the discontinued DO Group and
CenterCore segment consist of the following:
DECEMBER 31, MARCH 31,
2002 2002
---------- ----------
CURRENT ASSETS:
Accounts receivable. . . . . . . . . . . . . $ -- $1,478,000
Inventories. . . . . . . . . . . . . . . . . -- 85,000
---------- ----------
Total current assets. . . . . . . . . . . . . . $ -- $1,563,000
========== ==========
NON-CURRENT ASSETS:
Property and equipment, net. . . . . . . . . $ -- $ 845,000
---------- ----------
Total non-current assets. . . . . . . . . . . . $ -- $ 845,000
========== ==========
8. NOTES RECEIVABLE AND INVESTMENT IN AFFILIATE
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 quarters ended June 30, September 30,
and December 31, 2002, the Company invested an additional $250,000, $183,000,
and $52,000, respectively, in the form of notes receivable for a total
investment of $735,000. After review of the collectability of the notes
receivable, the Company decided to reserve $500,000 of the notes as of June
30, 2002, an additional $183,000 during the quarter ended September 30, 2002
and the remaining outstanding balance of $52,000 in the quarter ended December
31, 2002. This resulted in a charge to general and administrative expenses of
$500,000 for the first quarter, $183,000 for the second quarter, and $52,000
for the third quarter of fiscal 2003. Due to difficulties in penetrating the
market, the Company does not currently anticipate making any further
investments in this startup development company.
15
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. During the quarter ended
December 31, 2002, the Company paid an additional $82,000. This total
investment of $132,000 represents a 50 percent equity ownership in this
startup development company. The Company had previously accounted for the
original $50,000 deposit as a note receivable. Since the Company has made the
additional $82,000 investment, the $50,000 note was converted into an
investment in affiliate. The Company utilizes the equity method of accounting
for its investment. Under the equity method, the Company recognizes its
proportionate share of the earnings or losses of this startup development
company as incurred. No material earnings or expenses occurred with this
business during the quarter ended December 31, 2002. The Company has also
extended a line of credit of $125,000 to the shareholder owning the other 50
percent share of the company and is secured by the shareholder's ownership in
the company. The line of credit, which bears interest at the prime rate
(adjusted monthly) as published by the Wall Street Journal, requires an
initial payment of the accrued interest six months after the line was
extended. Thereafter, monthly payments of interest only are required until
November 30, 2004 at which time, the full amount of the outstanding line is
due and payable. As of December 31, 2002, the full credit line of $125,000
was outstanding.
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
$180,000 for this note receivable. At December 31, 2002, the gross value of
this note receivable was $322,000. At December 31, 2002, $58,000 was the
current portion of this note receivable, which is included in prepaid expenses
and other current assets. As of December 31, 2002, the dealer was current on
payments on this note receivable.
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 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(R) 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 the Company's 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. Continued global tension related to threats of terrorist attacks and
prospects of war continue to negatively impact 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 expected
further declines during calendar year 2002 of 20 percent. 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. During the quarter ended December 31, 2002,
sales volumes were 3 percent higher compared to the prior year's third
quarter. However, during the first few weeks of the fourth fiscal quarter,
order rates began to soften. Still, the Company currently anticipates that
sales volumes during the quarter ending March 31, 2003 will be up as much as 5
percent compared to the prior year's fourth quarter. However, the Company may
not be successful in achieving this sales level in the fourth 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
December 31, 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. On November 8, 2002, the Company completed its
plan for exiting and selling the assets of the specialty office seating and
systems segment of its business (the CenterCore and DO Group businesses).
This plan was originally approved by the Company's Board of Directors on June
29, 2001. Since that time and in accordance with APB 30, the Company has
treated the DO Group and CenterCore segment of its operations as a
discontinued operation. At the time that the plan was originally formulated,
an estimated $3,256,000 loss was accrued for in the three months ended June
30, 2001 to account for the expected losses on disposal and estimated
operating losses through the disposal date. After the completion of the plan,
the actual net loss, after tax has been determined to be $2,511,000. Since
the amount of loss that was originally estimated and accrued for in the June
2001 quarter of $3,256,000 was higher than this amount, the Company is
recognizing a gain, net of tax, of $745,000, in the three month period ended
December 31, 2002. The sale of the assets of this segment was completed in
three transactions. The first two transactions took place on September 12,
and October 2, 2001. The final transaction occurred on November 8, 2002.
Further details on these individual transactions are discussed below.
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.
18
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
December 31, 2002, the buyer is current on both of these notes.
On November 8, 2002, the Company completed the sale of its specialty
office systems line. The Company sold inventory, property, plant, tooling,
machinery, equipment, and intellectual property related to the systems line
for a net $250,000 in cash. The Company retained existing accounts
receivable, deferred tax assets and liabilities.
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.
19
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: On November 8, 2002, the Company
completed its plan for exiting and selling the assets of the specialty office
seating and systems segment of its business. This plan was originally
approved by the Company's Board of Directors on June 29, 2001. 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. Since that time and in accordance with APB 30, the Company
has treated the DO Group and CenterCore segment of its operations as a
discontinued operation. At the time that the plan was originally formulated,
an estimated $3,256,000 loss was accrued for in the three months ended June
30, 2001 to account for the expected losses on disposal and estimated
operating losses through the disposal date. After the completion of the plan,
the actual net loss, after tax has been determined to be $2,511,000. Since
the amount of loss that was originally estimated and accrued for in the June
2001 quarter of $3,256,000 was higher than this amount, the Company is
recognizing a gain, net of tax, of $745,000, in the period ended December 31,
2002. The Company did retain certain assets and liabilities of the segment
after completion of the sales plan. Considerable judgment was used to
estimate the value of these assets and liabilities based on many factors
including the net expected realizable value of the remaining accounts
receivable, the realization of tax benefits, and potential remaining expenses.
Due to the level of uncertainty in this process, actual gains or losses may be
less than or greater than those estimated.
INTANGIBLE ASSETS: The Company annually 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 $735,000 on the notes receivable for one of these companies. 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.
20
INVESTMENT IN AFFILIATE. The Company has an investment in a startup
development company of $132,000. The Company utilizes the equity method of
accounting for its investment. Under the equity method, the Company will
recognize its proportionate share of the earnings or losses of the startup
development company. No material earnings or expenses occurred with this
business during the quarter ended December 31, 2002.
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 NINE MONTHS ENDED
DECEMBER 31, 2002 AND 2001
NET SALES. The Company's third quarter fiscal 2003 net sales of
$10,375,000 were up 3 percent as compared with the third quarter net sales in
the prior fiscal year. For the quarter ended December 31, 2002, the increase
reflects sales increases, as compared to the quarter ended December 31, 2001,
of 14 percent in the Company's healthcare chair operations and 1 percent in
the Company's multipurpose room operations. The Company's total international
sales represented 11 percent of net sales for the quarter ended December 31,
2002 as compared to 13 percent in the third quarter of fiscal 2002. The
Company attributes most of the increase in sales in the multipurpose room
operations to increases in table sales which was partially offset by lower
chair 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 fourth quarter
of fiscal 2003 will be up to 5 percent higher than the fourth quarter of
fiscal 2002.
For the nine months ended December 31, 2002, the Company's net sales of
$31,711,000 represented an increase of 1 percent over the same period in the
prior fiscal year. For the nine months ended December 31, 2002, the increase
reflects sales increases, as compared to the nine months ended December 31,
2001, of 8 percent in the Company's healthcare chair operations and 1 percent
in the Company's multipurpose room operations. The Company's total
international sales represented 10 percent of net sales for the nine months
ended December 31, 2002 as compared to 12 percent in the prior year's period.
The 1 percent increase in the Company's multipurpose room operations is
attributed to increases in chair sales partially offset by declines in table
sales.
GROSS PROFIT. Gross profit as a percentage of net sales in the quarter
ended December 31, 2002 stayed even with the same quarter in the prior fiscal
year at 41 percent. Gross margins at the Company's multipurpose room
operations were 1 percentage point lower than the same quarter in the prior
year due primarily to higher overhead costs, partially offset by lower
material costs. This decrease was offset by an improved gross margin of 1
percentage point at the Company's healthcare seating operations.
21
Gross profit as a percentage of net sales in the nine months ended
December 31, 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 15 percent of net sales in the
third quarter of fiscal 2003 as compared to 16 percent for the same quarter of
the prior fiscal year. Actual expenses increased by $2,000. Multipurpose
room furniture selling costs decreased by $28,000 over the prior fiscal year.
This decrease resulted from lower costs for personnel partially offset by
higher costs for sales samples and literature. Selling expenses at the
healthcare seating operations increased by $30,000 over the prior fiscal year
due primarily to increased personnel costs.
Selling expenses were 15 percent of net sales in the nine months ended
December 31, 2002 as compared to 16 percent for the same period of the prior
fiscal year. Actual expenses decreased by $246,000. Multipurpose room
furniture selling costs decreased by $427,000 over the prior fiscal year.
This decrease resulted from lower costs for personnel and sales literature.
Selling expenses at the healthcare seating operations increased by $181,000
over the prior fiscal year due primarily to increased personnel and travel
costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were 6 percent of net sales for the third quarter of fiscal 2003 as compared
to 5 percent for the same quarter of the prior fiscal year. Actual spending
increased by 14 percent or $74,000. The increase was primarily due to higher
professional fees as well as a charge of $52,000 that fully reserved the
December 31, 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.
General and administrative expenses were 7 percent of net sales for the
nine months ended December 31, 2002 as compared to 5 percent for the same
period of the prior fiscal year. Actual spending increased by 45 percent or
$716,000. The increase was primarily due to a charge of $735,000 that fully
reserved the December 31, 2002 balance in a note receivable to a startup
development company as well as higher professional fees. 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 third quarter of fiscal 2003 as compared
to 3 percent for the same quarter of the prior fiscal year. Actual spending
increased by $123,000. The increase was primarily due to higher expenditures
for personnel, outside services, and supplies 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
third quarter of fiscal 2003 as compared to 3 percent for the same quarter of
the prior fiscal year. Actual spending increased by $218,000 primarily due to
higher expenditures for personnel, outside services, and supplies related to
the Company's development of a new generation of multipurpose room table.
22
OTHER INCOME AND EXPENSE. Other income and expense netted to $0 for the
quarter ended December 31, 2002. Third quarter interest income was $19,000, a
decrease of $77,000 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 expenses,
which totaled $19,000 for the current quarter, consisted of $9,000 in realized
foreign currency exchange losses, a $23,000 net loss on asset disposals, and
other net income of $13,000.
Other income and expense netted to $164,000 for the nine months ended
December 31, 2002. Interest income was $193,000, a decrease of $66,000 from
the same period of the prior fiscal year. The decrease was due to less
interest earned on the lower cash balance held in the current fiscal year as
well as lower rates of return. Other expenses, which totaled $29,000 for the
period, consisted of $12,000 in realized foreign currency exchange net losses,
a $26,000 net loss on asset disposals and other net income of $9,000.
NET INCOME FROM CONTINUING OPERATIONS. For the reasons stated above, the
Company's net income from continuing operations for the quarter ended December
31, 2002 of $1,004,000 decreased $104,000 or 9 percent over the third quarter
net income from continuing operations in the prior fiscal year.
For the reasons stated above, net income from continuing operations for
the nine months ended December 31, 2002 was $3,212,000, a decrease of $258,000
or 7 percent over the same period of the prior fiscal year.
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 $2.22 million at December 31, 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:
NINE MONTHS ENDED
DECEMBER 31, 2002
----------------------
Net cash provided by operating activities. . . . $ 5,597,000
Net sales of available-for-sale securities . . . 2,790,000
Decrease in notes receivable . . . . . . . . . . 230,000
Investment in affiliate. . . . . . . . . . . . . (82,000)
Purchases of property and equipment. . . . . . . (4,629,000)
Net cash provided by investing activities from
discontinued operations . . . . . . . . . . . 250,000
Net proceeds from exercise of stock options. . . 244,000
Purchase and retirement of common stock. . . . . (11,121,000)
23
The decrease in cash and cash equivalents was due primarily to the
purchase and retirement of common stock ($11.12 million) described further
below, purchases of property and equipment ($4.63 million), and an investment
in affiliate ($0.08 million). This decrease was partially offset by cash
provided by operating activities ($5.60 million), the net sale of available-
for-sale securities ($2.79 million), the net decrease in notes receivable
($0.23 million), net cash provided by investing activities from discontinued
operations ($0.25 million), and net proceeds related to the exercise of stock
options ($0.24 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 December
31, 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 December 31, 2002, the Company was in 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. 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 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 December 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 $2.76 million. There is no assurance that such
options will be exercised.
The Company's material cash commitments at December 31, 2002 included
current liabilities of $3.93 million to be repaid from funds generated from
operations. Current liabilities as of December 31, 2002 and March 31, 2002
consisted of the following:
DECEMBER 31, MARCH 31,
2002 2002
------------ ------------
Accounts payable. . . . . . . . . . . . . . . . $1,472,000 $1,649,000
Accrued payroll . . . . . . . . . . . . . . . . 1,321,000 1,044,000
Accrued warranty expense. . . . . . . . . . . . 345,000 375,000
Reserve for discontinued operations . . . . . . 443,000 2,534,000
Other accruals. . . . . . . . . . . . . . . . . 148,000 448,000
---------- ----------
Total current liabilities . . . . . . . . . . . $3,729,000 $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.
24
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 quarters ended June 30, September 30,
and December 31, 2002, the Company invested an additional $250,000, $183,000,
and $52,000, respectively, in the form of notes receivable for a total
investment of $735,000. After review of the collectability of the notes
receivable, the Company decided to reserve $500,000 of the notes as of June
30, 2002, an additional $183,000 during the quarter ended September 30, 2002
and the remaining outstanding balance of $52,000 in the quarter ended
December,31 2002. This resulted in a charge to general and administrative
expenses of $500,000 for the first quarter, $183,000 for the second quarter,
and $52,000 for the third quarter of fiscal 2002. Due to difficulties in
penetrating the market, the Company does not currently anticipate making any
further investments in 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. During the quarter ended
December 31, 2002, the Company paid an additional $82,000. This total
investment of $132,000 represents a 50 percent equity ownership in this
startup development company. The Company has also extended a line of credit
of $125,000 to the shareholder owning the other 50 percent share of the
company. The line of credit, which bears interest at the prime rate (adjusted
monthly) as published by the Wall Street Journal, requires an initial payment
of the accrued interest six months after the line was extended. Thereafter,
monthly payments of interest only are required until November 30, 2004 at
which time, the full amount of the outstanding line is due and payable. As of
December 31, 2002, the full credit line of $125,000 was outstanding.
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 December 31, 2002, approximately 238,000 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 by 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 at a discount
from the publicly traded share price as the Company's stock closed at $12.21
on September 3, 2002.
25
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, additional
capital expenditures of approximately $4.5 million may be required over the
next 3 to 9 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 reflect the Company's current
expectations and beliefs regarding the future results of operations,
performance anc achievements of the Company. These forward-looking statements
involve risks and uncertainties and are based on certain assumptions that may
not be realized, and actual results and outcomes may differ materially from
those discussed or anticipated. These forward-looking statements include, but
are not limited to, statements concerning:
- references to predicted declines in 2002, and increases in 2003, 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
fourth quarter of fiscal 2003 may be up to 5 percent higher than sales levels
of the fourth 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 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 $4.5 million may be required
over the next 3 to 9 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;
26
- 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:
- continued uncertainty in the strength of domestic and international
economies and business conditions specifically in the institutional furniture
industry;
- continued global tension related to threats of terrorist attacks and
prospects of war;
- 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;
27
- 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;
- 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.
28
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 December 31, 2002. The Company's healthcare chair operations have
occasionally entered into forward contracts for specific US$ denominated
accounts receivable. As of December 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.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of its
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, the Company's disclosure controls and procedures were
effective in timely alerting them to the material information relating to the
Company (or its consolidated subsidiaries) required to be included in its
periodic SEC filings.
(b) Changes in internal controls
There were no significant changes made in the Company's internal controls
during the period covered by this report, or to its knowledge, in other
factors that could significantly affect these controls subsequent to the date
of their evaluation.
29
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.29 Bradley T Nielson Certification pursuant to 18 U.S.C. Section 1350
99.30 Paul R. Killpack Certification pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
On October 30, 2002 the Company filed a current report on Form 8-K
announcing its financial results for the second fiscal quarter of fiscal
year 2003.
On November 14, 2002 the Company filed a current report on Form 8-K
announcing the sale of the specialty office systems segment of its
operations.
On December 23, 2002 the Company filed a current report on Form 8-K
announcing its expectation for stronger sales than previously announced
for the quarter ending December 31, 2002.
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: January 29, 2003 /s/ Bradley T Nielson
-------------------------------------
Bradley T Nielson
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 29, 2003 /s/ Paul R. Killpack
-------------------------------------
Paul R. Killpack
Chief Financial Officer
(Principal Financial and Accounting
Officer)
30
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
(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
31
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: January 29, 2003 /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;
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;
32
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: January 29, 2003 /s/ Paul R. Killpack
-------------------------------------
Paul R. Killpack
Chief Financial Officer