1
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United States Securities and Exchange Commission
Washington, D.C. 20549
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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 June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23898
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MITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0448892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 WEST 400 NORTH
OREM, UTAH 84057
(Address of principal executive offices)
Registrant's telephone number: (801) 224-0589
N/A
(Former name, former address and former fiscal year, if changed since last
report)
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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 4,109,127 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on July 28, 2003.
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2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
JUNE 30, MARCH 31,
2003 2003
ASSETS ----------- -----------
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 1,178,000 $ 2,203,000
Available-for-sale securities. . . . . . . . 3,271,000 2,336,000
Accounts receivable, less allowances of
$318,000 at June 30, 2003 and
$235,000 at March 31, 2003 . . . . . . . . 5,119,000 3,792,000
Inventories. . . . . . . . . . . . . . . . . 1,814,000 1,368,000
Tax receivable . . . . . . . . . . . . . . . 59,000 1,284,000
Prepaid expenses and other current assets. . 333,000 274,000
Deferred income taxes, current . . . . . . . 601,000 635,000
----------- -----------
Total current assets . . . . . . . . . . . . . 12,375,000 11,892,000
Property and equipment, net. . . . . . . . . . 12,743,000 11,656,000
Deferred income taxes. . . . . . . . . . . . . 311,000 376,000
Goodwill . . . . . . . . . . . . . . . . . . . 1,104,000 1,010,000
Notes receivable, net. . . . . . . . . . . . . 191,000 204,000
Other intangible assets. . . . . . . . . . . . 264,000 264,000
----------- -----------
Total assets . . . . . . . . . . . . . . . . . $26,988,000 $25,402,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 1,869,000 2,184,000
Accrued expenses and other current
liabilities. . . . . . . . . . . . . . . . 2,174,000 1,639,000
----------- -----------
Total current liabilities. . . . . . . . . . . 4,043,000 3,823,000
Minority interest. . . . . . . . . . . . . . . 113,000 125,000
----------- -----------
Total liabilities. . . . . . . . . . . . . . . 4,156,000 3,948,000
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 4,106,199 at June 30,
2003 and 4,115,181 at March 31, 2003 . . 41,000 41,000
Additional paid-in capital . . . . . . . . 10,065,000 9,925,000
Retained earnings. . . . . . . . . . . . . 12,377,000 11,376,000
Accumulated other comprehensive income . . 349,000 112,000
----------- -----------
Total stockholders' equity . . . . . . . . . 22,832,000 21,454,000
----------- -----------
Total liabilities and stockholders' equity . . $26,988,000 $25,402,000
=========== ===========
See accompanying notes to unaudited condensed consolidated
financial statements.
3
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . . $11,357,000 $10,559,000
Cost of products sold . . . . . . . . . . . . . . 6,916,000 6,068,000
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . 4,441,000 4,491,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 1,499,000 1,597,000
General and administrative. . . . . . . . . . . 542,000 1,007,000
Research and development. . . . . . . . . . . . 336,000 295,000
----------- -----------
Total expenses. . . . . . . . . . . . . . . . . . 2,377,000 2,899,000
----------- -----------
Income from operations. . . . . . . . . . . . . . 2,064,000 1,592,000
Other income (expense):
Interest income . . . . . . . . . . . . . . . . 33,000 100,000
Other . . . . . . . . . . . . . . . . . . . . . (71,000) (43,000)
----------- -----------
Total other income (expense), net . . . . . . . . (38,000) 57,000
----------- -----------
Income before provision for income taxes and
minority interest . . . . . . . . . . . . . . . 2,026,000 1,649,000
Provision for income taxes. . . . . . . . . . . . 776,000 644,000
----------- -----------
Net income before minority interest . . . . . . . 1,250,000 1,005,000
Minority interest . . . . . . . . . . . . . . . . 12,000 --
----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 1,262,000 $ 1,005,000
=========== ===========
Basic earnings per share. . . . . . . . . . . . . $ 0.31 $ 0.20
=========== ===========
Weighted average number of common shares - basic. 4,121,576 5,006,792
=========== ===========
Diluted earnings per share. . . . . . . . . . . . $ 0.29 $ 0.19
=========== ===========
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 4,305,504 5,250,466
=========== ===========
See accompanying notes to unaudited condensed consolidated
financial statements.
4
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . $ 1,262,000 $ 1,005,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . 391,000 287,000
Deferred taxes . . . . . . . . . . . . . . . 101,000 151,000
Net loss on disposal of equipment. . . . . . -- 3,000
Tax benefit from exercise of stock options . 8,000 3,000
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . (1,241,000) (516,000)
Inventories. . . . . . . . . . . . . . . . (405,000) (200,000)
Prepaid expenses and other current assets. (54,000) (193,000)
Tax receivable . . . . . . . . . . . . . . 1,233,000 164,000
Accounts payable . . . . . . . . . . . . . (347,000) 139,000
Accrued expenses and other current
liabilities . . . . . . . . . . . . . . . 520,000 222,000
----------- -----------
Net cash provided by continuing operations . . . 1,468,000 1,065,000
Net cash provided by discontinued operations . . -- 899,000
----------- -----------
Net cash provided by operating activities. . . . 1,468,000 1,964,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities . . . (1,885,000) (551,000)
Sales and maturities of available-for-sale
securities . . . . . . . . . . . . . . . . . . 944,000 1,759,000
Proceeds from sales of property & equipment. . . -- 6,000
Decrease in notes receivable . . . . . . . . . . 12,000 270,000
Purchases of property and equipment. . . . . . . (1,441,000) (2,298,000)
----------- -----------
Net cash used in continuing operations . . . . . (2,370,000) (814,000)
Net cash used in discontinued operations . . . . -- (44,000)
----------- -----------
Net cash used in investing activities. . . . . . (2,370,000) (858,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of stock options and
issuance of shares to the 401(k) plan. . . . . 208,000 73,000
Minority interest. . . . . . . . . . . . . . . . (12,000) --
Purchase and retirement of common stock. . . . . (336,000) --
----------- -----------
Net cash used in financing activities. . . . . . (140,000) 73,000
----------- -----------
Effect of exchange rate changes on cash. . . . . 17,000 10,000
----------- -----------
Net increase in cash and cash equivalents. . . . (1,025,000) 1,189,000
Cash and cash equivalents at beginning of period 2,203,000 8,926,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . $ 1,178,000 $10,115,000
=========== ===========
See accompanying notes to unaudited condensed consolidated
financial statements.
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes . . $ 51,000 $ 146,000
See accompanying notes to unaudited condensed consolidated
financial statements.
6
MITY ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
Interim Period Accounting Policies
In the opinion of the management of MITY Enterprises, Inc. (the
"Company"), 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 ended June 30,
2003 are not necessarily indicative of results to be expected for the full
fiscal year ending March 31, 2004.
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,
2003.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards (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 No. 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 has
decided to continue applying APB Statement No. 25 (as permitted by SFAS No.
123 and SFAS no. 148). The required disclosure of the effects of SFAS No. 123
and SFAS No. 148 are included in the consolidated financial statements.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost of the Company's two stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with SFAS No. 123, the Company's net income and
earnings per share would have changed to the pro forma amounts indicated
below:
7
THREE MONTHS ENDED JUNE 30,
2003 2002
----------- ----------
Net income:
As reported $1,262,000 $1,005,000
Pro forma 1,209,000 971,000
Earnings per share - basic:
As reported $0.31 $0.20
Pro forma 0.29 0.19
Earnings per share - diluted:
As reported $0.29 $0.19
Pro forma 0.28 0.18
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing. No options were issued during the three
months ended June 30, 2003 or June 30, 2002.
2. INVENTORIES
Inventories consisted of the following:
JUNE 30, MARCH 31,
2003 2003
----------- -----------
Materials and supplies . . . . $ 1,452,000 $ 980,000
Work-in-progress . . . . . . . 225,000 268,000
Finished goods . . . . . . . . 137,000 120,000
----------- -----------
$ 1,814,000 $ 1,368,000
=========== ===========
3. 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 three
months ended June 30, 2003, comprehensive income exceeded net income by
$237,000, consisting of $243,000 in foreign currency translation gains and
$6,000 in unrealized losses on available for sale securities. For the three
months ended June 30, 2002, comprehensive income exceeded net income by
$129,000, consisting of $116,000 in foreign currency translation gains and
$13,000 in unrealized gains on available for sale securities.
4. 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 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 Company's healthcare seating segment represents all of the
Company's foreign-based sales.
8
Reportable segment data of continuing operations reconciled to the
consolidated financial statements for the three months ended June 30, 2003 and
2002 is as follows:
THREE MONTHS ENDED JUNE 30,
2003 2002
----------- -----------
Net sales:
Multipurpose room furniture. . . . . . . . $10,050,000 $ 9,329,000
Healthcare seating . . . . . . . . . . . . 1,307,000 1,230,000
----------- -----------
$11,357,000 $10,559,000
=========== ===========
Income from operations:
Multipurpose room furniture. . . . . . . . $ 1,836,000 $ 1,335,000
Healthcare seating . . . . . . . . . . . . 228,000 257,000
----------- -----------
$ 2,064,000 $ 1,592,000
=========== ===========
Depreciation and amortization expense:
Multipurpose room furniture. . . . . . . . $ 362,000 $ 267,000
Healthcare seating . . . . . . . . . . . . 29,000 20,000
----------- -----------
$ 391,000 $ 287,000
=========== ===========
Capital expenditures, net:
Multipurpose room furniture. . . . . . . . $ 1,371,000 $ 2,249,000
Healthcare seating . . . . . . . . . . . . 70,000 49,000
----------- -----------
$ 1,441,000 $ 2,298,000
=========== ===========
JUNE 30, MARCH 31,
2003 2003
----------- -----------
Total assets:
Multipurpose room furniture. . . . . . . . $23,583,000 $22,364,000
Healthcare seating . . . . . . . . . . . . 3,405,000 3,038,000
----------- -----------
$26,988,000 $25,402,000
=========== ===========
5. COMPUTATION OF NET INCOME PER SHARE
The following is the Company's reconciliation of basic and diluted net income
per share for the three months ended June 30, 2003 and 2002, respectively.
9
THREE MONTHS ENDED
JUNE 30,
2003 2002
----------- -----------
Net income as reported. . . . . . . . . . . . . . .$ 1,262,000 $ 1,005,000
=========== ===========
Basic:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . . 4,121,576 5,006,792
=========== ===========
Basic net income per share . . . . . . . . . . . . $ 0.31 $ 0.20
=========== ===========
Diluted:
Common and common equivalent shares outstanding:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . . 4,121,576 5,006,792
Common stock equivalents from options computed
on the treasury-stock method using the average
fair market value of common stock outstanding
during the period . . . . . . . . . . . . . . . 183,928 243,674
----------- -----------
Shares used in the computation . . . . . . . . . 4,305,504 5,250,466
=========== ===========
Diluted net income per share . . . . . . . . . . . $ 0.29 $ 0.19
=========== ===========
6. NOTES RECEIVABLE AND INVESTMENT IN SUBSIDIARY
During the quarter ended March 31, 2002, the Company paid $50,000 as a
good faith deposit for technology to be used 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 technology investment of $132,000 was contributed to a startup
development company for which the Company received a 50 percent equity
ownership interest. The other 50 percent interest in the technology was
contributed by the other 50 percent owner. The Company has entered into a
royalty agreement with the other 50 percent owner of the startup development
company for some of the products sold by the startup company. The Company has
also extended a line of credit of $125,000 to this other shareholder, which is
secured by such owner's interest in the company and future royalty payments.
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 from June 1, 2003 until November 30,
2004 at which time, the full amount of the outstanding line is due and
payable. As of June 30, 2003, the full credit line of $125,000 was
outstanding and all interest payments are current.
10
During the quarter ended March 31, 2002, the Company entered into an
agreement with 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 June 30, 2003,
the gross value of this note receivable was $300,000. At June 30, 2003,
$54,000 was the current portion of this note receivable, which is included in
prepaid expenses and other current assets. As of June 30, 2003, the dealer
was current on payments on this note receivable.
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, 2003.
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
line consists of lightweight, durable, folding leg tables, stacking chairs,
folding chairs, lecterns, and other related products. These products are used
in multipurpose rooms of educational, recreational, hotel and hospitality,
government, office, healthcare, religious and other public assembly
facilities. Historically, growth in this segment has come from an expanding
base of new customers, from increasing sales to existing customers and from
expansion of the Company's multipurpose room product line. The current and
future growth of the Company's multipurpose room furniture operations depends
largely upon conditions in the industry, the Company's ability to successfully
introduce and market new product lines of multipurpose room furniture and its
ability to profitably increase its market penetration into existing and new
markets.
11
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 education and recreation, has
negatively impacted the Company's historical sales growth rates in fiscal 2003
and 2002. The events of September 11, 2001 as well as subsequent terror
threats and military conflicts have also negatively impacted many of the
Company's markets, particularly travel-related markets such as the hotel and
hospitality, recreational and public assembly markets. Industry experts
reported a decline in the U.S. office furniture market of 19 percent for
calendar year 2002 and are predicting further declines of 8 percent in
calendar year 2003. Through May 2003, industry experts reported a 9 percent
decline. 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's
multipurpose room operations for the quarter ended June 30, 2003 performed
better than industry estimates as sales volumes increased 8 percent compared
to the prior year. Despite this increase, the Company anticipates that
weakness in furniture demand will continue until overall business conditions
improve. The Company anticipates that sales volumes during the quarter ending
September 30, 2003 will be roughly flat as compared to the prior year's second
quarter. Despite these trends, the Company, for a variety of reasons
including those described elsewhere herein, may not be successful in achieving
this sales level in the second quarter or in generating high levels of
positive cash flow.
HEALTHCARE SEATING. Through its wholly owned subsidiary, Broda
Enterprises, Inc., the Company markets a line of healthcare seating products
to customers in Canada and the United States. Broda's operations are based in
Waterloo, Ontario, Canada. Broda focuses on providing products which assist
long-term care patients with advanced needs due to a debilitating condition or
disease, and has developed a line of premium-priced geriatric seating
products. Broda chairs serve a very specific niche in the healthcare market
and thus do not compete 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 June
30, 2003, the Company's healthcare seating operations have not been
significantly 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 operations are located in the Toronto, Ontario, Canada area with a
portion of its sales revenues being generated from that area. With the
outbreak of SARS that occurred during the first quarter in the Toronto area,
the Company's business was negatively impacted because sales representatives
were not able to contact hospitals and nursing homes as easily. As the
outbreak has been contained, Broda sales representatives are once again able
to contact these institutions in the manner they did prior to the SARS
outbreak. However, the Company cannot predict the extent to which the SARS
outbreak will be contained either in the Toronto area or in other areas, and
future outbreaks may have a negative impact on the Company. The Company's
healthcare seating operation's future growth depends largely upon increasing
its market penetration into the U.S. and other foreign markets as well as its
ability to successfully introduce and market new product lines.
12
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 of America. 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, reserve for obsolete inventory, accruals for warranty
expense, values for the discontinued operations, goodwill and other intangible
assets, notes receivable, income taxes, and pension liability.
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.
GOODWILL AND OTHER INTANGIBLE ASSETS: The Company reviews annually the
carrying value of its goodwill and other intangible assets. The goodwill
arose from the Broda acquisition and the other intangible asset is
intellectual property related to a startup development company in which the
Company has invested. During the quarter ended June 30, 2003, the Company
reviewed the goodwill related to the Broda acquisition. This review is
performed using estimates of future cash flows. If the carrying value of the
intangible asset is considered impaired, an impairment charge is recorded for
the amount by which the carrying value of the intangible asset exceeds its
fair value. No impairment charges have been recorded related to Broda
goodwill or the intellectual property related to the startup development
company.
NOTES RECEIVABLE: The Company reviews its notes receivable to determine likely
collectability. Since the notes are with entities 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 or on the Company's belief of what the liquidation
value of the operation would be. At this time, the Company has created
reserves on some 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.
13
INVESTMENT IN AFFILIATE: The Company has an investment in a startup
development company of $132,000. The Company consolidates this entity within
its financial statements and eliminates the other owner's 50 percent interest
in the net profits or losses in the income statement. For the quarter ended
June 30, 2003, this entity realized a net loss of $24,000 of which 50 percent
or $12,000 was eliminated as a minority interest.
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.
PENSION LIABILITY: The Company has certain alleged obligations of up to $1
million related to a defined benefit pension plan resulting from exiting and
selling its specialty office seating and systems business. The Company does
not believe that it is liable for this amount and plans to vigorously defend
its position. At this time, the Company is unable to determine what its
liability will be, if any.
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
NET SALES. The Company's first quarter fiscal 2004 net sales of
$11,357,000 were up 8 percent as compared with the first quarter net sales in
the prior fiscal year. For the quarter ended June 30, 2003, the increase
reflects sales increases, as compared to the quarter ended June 30, 2002, of 6
percent in the Company's healthcare chair operations and 8 percent in the
Company's multipurpose room operations. The Company's total international
sales represented 13 percent of net sales for the quarter ended June 30, 2003
as compared to 10 percent in the first quarter of fiscal 2003. The Company
attributes most of the increase in sales in the multipurpose room operations
to a 30 percent increase in chair sales, and a 3 percent increase in table
sales. The Company expects that its sales will be roughly flat in the second
quarter of fiscal 2004 as compared to the second quarter of fiscal 2003.
GROSS PROFIT. Gross profit as a percentage of net sales in the quarter
ended June 30, 2003 decreased by 3 percentage points over the same quarter in
the prior fiscal year to 39 percent. This decrease was due to higher labor
and overhead costs associated with the startup of the manufacturing operation
for the Company's next generation of table, slightly higher material costs at
the Company's multipurpose room operations, and higher labor and overhead
costs at the Company's healthcare seating operations. This decrease was
partially offset by lower material costs at the Company's healthcare seating
operations.
SELLING EXPENSES. Selling expenses were 13 percent of net sales in the
first quarter of fiscal 2004 as compared to 15 percent for the first quarter
of the prior fiscal year. Actual expenses decreased by $98,000. Multipurpose
room furniture selling costs decreased by $107,000 over the prior fiscal year.
This decrease resulted from lower costs for personnel, trade shows, and sales
literature. Selling expenses at the healthcare seating operations increased
by $9,000 over the prior fiscal year.
14
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were 5 percent of net sales for the first quarter of fiscal 2004 as compared
to 10 percent for the first quarter of the prior fiscal year. Actual spending
decreased by 46 percent or $465,000. The decrease was primarily due to a
non-recurring charge in the prior fiscal year of $500,000 that fully reserved
the June 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 decrease was partially offset by higher personnel costs and
professional fees.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were 3 percent of net sales for the first quarter of fiscal 2004 as compared
to 3 percent for the first quarter of the prior fiscal year. Actual spending
increased by $41,000 primarily due to increased personnel costs at the
Company's healthcare seating operation.
OTHER INCOME AND EXPENSE. Other income and expense netted to a net
expense of $38,000 for the first quarter of fiscal 2004. First quarter
interest income was $33,000, a decrease of $67,000 from the first quarter of
the prior fiscal year. The decrease was due to a lower rate of return on a
lower cash balance held in the current fiscal year. Other expenses, which
totaled $71,000 for the current quarter, consisted of $72,000 in realized
foreign currency exchange losses and other income of $1,000.
NET INCOME. For the reasons stated above, the Company's fiscal 2004
first quarter net income of $2,026,000 increased $377,000 or 23 percent over
the first quarter net income in 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 $1.18 million at June 30, 2003 as compared to $2.20
million at March 31, 2003.
The following table highlights certain key cash flow and capital
information pertinent to the discussion that follows:
THREE MONTHS ENDED
JUNE 30, 2003
--------------
Net cash provided by operating activities. . . . 1,468,000
Net purchases of available-for-sale securities . (941,000)
Purchases of property and equipment. . . . . . . (1,441,000)
Net proceeds from exercise of stock options. . . 208,000
Purchase and retirement of common stock. . . . . (336,000)
The decrease in cash and cash equivalents was due primarily to the net
purchases of available-for-sale securities ($0.94 million), the purchases of
property and equipment ($1.44 million), and the purchase and retirement of
common stock ($0.34 million). This decrease was partially offset by cash
provided by operating activities ($1.47 million) and net proceeds related to
the exercise of stock options ($0.21 million).
15
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 $0.72 million. As of June 30,
2003, no amount was drawn under this facility. This credit facility requires
the maintenance of certain financial ratios and levels of working capital. As
of June 30, 2003, the Company was in full compliance with the loan covenants
related to Broda's credit facility. The Company's liquidity depends only
partially upon the availability of the Broda 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 June 30, 2003, the proceeds which would have been received by the
Company upon exercise of outstanding options which were exercisable on that
date were approximately $2.79 million. There is no assurance that such
options will be exercised.
The Company's material cash commitments at June 30, 2003 include current
liabilities of $4.04 million to be repaid from funds generated from
operations. Current liabilities consist of the following:
JUNE 30, MARCH 31,
2003 2003
---------- ----------
Accounts payable. . . . . . . . . . . . . . . . $1,869,000 $2,184,000
Accrued payroll . . . . . . . . . . . . . . . . 1,013,000 931,000
Accrued warranty expense. . . . . . . . . . . . 366,000 365,000
Other accruals. . . . . . . . . . . . . . . . . 795,000 343,000
---------- ----------
Total current liabilities . . . . . . . . . . . $4,043,000 $3,823,000
========== ==========
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 $11,000) per month through August 2004.
16
During the quarter ended March 31, 2002, the Company paid $50,000 as a
good faith deposit for technology to be used 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 technology investment of $132,000 was contributed to a startup
development company for which the Company received a 50 percent equity
ownership interest. The other 50 percent interest in the technology was
contributed by the other 50 percent owner. The Company has entered into a
royalty agreement with the other 50 percent owner of the startup development
company for some of the products sold by the startup company. The Company has
also extended a line of credit of $125,000 to the other 50 percent owner of
the startup development company, which is secured by such owner's interest in
the company and future royalty payments. 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 from June 1, 2003 until November 30, 2004 at which time, the full
amount of the outstanding line is due and payable. As of June 30, 2003, the
full credit line of $125,000 was outstanding and all interest payments are
current.
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. During the first quarter, the Company completed the repurchase of
275,000 shares. The board of directors further authorized an additional
10,000 shares to be repurchased during the first quarter. This authorization
was fulfilled as well. The Company does not currently have a share repurchase
authorization. However, the Company may do additional repurchases in the
future which will reduce the Company's liquidity.
The Company is in the process of developing new products including a new
generation of multipurpose room tables. In connection with this, the Company
has constructed a new 63,000 square foot facility which will be used for the
manufacturing of its next generation of multipurpose room tables. In
addition, the Company is both purchasing and developing machinery and
equipment to be used in this new process. As of June 30, 2003, the Company
had invested approximately $4.2 million for the building and capital
equipment. The Company anticipates additional capital expenditures of
approximately $1.9 million over the next 3 to 6 months. The Company
anticipates funding these capital expenditures using existing capital reserves
as well as using cash from operations. However, there is no assurance that
such resources will be sufficient and that the Company will not need to raise
additional capital.
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.
17
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 or cost
reductions to preserve margins. These forward-looking statements involve
risks and uncertainties and are based on certain assumptions that may not be
realized. Actual results and outcomes may differ materially from those
discussed or anticipated. The forward-looking statements and associated risks
set forth herein and elsewhere in this filing relate to:
- references to predicted declines in the institutional furniture and U.S.
office furniture markets, and the Company's belief that weakness in furniture
demand will continue;
- statements that the Company anticipates that its sales volumes during the
second quarter of fiscal 2004 will be roughly flat as compared to the sales
levels of the second quarter of fiscal 2003;
- 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;
- the statement that the Company's inability to predict the extent to which
the SARS outbreak will be contained either in the Toronto area or in other
areas, as well as future outbreaks;
- 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 flow from operations and debt financing are insufficient
to fund the Company's working capital requirements;
- statements related to anticipated capital expenditures; and
- statements related to the Company's belief that it is not liable for
certain alleged obligations of up to $1 million related to a defined benefit
pension plan resulting from exiting and selling its specialty office seating
and systems business.
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:
18
- 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 and continued acts of terror and threats
of terrorism;
- increased competition in the Company's core businesses;
- 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
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 including its next generation multipurpose room of tables;
- the Company's ability to manufacture and market at current margins high
quality, high performance products at competitive prices;
- import restrictions and economic conditions in the Company's foreign
markets and foreign currency risks associated therewith;
- the Company's ability to maintain relatively low cost labor rates;
- the Company's ability to source a sufficient volume of acceptable raw
materials at current prices;
- increased product warranty service costs if warranty claims increase as a
result of the Company's new product introductions or acquisitions or for any
other reason;
- the Company's ability to refine and enhance the quality and productivity
of its manufacturing process;
- the Company's ability to locate and successfully consummate and integrate
acquisitions, if any, of complementary product lines or companies on terms
acceptable to the Company;
- the Company's ability to retain and maintain relationships with key
customers;
19
- 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 manufactures 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 June 30, 2003. The Company has occasionally entered into forward
contracts for specific US$ denominated accounts receivable related to its
healthcare seating operations. As of June 30, 2003, 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.
Under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 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 the Company's periodic SEC filings.
20
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:
None.
(b) Reports on Form 8-K
On May 21, 2003 the Company filed a current report on Form
8-K announcing its financial results for the fourth fiscal
quarter and fiscal year 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITY Enterprises, Inc.
Date: July 30, 2003 /s/ Bradley T Nielson
-------------------------------------
Bradley T Nielson
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 30, 2003 /s/ Paul R. Killpack
-------------------------------------
Paul R. Killpack
Chief Financial Officer
(Principal Financial and Accounting
Officer)
21
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
22
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: July 30, 2003 /s/ Bradley T Nielson
------------------------------------
Bradley T Nielson
Chief Executive Officer
23
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;
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
24
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: July 30, 2003 /s/ Paul R. Killpack
------------------------------------
Paul R. Killpack
Chief Financial Officer