1
- -----------------------------------------------------------------------------
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, 2004
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: (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 4,314,883 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on January 27, 2005.
- -----------------------------------------------------------------------------
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
ASSETS 2004 2004
----------- -----------
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 6,049,000 $ 6,382,000
Available-for-sale securities. . . . . . . . 2,906,000 1,050,000
Accounts receivable, less allowances of
$308,000 at December 31, 2004 and
$339,000 at March 31, 2004 . . . . . . . . 5,893,000 5,586,000
Inventories (see note 9) . . . . . . . . . . 3,672,000 2,339,000
Tax receivable . . . . . . . . . . . . . . . - 781,000
Prepaid expenses and other current assets. . 310,000 477,000
Deferred income taxes, current (see note 9). 586,000 568,000
Total current assets . . . . . . . . . . . . . 19,416,000 17,183,000
----------- -----------
Property and equipment, net (see note 9) . . . 13,861,000 13,230,000
Deferred income taxes. . . . . . . . . . . . . - 63,000
Goodwill . . . . . . . . . . . . . . . . . . . 2,319,000 1,136,000
Other intangible asset, net (see note 9) . . . 231,000 264,000
Notes receivable, net. . . . . . . . . . . . . 25,000 80,000
----------- -----------
Total assets . . . . . . . . . . . . . . . . . $35,852,000 $31,956,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . $ 1,744,000 2,088,000
Accrued expenses and other current
liabilities. . . . . . . . . . . . . . . . 2,187,000 2,035,000
----------- -----------
Total current liabilities. . . . . . . . . . . 3,931,000 4,123,000
Deferred income tax. . . . . . . . . . . . . . 201,000 -
Minority interest. . . . . . . . . . . . . . . - 34,000
----------- -----------
Total liabilities. . . . . . . . . . . . . . . 4,132,000 4,157,000
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 4,313,838 at December 31,
2004 and 4,258,590 at March 31, 2004 . . 43,000 43,000
Additional paid-in capital . . . . . . . . 12,083,000 11,469,000
Retained earnings (see note 9) . . . . . . 18,875,000 15,868,000
Accumulated other comprehensive income . . 719,000 419,000
----------- -----------
Total stockholders' equity . . . . . . . . . 31,720,000 27,799,000
----------- -----------
Total liabilities and stockholders' equity . . $35,852,000 $31,956,000
=========== ===========
See accompanying notes to unaudited condensed consolidated
financial statements.
3
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Dec. 31,
2004 2003
----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . . $11,635,000 $10,976,000
Cost of products sold . . . . . . . . . . . . . . 7,630,000 6,764,000
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . 4,005,000 4,212,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 1,945,000 1,689,000
General and administrative. . . . . . . . . . . 476,000 336,000
Research and development. . . . . . . . . . . . 314,000 329,000
----------- -----------
Total expenses. . . . . . . . . . . . . . . . . . 2,735,000 2,354,000
----------- -----------
Income from operations. . . . . . . . . . . . . . 1,270,000 1,858,000
Other income (expense)
Interest income . . . . . . . . . . . . . . . . 44,000 19,000
Other . . . . . . . . . . . . . . . . . . . . . (60,000) (41,000)
----------- -----------
Total other expense, net. . . . . . . . . . . . . (16,000) (22,000)
----------- -----------
Income before provision for income taxes and
minority interest . . . . . . . . . . . . . . . 1,254,000 1,836,000
Provision for income taxes. . . . . . . . . . . . 459,000 649,000
----------- -----------
Net income before minority interest . . . . . . . 795,000 1,187,000
Minority interest . . . . . . . . . . . . . . . . - (41,000)
----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 795,000 $ 1,146,000
=========== ===========
Basic earnings per share. . . . . . . . . . . . . $ 0.18 $ 0.28
=========== ===========
Weighted average number of common shares - basic. 4,301,266 4,162,872
=========== ===========
Diluted earnings per share. . . . . . . . . . . . $ 0.18 $ 0.26
=========== ===========
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 4,462,038 4,410,412
=========== ===========
See accompanying notes to unaudited condensed consolidated
financial statements.
4
MITY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Nine months ended Dec. 31,
2004 2003
----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . . $36,578,000 $33,610,000
Cost of products sold . . . . . . . . . . . . . . 23,830,000 20,468,000
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . 12,748,000 13,142,000
Expenses:
Selling . . . . . . . . . . . . . . . . . . . . 5,535,000 4,801,000
General and administrative. . . . . . . . . . . 1,510,000 1,356,000
Research and development. . . . . . . . . . . . 926,000 1,000,000
----------- -----------
Total expenses. . . . . . . . . . . . . . . . . . 7,971,000 7,157,000
----------- -----------
Income from operations. . . . . . . . . . . . . . 4,777,000 5,985,000
Other income (expense)
Interest income . . . . . . . . . . . . . . . . 117,000 58,000
Other . . . . . . . . . . . . . . . . . . . . . (159,000) (111,000)
----------- -----------
Total other expense, net. . . . . . . . . . . . . (42,000) (53,000)
----------- -----------
Income before provision for income taxes and
minority interest . . . . . . . . . . . . . . . 4,735,000 5,932,000
Provision for income taxes. . . . . . . . . . . . 1,751,000 2,214,000
----------- -----------
Net income before minority interest . . . . . . . 2,984,000 3,718,000
Minority interest . . . . . . . . . . . . . . . . 22,000 (7,000)
----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 3,006,000 $ 3,711,000
=========== ===========
Basic earnings per share. . . . . . . . . . . . . $ 0.70 $ 0.90
=========== ===========
Weighted average number of common shares - basic. 4,289,106 4,136,339
=========== ===========
Diluted earnings per share. . . . . . . . . . . . $ 0.67 $ 0.86
=========== ===========
Weighted average number of common and common
equivalent shares - diluted. . . . . . . . . . . 4,475,784 4,337,433
=========== ===========
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,
2004 2003
----------- -----------
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . $ 3,006,000 $ 3,711,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . 1,423,000 1,205,000
Deferred taxes . . . . . . . . . . . . . . . 248,000 201,000
Loss (gain) on disposal of equipment . . . . (1,000) 21,000
Tax benefit from exercise of stock options . 111,000 194,000
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . (62,000) (1,282,000)
Inventories. . . . . . . . . . . . . . . . (1,236,000) (829,000)
Prepaid expenses and other current assets. 180,000 (253,000)
Tax receivable . . . . . . . . . . . . . . 780,000 626,000
Accounts payable . . . . . . . . . . . . . (416,000) (600,000)
Accrued expenses and other current
liabilities . . . . . . . . . . . . . . . 18,000 768,000
----------- -----------
Net cash provided by operating activities. . . . 4,051,000 3,762,000
----------- -----------
Cash flows from investing activities
Purchases of available-for-sale securities . . . (2,206,000) (1,813,000)
Sales and maturities of available-for-sale
securities . . . . . . . . . . . . . . . . . . 341,000 2,750,000
Proceeds from sales of property & equipment. . . 76,000 1,000
Decrease in notes receivable . . . . . . . . . . 55,000 88,000
Purchase of Versipanel . . . . . . . . . . . . . (1,201,000) --
Purchases of property and equipment. . . . . . . (1,935,000) (2,735,000)
----------- -----------
Net cash used in investing activities. . . . . . (4,870,000) (1,709,000)
----------- -----------
Cash flows from financing activities
Net proceeds from exercise of stock options and
issuance of shares to the 401(k) plan. . . . . 503,000 833,000
Minority interest. . . . . . . . . . . . . . . . (34,000) 7,000
Purchase and retirement of common stock. . . . . - (336,000)
----------- -----------
Net cash provided by financing activities. . . . 469,000 504,000
----------- -----------
Effect of exchange rate changes on cash. . . . . 17,000 30,000
----------- -----------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . (333,000) 2,587,000
Cash and cash equivalents at beginning of period 6,382,000 2,203,000
----------- -----------
Cash and cash equivalents at end of period . . . $ 6,049,000 $ 4,790,000
=========== ===========
See accompanying notes to unaudited condensed consolidated
financial statements.
6
Supplemental disclosure of cash flow information:
Nine months ended Dec. 31,
2004 2003
----------- -----------
Net cash paid during the period for income taxes . $ 678,000 $ 1,110,000
Supplemental schedule of noncash investing and financing activities:
In April of 2004, the Company purchased the assets of Versipanel LLC for
$1,201,000. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired. . . . . . . . . . . . $ 219,000
Cost in excess of fair value of assets (goodwill). . 1,085,000
Cash paid for assets . . . . . . . . . . . . . . . . (1,201,000)
-----------
Liabilities assumed. . . . . . . . . . . . . . . . . $ 103,000
===========
In 2002, the Company acquired a 50 percent interest in a startup development
company. On September 30, 2004, the Company sold its 50 percent equity
ownership interest in the startup development company to the other 50 percent
owner. The Company exchanged its ownership interest for an exclusive license
for furniture products and selected other products, release of all royalty
obligations on existing and future products, and other considerations. This
transaction resulted in the Company reporting an intangible asset on the
balance sheet which as of December 31, 2004 amounted to $231,000, net of
accumulated amortization (see note 9).
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 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 periods. Results of operations for the three months and nine months
ended December 31, 2004 are not necessarily indicative of results to be
expected for the full fiscal year ending March 31, 2005.
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,
2004.
STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement 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 SFAS 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 Accounting Principles Board (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, as all options granted had an exercise
price equal to the market value of the underlying common stock on the date of
grant. 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:
8
Three months ended Dec. 31,
2004 2003
---------- ----------
Net income, as reported $ 795,000 $1,146,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax 54,000 36,000
---------- ----------
Pro forma net income $ 741,000 $1,110,000
========== ==========
Earnings per share - basic:
As reported $0.18 $0.28
Pro forma 0.17 0.27
Earnings per share - diluted:
As reported $0.18 $0.26
Pro forma 0.17 0.25
Nine months ended Dec. 31,
2004 2003
---------- ----------
Net income, as reported $3,006,000 $3,711,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax 161,000 105,000
---------- ----------
Pro forma net income $2,845,000 $3,606,000
========== ==========
Earnings per share - basic:
As reported $0.70 $0.90
Pro forma 0.66 0.87
Earnings per share - diluted:
As reported $0.67 $0.86
Pro forma 0.64 0.83
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in the nine months ended December 31, 2004 and 2003, respectively:
expected volatility of 43 percent, risk free interest rate of 2.64 percent and
2.06 percent, and expected lives of three to four years. During the nine
months ended December 31, 2004 and 2003, respectively, 13,750 and 26,300
options were granted. Under SFAS No. 123, the weighted average fair value per
share of options issued during the nine months ended December 31, 2004 and
2003 was $5.42 and $4.74, respectively.
9
On December 16, 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R eliminates the alternative of
applying the intrinsic value measurement provisions of Opinion 25 to stock
compensation awards issued to employees. Rather, the new standard requires
enterprises to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which an employee
is required to provide services in exchange for the award, known as the
requisite service period (usually the vesting period).
The Company has not yet quantified the effects of the adoption of SFAS 123R,
but it is expected that the new standard will result in significant
stock-based compensation expense. The pro forma effects on net income and
earnings per share if the Company had applied the fair value recognition
provisions of original SFAS 123 on stock compensation awards (rather than
applying the intrinsic value measurement provisions of Opinion 25) are
disclosed above on the prior page. Although such pro forma effects of
applying original SFAS 123 may be indicative of the effects of adopting SFAS
123R, the provisions of these two statements differ in some important
respects. The actual effects of adopting SFAS 123R will be dependent on
numerous factors including, but not limited to, the valuation model chosen by
the Company to value stock-based awards; the assumed award forfeiture rate;
the accounting policies adopted concerning the method of recognizing the fair
value of awards over the requisite service period; and the transition method
(as described below) chosen for adopting SFAS 123R.
SFAS 123R will be effective for the Company's fiscal quarter beginning July 1,
2005, and requires the use of the Modified Prospective Application Method.
Under this method SFAS 123R is applied to new awards and to awards modified,
repurchased, or cancelled after the effective date. Additionally,
compensation cost for the portion of awards for which the requisite service
has not been rendered (such as unvested options) that are outstanding as of
the date of adoption shall be recognized as the remaining requisite services
are rendered. The compensation cost relating to unvested awards at the date
of adoption shall be based on the grant-date fair value of those awards as
calculated for pro forma disclosures under the original SFAS 123. In
addition, companies may use the Modified Retrospective Application Method.
This method may be applied to all prior years for which the original SFAS 123
was effective or only to prior interim periods in the year of initial
adoption. If the Modified Retrospective Application Method is applied,
financial statements for prior periods shall be adjusted to give effect to the
fair-value-based method of accounting for awards on a consistent basis with
the pro forma disclosures required for those periods under the original SFAS
123.
10
2. INVENTORIES
Inventories consisted of the following (see footnote 9):
December 31, March 31,
2004 2004
------------ ------------
Materials and supplies . . . . $ 2,214,000 $ 1,486,000
Work-in-progress . . . . . . . 175,000 265,000
Finished goods . . . . . . . . 1,283,000 588,000
------------ ------------
$ 3,672,000 $ 2,339,000
============ ============
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 nine
months ended December 31, 2004, comprehensive income exceeded net income by
$300,000, consisting of $309,000 in foreign currency translation gains and
$9,000 in unrealized losses on available for sale securities. For the nine
months ended December 31, 2003, comprehensive income exceeded net income by
$345,000, consisting of $343,000 in foreign currency translation gains and
$2,000 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, portable partitions, 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.
Reportable segment data of continuing operations reconciled to the
consolidated financial statements for the three months and nine months ended
December 31, 2004 and 2003 is as follows:
Three months ended December 31,
2004 2003
------------ ------------
Net sales:
Multipurpose room furniture. . . . . . . . $ 9,597,000 $ 9,336,000
Healthcare seating . . . . . . . . . . . . 2,038,000 1,640,000
------------ ------------
$11,635,000 $10,976,000
11
============ ============
Income from operations:
Multipurpose room furniture. . . . . . . . $ 794,000 $ 1,519,000
Healthcare seating . . . . . . . . . . . . 476,000 339,000
------------ ------------
$ 1,270,000 $ 1,858,000
============ ============
Depreciation and amortization expense:
Multipurpose room furniture. . . . . . . . $ 459,000 $ 392,000
Healthcare seating . . . . . . . . . . . . 36,000 34,000
------------ ------------
$ 495,000 $ 426,000
============ ============
Capital expenditures, net:
Multipurpose room furniture. . . . . . . . $ 362,000 $ 503,000
Healthcare seating . . . . . . . . . . . . 137,000 43,000
------------ ------------
$ 499,000 $ 546,000
============ ============
Nine months ended December 31,
2004 2003
------------ ------------
Net sales:
Multipurpose room furniture. . . . . . . . $31,347,000 $29,166,000
Healthcare seating . . . . . . . . . . . . 5,231,000 4,444,000
------------ ------------
$36,578,000 $33,610,000
============ ============
Income from operations:
Multipurpose room furniture. . . . . . . . $ 3,659,000 $ 5,045,000
Healthcare seating . . . . . . . . . . . . 1,118,000 940,000
------------ ------------
$ 4,777,000 $ 5,985,000
============ ============
Depreciation and amortization expense:
Multipurpose room furniture. . . . . . . . $ 1,314,000 $ 1,110,000
Healthcare seating . . . . . . . . . . . . 109,000 95,000
------------ ------------
$ 1,423,000 $ 1,205,000
============ ============
Capital expenditures, net:
Multipurpose room furniture. . . . . . . . $ 1,757,000 $ 2,613,000
Healthcare seating . . . . . . . . . . . . 178,000 122,000
------------ ------------
$ 1,935,000 $ 2,735,000
============ ============
12
December 31, March 31,
2004 2004
------------ ------------
Total assets:
Multipurpose room furniture. . . . . . . . $30,963,000 $28,042,000
Healthcare seating . . . . . . . . . . . . 4,889,000 3,914,000
------------ ------------
$35,852,000 $31,956,000
============ ============
Total goodwill:
Multipurpose room furniture. . . . . . . . $ 1,085,000 -
Healthcare seating . . . . . . . . . . . . 1,234,000 $ 1,136,000
------------ ------------
$ 2,319,000 $ 1,136,000
============ ============
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 and nine months ended December 31, 2004 and
2003, respectively.
Three months ended Nine months ended
December 31, December 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income as reported. . . .$ 795,000 $ 1,146,000 $ 3,006,000 $ 3,711,000
=========== =========== =========== ===========
Basic:
Weighted average number of
common shares outstanding . 4,301,266 4,162,872 4,289,106 4,136,339
=========== =========== =========== ===========
Basic net income per share . $ 0.18 $ 0.28 $ 0.70 $ 0.90
=========== =========== =========== ===========
Diluted:
Common and common equivalent
shares outstanding:
Weighted average number of
common shares outstanding . 4,301,266 4,162,872 4,289,106 4,136,339
Common stock equivalents
from options computed on
the treasury-stock method
using the average fair
market value of common
stock outstanding during
the period . . . . . . . 160,772 247,540 186,678 201,094
----------- ----------- ----------- -----------
Shares used in the
computation . . . . . . . 4,462,038 4,410,412 4,475,784 4,337,433
=========== =========== =========== ===========
Diluted net income per share $ 0.18 $ 0.26 $ 0.67 $ 0.86
=========== =========== =========== ===========
13
6. NOTES RECEIVABLE AND INVESTMENT IN SUBSIDIARY
In 2002, the Company acquired a 50 percent interest in a startup
development company. On September 30, 2004, the Company sold its 50 percent
equity ownership interest in the startup development company to the other 50
percent owner. The Company exchanged its ownership interest for an exclusive
license for furniture products and selected other products, release of all
royalty obligations on existing and future products, and other considerations.
The Company has retained most of the tangible assets and liabilities of the
startup development company including cash, inventory, fixed assets, and
accounts payable. This transaction resulted in the company reporting an
intangible asset on the balance sheet which as of December 31, 2004 amounted
to $231,000, net of accumulated amortization (see footnote 9).
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 nine 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 $150,000 for this note receivable. At December 31,
2004, the gross value of this note receivable was $193,000. At December 31,
2004, $43,000 was the net current portion of this note receivable, which is
included in prepaid expenses and other current assets.
7. COMMITMENTS AND CONTINGENCIES
The Company has been named as defendant in certain lawsuits. While the
Company cannot predict the results of these actions, management believes,
based in part on the advice of legal counsel, that the liability, if any,
resulting from such litigation and claims will not have a material affect on
the consolidated financial statements.
The Company has certain alleged obligations of up to $0.4 million related
to a defined benefit pension plan resulting from exiting and selling its
specialty office seating and systems business in 2001. 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.
8. RECENT ACQUISITION
On April 1, 2004, the Company announced the acquisition of the assets of
Versipanel LLC, a privately-owned designer, manufacturer and marketer of a
variety of portable partitions based in Phoenix, Arizona. The transaction was
treated for accounting purposes as a purchase and accordingly, the Company has
included the operating results of Versipanel in the financial statements from
April 1, 2004.
14
In conjunction with this acquisition, the Company paid $1,201,000 in
cash. The acquisition resulted in goodwill of $1,085,000 all of which is
deductible for tax purposes. Up to an additional $200,000 of the purchase
price is contingently payable based on obtaining certain sales growth targets
on the Versipanel product line through April 26, 2005. If achieved, goodwill
will be increased by the amount paid out. The actual amount of goodwill
recorded will also vary based upon the final purchase price allocation
resulting from post-closing purchase price adjustments which may result from
any breaches of sellers' representations, warranties or covenants.
The unaudited pro forma results of operations of the Company for the nine
months ended December 31, 2003 and 2004 (assuming the acquisition of
Versipanel had occurred as of April 1, 2003) are as follows:
Nine months ended
December 31,
2004 2003
----------- -----------
Net sales . . . . . . . . . . . . . . . . . . . $36,578,000 $34,462,000
Net income. . . . . . . . . . . . . . . . . . . 3,013,000 3,689,000
Basic earnings per share. . . . . . . . . . . . 0.70 0.89
Diluted earnings per share. . . . . . . . . . . 0.67 0.85
9. SUBSEQUENT EVENT
During a meeting of MITY's Board of Directors on January 25, 2005, the
board decided to discontinue funding the Company's initiative to develop its
next generation table. The decision was made based on the difficulties
encountered and additional expenses required to achieve a consistent,
repeatable manufacturing process. At this time, the decision was also made to
redirect some of the resources previously focused on the next generation table
project towards using the same technology and equipment for other products
that do not require the same level of precision as tables. However, the
Company does not have a specific plan in place for the use of these assets and
can give no assurance that it will be successful in its efforts.
As a result, during the quarter ending March 31, 2005, in accordance with
SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets",
the Company will realize an impairment on some of the assets involved in that
project to reduce their carrying amounts to their estimated fair value. As
per SFAS No. 144, the fair value will be determined by the amount at which the
assets could be bought or sold in a current transaction between willing
parties. The Company is in the process of hiring an expert to help establish
the fair value of the assets. At the current time, the Company estimates that
the impairment will total between $2.3 million and $2.6 million. Because the
determination to discontinue funding was made after the end of the quarter
ended December 31, 2004, the impairment will impact the Company's financial
statements for the quarter ended and fiscal year ended March 31, 2005. The
following information shows pro forma financial data giving effect to the
determination as if it had occurred prior to December 31, 2004, assuming that
the full $2.6 million in estimated impairment is realized:
15
BALANCE SHEET EFFECTS:
Amount as shown
at December 31, Effect from Pro forma
2004 Impairment Financials
--------------- ----------- ----------
Inventory. . . . . . . . . . . $3,672,000 ($391,000) $3,281,000
Property and equipment, net. . 13,861,000 (1,983,000) 11,878,000
Other intangible asset, net. . 231,000 (231,000) -
Deferred income taxes. . . . . 586,000 964,000 1,572,000
Retained Earnings. . . . . . . 31,720,000 (1,641,000) 30,079,000
STATEMENT OF INCOME EFFECTS:
Amount shown for
three months ended Effect from Pro forma
December 31, 2004 Impairment Financials
--------------- ----------- ----------
Impairment expense. . . . . . . - $2,605,000 $2,605,000
Provision for income taxes. . . $459,000 (964,000) (964,000)
Net income (loss) . . . . . . . 795,000 (1,641,000) (846,000)
Basic earnings (loss) per share $0.18 ($0.38) ($0.20)
Diluted earnings (loss) per
share . . . . . . . . . . . . 0.18 (0.37) (0.19)
Amount shown for
nine months ended Effect from Pro forma
December 31, 2004 Impairment Financials
--------------- ----------- ----------
Impairment expense. . . . . . . - $2,605,000 $2,605,000
Provision for income taxes. . .$1,751,000 (964,000) 787,000
Net income (loss) . . . . . . .$3,006,000 (1,641,000) 1,365,000
Basic earnings (loss) per share $0.70 ($0.38) $0.32
Diluted earnings (loss) per
share . . . . . . . . . . . . 0.67 (0.37) 0.30
The expected fair value of the assets previously associated with the next
generation table project that will now be redirected on other processes,
consists of $2.6 million in building, $0.9 million for equipment, and $0.4
million in inventory. The Company believes that it will be able to fully
realize the value of these assets.
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
accompanying condensed consolidated financial statements of MITY Enterprises,
Inc. (the "Company") and the notes thereto and with the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2004.
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
line consists of lightweight, durable, folding leg tables, stacking chairs,
folding chairs, lecterns, portable partitions, 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.
Multipurpose Room Furniture Outlook. After three years of declines in
the office furniture marketplace due to the downturn in the domestic and
international economy, the office furniture marketplace has started to grow
again in calendar year 2004. Through November 2004, industry experts are
reporting an increase of 4 percent in shipments. Industry experts predict a
continued recovery in calendar year 2005, with shipments projected to be up by
8 percent. The Company's multipurpose room operations for the nine months
ended December 31, 2004 exceeded estimates for the industry as sales volumes
increased 7 percent as compared to the prior year. However, continued terror
threats and military conflicts could again negatively impact many of the
Company's markets, particularly travel-related markets such as the hotel and
hospitality, recreational and public assembly markets. During calendar year
2004, there has also been significant pressure on commodity prices for many of
the raw materials that the Company uses including steel, wood, and plastic.
This has caused a tightening in gross margins, which has caused the Company to
increase the price of its products. 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.
17
During the past few years, chair sales have begun to make up a larger
portion of the multipurpose room operation's sales. Although table sales
still dominate the volume of this operation, much of the increases in sales in
recent years can be attributed to increases in chair sales. During the
preceding fiscal year, the Company launched a new line of stacking chairs to
complement its existing chair lines. The Company anticipates developing
additional complementary chair lines to continue to grow this portion of its
business as well as further penetrating its existing marketplace with its
current line of chairs. However, there can be no assurance that the Company
will be able to successfully develop and launch such chair lines or further
penetrate its existing marketplace.
On April 1, 2004, the Company announced the acquisition of the assets of
Versipanel LLC, a privately owned designer, manufacturer and marketer of a
variety of portable partitions based in Phoenix, Arizona. Versipanel
specializes in the production of a unique and innovative line of portable
partitions, moveable walls, sight barriers, sound barriers, and other
applications. The partitions are constructed of sound absorbing lightweight
materials, making them easily portable. They can be used to create instant
classrooms, portable dressing rooms and trade show meeting rooms. For the
year ended December 31, 2003, Versipanel generated sales of approximately $1.5
million. During the quarter ended June 30, 2004, Versipanel was integrated
into the multipurpose room furniture operation. The Company is now selling
Versipanel products through its multipurpose room furniture sales system to
existing customers.
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. During the recent economic
downturn, the Company's healthcare seating operations was not 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
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.
During the past few years, the Company has hired direct employees in the
United States to market its healthcare seating production, replacing some of
the dealers and distributors that it previously had in those areas. To date,
the Company has a sales presence through these direct employees in parts of
approximately 12 states. The Company intends to expand this presence in the
coming years.
18
General Outlook. Based on the reasons stated above, the Company
anticipates that sales volumes during the quarter ending March 31, 2005 will
be up to 15 percent higher as compared to the prior year's fourth 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 fourth quarter.
Impairment of assets. During the past few years, the Company has been
working to develop its next generation table that would be stronger, lighter,
more durable and better able to withstand outdoor use than its current
multipurpose room tables. The Company was able to produce tables that met
most of these criteria, but was not able to do so at costs equal to existing
table production using a repeatable manufacturing nor achieving the desired
quality expectations necessary.
During a meeting of MITY's Board of Directors on January 25, 2005, the
board decided to discontinue funding the Company's initiative to develop its
next generation table. The decision was made based on the difficulties
encountered and additional expenses required to achieve a consistent,
repeatable manufacturing process. At that time, the decision was also made to
redirect some of the resources previously focused on the next generation table
project towards using the same technology and equipment for other products
that do not require the same level of precision as tables. However, the
Company does not have a specific plan in place for the use of these assets and
can give no assurance that it will be successful in its efforts.
As a result, during the quarter ending March 31, 2005, in accordance with
SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets",
the Company will realize an impairment on some of the assets involved in that
project to reduce their carrying amounts to their fair value. As per SFAS No.
144, the fair value will be determined by the amount at which the assets could
be bought or sold in a current transaction between willing parties. The
Company is in the process of hiring an expert to give the Company an estimate
of fair valuation. At the current time, the Company estimates that the
impairment will total between $2.3 million and $2.6 million. Because the
determination to discontinue funding was made after the end of the quarter
ended December 31, 2004, the impairment will impact the Company's financial
statements for the quarter ended and fiscal year ended March 31, 2005. The
following information shows pro forma financial data giving effect to the
determination as if it had occurred prior to December 31, 2004, assuming that
the full $2.6 million in estimated impairment is realized:
19
BALANCE SHEET EFFECTS:
Amount as shown
at December 31, Effect from Pro forma
2004 Impairment Financials
--------------- ----------- ----------
Inventory. . . . . . . . . . . $3,672,000 ($391,000) $3,281,000
Property and equipment, net. . 13,861,000 (1,983,000) 11,878,000
Other intangible asset, net. . 231,000 (231,000) -
Deferred income taxes. . . . . 586,000 964,000 1,572,000
Retained Earnings. . . . . . . 31,720,000 (1,641,000) 30,079,000
STATEMENT OF INCOME EFFECTS:
Amount shown for
three months ended Effect from Pro forma
December 31, 2004 Impairment Financials
--------------- ----------- ----------
Impairment expense. . . . . . . - $2,605,000 $2,605,000
Provision for income taxes. . . $459,000 (964,000) (964,000)
Net income (loss) . . . . . . . 795,000 (1,641,000) (846,000)
Basic earnings (loss) per share $0.18 ($0.38) ($0.20)
Diluted earnings (loss) per
share . . . . . . . . . . . . 0.18 (0.37) (0.19)
Amount shown for
nine months ended Effect from Pro forma
December 31, 2004 Impairment Financials
--------------- ----------- ----------
Impairment expense. . . . . . . - $2,605,000 $2,605,000
Provision for income taxes. . .$1,751,000 (964,000) 787,000
Net income (loss) . . . . . . .$3,006,000 (1,641,000) 1,365,000
Basic earnings (loss) per share $0.70 ($0.38) $0.32
Diluted earnings (loss) per
share . . . . . . . . . . . . 0.67 (0.37) 0.30
The expected post-impairment fair value of the assets previously
associated with the next generation table project, that will now be redirected
on other processes, consists of $2.6 million in building, $0.9 million for
equipment, and $0.4 million in inventory. The Company believes that it will
be able to fully realize the value of these assets.
20
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. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. The Company's critical accounting
policies include the allowance for doubtful accounts receivable, reserve for
obsolete inventory, accruals for warranty expense, 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 (see note 9 in the financial statements).
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 asset: The Company reviews annually the carrying
value of its goodwill and other intangible assets. The goodwill arose from
its acquisitions of Broda Enterprises and Versipanel and the other intangible
asset represented by intellectual property related to certain rights the
Company obtained to utilize new technology in its next generation table
product development efforts. During the quarter ended June 30, 2004, the
Company reviewed the goodwill related to the Broda acquisition and the
intellectual property related to the startup development company. 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 other intangible asset during the quarter ended December 31,
2004. However, due to the decision by the board of directors after the end of
the quarter to discontinue the next generation table project, the Company will
fully impair the other intangible asset related to this intellectual property
during the quarter ending March 31, 2005. This will result in an impairment
charge of $2.6 million, including $231,000 related to other intangible assets
(see note 9 in the financial statements).
21
Notes receivable: The Company reviews its notes receivable to determine likely
collectability. Since some of 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 financial strength of the
entities. 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 entities, these notes receivable may not be ultimately realized.
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 $0.4
million related to a defined benefit pension plan resulting from exiting and
selling its specialty office seating and systems business. The Company is
investigating this matter and 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 AND NINE MONTHS ENDED DECEMBER
31, 2004 AND 2003
Net sales. The Company's third quarter fiscal 2005 net sales of
$11,635,000 were up 6 percent as compared with the third quarter net sales in
the prior fiscal year. For the quarter ended December 31, 2004, the increase
reflects sales increases, as compared to the quarter ended December 31, 2003,
of 24 percent in the Company's healthcare chair operations and 3 percent in
the Company's multipurpose room operations. The Company's total international
sales represented 14 percent of net sales for the quarter ended December 31,
2004 and 15 percent of net sales for the prior year's quarter. The Company
attributes most of the increase in sales in the multipurpose room operations
to a 5 percent increase in table sales, offset by a 18 percent decrease in
chair sales. Other sales grew by 53 percent, mainly as a result of the
Versipanel acquisition. The decrease in chair sales was due primarily to a
large order totaling about $480,000, which, for the most part, was produced in
December but not needed by the customer until mid-January. This sale and
resulting reduction in inventory will be included in the fourth quarter's
results. The Company expects that its overall net sales will be up to 15
percent higher in the fourth quarter of fiscal 2005 as compared to the fourth
quarter of fiscal 2004.
22
For the nine months ended December 31, 2004, the Company's net sales of
$36,578,000 represented an increase of 9 percent over the same period in the
prior fiscal year. For the nine months ended December 31, 2004, the increase
reflects sales increases, as compared to the nine months ended December 31,
2003, of 18 percent in the Company's healthcare chair operations and 7 percent
in the Company's multipurpose room operations. The Company's total
international sales represented 14 percent of net sales for the nine months
ended December 31, 2004 as compared to 13 percent in the prior year's period.
The 7 percent increase in the Company's multipurpose room operations is
attributed to a 5 percent increase in table and chair sales, and a 53 percent
increase in other sales. For the nine months ended December 31, 2004, table
sales accounted for 61 percent of net sales, multipurpose room chair sales
accounted for 18 percent, and healthcare chairs were 14 percent. Other sales,
consisting primarily of sales of carts, portable partitions, and lecterns,
totaled 7 percent of the Company's net sales.
Gross profit. Gross profit as a percentage of net sales in the quarter
ended December 31, 2004 decreased by 4 percentage points over the same quarter
in the prior fiscal year to 34 percent. This decrease was due to higher
overhead and labor costs associated primarily with the startup of the
manufacturing operation for the Company's next generation table as well as
higher material costs due to higher commodity pricing at the multipurpose room
furniture operation. The gross margin decrease was partially offset by lower
material costs at the Company's healthcare seating operations.
Gross profit as a percentage of net sales in the nine months ended
December 31, 2004 decreased by 4 percentage points over the same period in the
prior fiscal year to 35 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 table, and higher material and overhead costs at
the Company's multipurpose room operations.
Selling expenses. Selling expenses were 17 percent of net sales in the
third quarter of fiscal 2005, an increase of 2 percentage points from the
third quarter of the prior fiscal year. Actual expenses increased by
$256,000. Multipurpose room furniture selling costs increased by $193,000
over the prior fiscal year. This increase resulted primarily from higher
personnel, trade show, and sales samples costs partially offset by lower
marketing literature costs. Selling expenses at the healthcare seating
operations increased by $63,000 over the prior fiscal year due primarily to
higher personnel and commission costs on the increased sales volume.
Selling expenses were 15 percent of net sales for the nine months ended
December 31, 2004 as compared to 14 percent for the prior year. Actual
expenses increased by $734,000. Multipurpose room furniture selling costs
increased by $590,000 over the prior fiscal year. This increase resulted
primarily from higher personnel, commission, trade show, and sales samples
costs. Selling expenses at the healthcare seating operations increased by
$144,000 over the prior fiscal year due primarily to higher personnel and
commission costs on the increased sales volume.
General and administrative expenses. General and administrative expenses
were 4 percent of net sales for the third quarter of fiscal 2005 as compared
to 3 percent of net sales for the prior year's period. Actual spending
increased by $140,000. The increase was primarily due to the receipt in the
prior year of a settlement in a legal suit as well as higher professional fees
in the current year.
23
General and administrative expenses were 4 percent of net sales for the
nine months ended December 31, 2004 and 2003. Actual spending increased by 11
percent or $154,000.
Research and development expenses. Research and development expenses
were 3 percent of net sales for the third quarter of fiscal 2005 and 2004.
Actual spending decreased by $15,000 primarily due to lower costs for legal
fees at the Company's multipurpose room operations.
Research and development expenses were 3 percent of net sales for the
nine months ended December 31, 2004 and 2003. Actual spending decreased by
$74,000 primarily due to lower costs for personnel, prototyping, and legal
fees at the Company's multipurpose room operations.
Other income and expense. Other income and expense netted to a net
expense of $16,000 for the third quarter of fiscal 2005 as compared to $22,000
for the third quarter of fiscal 2004. Third quarter interest income was
$44,000 as compared to $19,000 in the third quarter of the prior fiscal year
due to higher cash balances and higher rates of return. Other expenses
totaled $60,000 for the current quarter and consisted of $61,000 in realized
foreign currency exchange losses and $1,000 in other income.
Other income and expense netted to a net expense of $42,000 for the nine
months ended December 31, 2004. Interest income was $117,000, an increase of
$59,000 from the same period of the prior fiscal year. The increase was due
to a higher rate of return on a higher cash balance held in the current fiscal
year. Other expenses, which totaled $159,000 for the nine months ended
December 31, 2004, consisted of $130,000 in realized foreign currency exchange
losses and other expenses of $29,000.
Minority interest. On September 30, 2004, the Company sold its 50
percent equity interest in a startup development company. During the
preceding six months ended September 30, 2004, this startup development
company realized a pre-tax net loss of $143,000. Since the Company
consolidated this entity within its financial statements and eliminated the
other owner's 50 percent interest in the net profits or losses, 50 percent of
the loss, or $71,000, was eliminated as a minority interest. However, the
$71,000 elimination amount exceeded the amount of minority interest
represented by the other partner's capital contribution by $37,000.
Consequently, $37,000 was fully recognized, while $34,000, or $22,000
after-tax, was allocated to the minority interest.
Net income. For the reasons stated above, the Company's fiscal 2005
third quarter net income of $795,000 decreased $351,000 or 31 percent as
compared to the third quarter net income in the prior fiscal year.
For the reasons stated above, net income for the nine months ended
December 31, 2004 was $3,006,000, a decrease of $705,000 or 19 percent as
compared to 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 $6.05 million at December 31, 2004 as compared to $6.38
million at March 31, 2004.
24
The following table highlights certain key cash flow and capital
information pertinent to the discussion that follows:
Nine months ended
December 31, 2004
------------------
Net cash provided by operating activities. . . . $ 4,051,000
Net purchases of available-for-sale securities . (1,865,000)
Purchase of the assets of Versipanel, LLC. . . . (1,201,000)
Purchases of property and equipment. . . . . . . (1,935,000)
Net proceeds from exercise of stock options. . . 503,000
The decrease in cash and cash equivalents was due primarily to the
purchase of Versipanel ($1.20 million), purchases of property and equipment
($1.94 million), and the net purchase of available-for-sale securities ($1.87
million). The decrease was partially offset by cash provided by operating
activities ($4.05 million) and net proceeds related to the exercise of stock
options ($0.50 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 $0.83 million. As of December
31, 2004, 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, 2004, 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 that 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, 2004, the proceeds which would have been
received by the Company upon exercise of outstanding options which were
exercisable on that date were approximately $3.29 million. There is no
assurance that such options will be exercised.
The Company's material cash commitments at December 31, 2004 include
current liabilities of $3.93 million to be repaid from funds generated from
operations. Current liabilities consist of the following:
25
December 31, March 31,
2004 2004
------------ ------------
Accounts payable. . . . . . . . . . . . . . . . $1,744,000 $2,088,000
Accrued payroll . . . . . . . . . . . . . . . . 1,360,000 1,236,000
Accrued warranty expense. . . . . . . . . . . . 436,000 416,000
Other accruals. . . . . . . . . . . . . . . . . 391,000 383,000
------------ ------------
Total current liabilities . . . . . . . . . . . $3,931,000 $4,123,000
============ ============
The Company has also entered into two operating lease agreements for
Broda's production and office facilities under which it is obligated to pay
$16,000 Canadian (approximately US $13,000) per month through August 2005.
The Company has an operating lease agreement for the facility producing the
Versipanel product under which it is obligated to pay $6,000 per month through
September 2005.
In connection with the development of the Company's next generation
multipurpose room table, the Company completed the construction of a new
63,000 square foot facility which was being used to manufacture the next
generation tables. In addition, the Company has both purchased and developed
machinery and equipment that was to be used in this new process. As of
December 31, 2004, the Company had invested, project to date, approximately
$2.6 million, net for the building and $3.5 million for the capital equipment.
Due to a decision by the Company's Board of Directors to discontinue funding
on this project, the Company will impair approximately $1.9 million of these
assets related to the capital equipment. The remaining unimpaired assets will
be redirected for other products that do not require the same level of
precision as the table. The Company is currently evaluating its alternatives
for these assets.
The Company has certain alleged obligations of up to $0.4 million related
to a defined benefit pension plan resulting from exiting and selling its
specialty office seating and systems business. The Company is investigating
this matter and 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. However, if the Company is
obligated for any or all of this amount, it would reduce the Company's
liquidity.
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.
26
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 include, but are not limited to:
- statements that the Company continues to pursue new product development
and acquisitions of product lines or companies that would be complementary to
the Company's businesses;
- references to predicted increases in the institutional furniture and U.S.
office furniture markets;
- statements that the Company anticipates developing additional
complementary chair lines and further penetrating its existing marketplace
with its current line of chairs;
- statements about the Company's belief that it will have an impairment of
between $2.3 and $2.6 million on the assets associated with its next
generation table product;
- statements about the Company's belief that it will be able to fully
realize the impaired value of the assets associated with the next generation
table project;
- statements that the Company anticipates that its sales volumes during the
fourth quarter of fiscal 2005 will be up to 15 percent higher as compared to
the sales levels of the fourth quarter of fiscal 2004;
- 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 future growth in the Company's healthcare seating
operation 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;
- the statement that the Company intends to expand the number of direct
employees hired to market its healthcare seating products in the coming years;
- statements that management believes it is more likely than not that
future earnings will be sufficient to recover deferred tax assets;
- 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;
27
- statements relating to the Company's possible need to raise additional
capital if its cash flow from operations and debt financing are insufficient
to fund the Company's working capital requirements; and
- statements related to the Company's belief that it is not liable for
certain alleged obligations of up to $0.4 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:
- downturns or improvements in domestic and international economies and
business conditions specifically in the institutional furniture industry;
- continued global tension 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 Company's ability to effectively produce and sell its next generation
multipurpose room table products;
- the Company's ability to effectively address any unanticipated design
and manufacturing challenges with respect to its next generation table
products and generally launch such table products by the anticipated launch
dates;
28
- the market's acceptance of products currently being developed by the
Company including its next generation multipurpose room 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;
- the Company's ability to raise capital, if needed;
- the availability of insurance funding for the Company's healthcare
seating products;
- the risk that the Company may become liable for certain alleged
obligations of up to $0.4 million related to a defined benefit pension plan
resulting from exiting and selling its specialty office seating and systems
business; and
- regulatory developments that adversely affect demand for the Company's
products, particularly the Company's healthcare seating products.
In light of the significant uncertainties inherent in forward-looking
statements, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company disclaims any obligation or
intent to update any such factors or forward-looking statements to reflect
future events or developments.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manufactures its products in the United States and Canada and
sells its products in those markets as well as in other countries. The
majority of the Company's sales and expenses are transacted in U.S. dollars
with limited transactions occurring in Canadian dollars or other foreign
currencies. Foreign currency exchange rate fluctuations did not have a
material impact on the financial results of the Company during the quarter
ended December 31, 2004. The Company has occasionally entered into forward
contracts for specific US$ denominated accounts receivable related to its
healthcare seating operations. As of December 31, 2004, 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.
Evaluation of disclosure 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, the Company evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, 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 reports the Company files or
submits under the Exchange Act.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter covered by this report, there has
been no change in the Company's internal control over financial reporting (as
defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
30
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS
31.1 Certification of Bradley T Nielson, President and Chief Executive
Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Paul R. Killpack, Chief Financial Officer,
pursuant to Rule 13a-14(a) of the Exchange Act, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Bradley T Nielson, President and Chief Executive
Officer, pursuant to Section 1350, Chapter 63 of Title 18, United
States Code, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification of Paul R. Killpack, Chief Financial Officer,
pursuant to Section 1350, Chapter 63 of Title 18, United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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: January 28, 2005 /s/ Bradley T Nielson
-----------------------------------
Bradley T Nielson
President and Chief Executive Officer
(Principal Executive Officer)
Date: January 28, 2005 /s/ Paul R. Killpack
-----------------------------------
Paul R. Killpack
Chief Financial Officer
(Principal Financial and Accounting
Officer)