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United States Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23898
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MITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
UTAH 87-0448892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 WEST 400 NORTH
OREM, UTAH 84057
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (801) 224-0589
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, PAR VALUE $.01
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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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ x ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes No x
2
The aggregate market value of the registrant's voting Common Stock held
by non-affiliates of the registrant was approximately $46,604,000 (computed
using the closing price of $16.54 per share of Common Stock on September 30,
2004 as reported by Nasdaq). Shares of Common Stock held by each officer and
director (and their affiliates) and each person who owns 5 percent or more of
the outstanding Common Stock have been excluded in that such persons may be
deemed affiliates for purposes of this calculation. The determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 4,344,112 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on May 26, 2005.
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on July 28, 2005, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended March 31, 2005, are incorporated by reference
in Part III of this Annual Report on Form 10-K.
3
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, in particular "Item 1. Business" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. These statements
represent the Company's expectations or beliefs concerning, among other
things, future revenue, earnings and other financial results, new products,
marketing, operations and manufacturing. The Company wishes to caution and
advise readers that these statements involve risks and uncertainties that
could cause actual results to differ materially from the expectations and
beliefs contained herein. For a summary of certain risks related to the
Company's business see "Item 1. Business-Risk Factors That May Affect Future
Results" beginning on page 6 and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward-Looking Statements
and Factors That May Affect Future Results of Operations" beginning on page
23.
Unless the context otherwise requires, references to the Company or MITY
Enterprises are to MITY Enterprises, Inc. and its subsidiaries. Mity-Lite(R)
MityTuff(R), MityStack(R), MityHost(TM), SwiftSet(R), Xpeditor(TM), Xtreme
Edge(TM), Summit(TM) Lectern, MitySnap(TM), BRODA(TM), Versipanel(TM), and
Intellicore(R) are trademarks or
trade names of the Company.
4
PART I
ITEM 1. BUSINESS
BACKGROUND
MITY Enterprises, Inc. (the Company) designs, manufactures and markets premium
quality, innovative institutional furniture created to meet the efficiency
needs of its customers. The Company's product lines include multipurpose room
furniture and healthcare seating. Its line of multipurpose room furniture is
sold both domestically and internationally in educational, recreational, hotel
and hospitality, government, office, healthcare, church and other public
assembly markets. Its healthcare seating is sold mainly in Canada and the
United States in the long-term healthcare market. A summary of our net sales,
income from continuing operations and assets for our business segments is
found in Note 13 to the Consolidated Financials Statements in Item 8, which is
incorporated herein by reference.
INSTITUTIONAL FURNITURE PRODUCTS
MULTIPURPOSE ROOM FUNNITURE. The Company's multipurpose room furniture
consists of lightweight, durable, folding leg tables, stacking chairs, folding
chairs, lecterns, portable partitions and other related products used in
multipurpose rooms.
LIGHTWEIGHT, HIGHLY DURABLE TABLES. The Company has developed and currently
manufactures and markets more than 50 different plastic table sizes. These
tables are made with several different folding leg and custom color options.
The Company has successfully applied engineering grade plastics and
sophisticated manufacturing and assembly methods to the production of tables
that weigh less and are more durable than competing particle board or plywood
table products of similar size. The Company's plastic tables are manufactured
using abrasion, stain and water resistant materials. The Company's cornered
tables are constructed using its proprietary high-impact corners which can
withstand a two-foot drop without sustaining debilitating damage. All of the
Company's plastic tables include reinforced edging. Cornered tables are
equipped with non-skid pads which facilitate stacking and storage. Management
believes the Company's plastic table products appeal to its customers because
they are durable, lightweight, easy to handle and attractive.
FOLDING AND STACKING CHAIRS. The Company currently offers five lines of
stacking chairs and two lines of folding chairs: MityTuff, MityStack,
MityHost, SwiftSet Stacking, and Steelcore Chiavari chair lines and the
SwiftSet Folding and Duramax Resin folding chair lines. The MityHost and
SwiftSet stacking chair lines are manufactured in-house while the Company's
other stacking chair lines are purchased from suppliers and marketed under the
Mity-Lite name. The SwiftSet folding chair is manufactured in-house and has a
plastic seat and back designed to be more comfortable, durable and lightweight
than other folding chairs.
5
OTHER MULTIPURPOSE ROOM PRODUCTS. The Company markets the Summit lectern, a
line of lightweight, durable lecterns. The lecterns are made of high quality
polyethylene and can withstand abusive environments. The Company offers these
lecterns in a variety of colors, with custom inserts that allow customers to
match decor. On April 1, 2004, the Company acquired the assets of Versipanel
LLC ("Versipanel"), a marketer of a variety of portable partitions. The
Company has added this line of partitions to its product offering. This
product line includes room dividers, portable partitions, moveable walls and
acoustic panels. In addition to lightweight, durable tables, chairs,
lecterns, and partitions, the Company manufactures and/or markets accessory
products including table and chair carts, tablecloths, skirting and skirt
clips.
HEALTHCARE SEATING. Through its wholly owned subsidiary, Broda Enterprises,
Inc. (Broda), the Company designs, manufactures and markets healthcare seating
and accessories used in long-term healthcare facilities located primarily in
the United States and Canada. The Company also markets its healthcare seating
products through distributors in Germany and Australia. Broda has developed
and manufactures a line of premium wheeled and stationary specialty chairs.
Most chair models come in two standard seat widths and six standard colors.
The Company also manufactures chairs with custom seat widths, seat depths, and
seat heights to accommodate special needs of residents including bariatric
sizes. Heavy gauge steel tube chair frames and large wheels and casters allow
for greater weight capacity and maneuverability. In addition, a powder coated
finish provides a scratch-resistant surface. Broda's high end seating
products offer a combination of features that differentiate them from the
competition. Broda chairs have been tested for interface pressures and
stability that, combined with their rigid and durable design, make Broda
chairs suitable seating for long-term care residents including those with
Huntington's Chorea Disease, Alzheimer's or Acquired Brain Injury. In
addition, nursing home residents susceptible to skin breakdown, suffering from
loss of upper body strength, or with other conditions that might otherwise
restrict them to bed or place them at risk of self injury or falls, can be
safely and comfortably seated in a Broda chair.
MARKET OVERVIEW
Based upon management's analysis of companies known to sell multipurpose room
furniture and based upon management's experience and contacts in its industry,
management estimates that the domestic market for multipurpose room furniture
exceeds $1.5 billion annually. It is estimated that folding tables alone make
up more than $400 million of this domestic market. Chairs and other related
seating products are estimated to account for approximately $1 billion of the
domestic multipurpose room furniture market. Other products such as staging,
risers, partitions, lecterns, and flooring account for the balance of the
estimated domestic market.
In the healthcare seating market, management estimates that in the United
States and Canada there are more than 28,000 nursing homes with over 1.8
million beds. Nursing homes and their residents represent the typical Broda
customer. In addition, Broda's market also includes chronic care, psychiatric
care or long-term care facilities. Management estimates that the North
American market for its current healthcare seating products is approximately
$60 million.
6
SALES AND MARKETING
MULTIPURPOSE ROOM FURNITURE. The Company primarily markets its multipurpose
room products directly to end users in the educational, recreational, hotel
and hospitality, governmental, office products, healthcare, public assembly
and church markets. This strategy enables the Company to manage selling costs
more effectively and maintain direct contact with its customers. The Company
currently employs 55 full-time in-house sales and customer service employees.
The Company's sales and customer service personnel are compensated on a salary
or commission basis and may qualify for other incentive bonuses based on
individual, sales team and Company performance. Each sales and customer
service employee receives training in product attributes, customer service,
use of the Company's computerized sales management system and all aspects of
the sales cycle.
The Company typically markets its products by first identifying customers
through internal market research, referrals, trade shows, customer networking
and test marketing. Once a market has been identified, the Company's sales
and marketing staff will attempt to generate leads for prospective purchasers
in such markets by attending trade shows, performing mass mailings and using
lead-oriented advertising. The Company uses a proprietary, computer-based
sales management system to qualify, track and manage sales leads for
prospective and existing customers and to compile customer feedback. While
each sales and customer service employee maintains some in-person contact with
such employee's assigned customers, most of the Company's sales efforts are
pursued using the telephone, fax machine, e-mail, internet, videotapes and
mail services.
The Company's plastic table and lectern products are sold with a twelve-year
pro-rata warranty covering materials and workmanship. The MityTuff is sold
with a seven-year warranty covering materials and workmanship. The MityStack
and SwiftSet are sold with a ten-year warranty covering materials and
workmanship. The MityHost is sold with a ten-year warranty covering the
structural integrity of the metal frame and a one-year warranty covering the
upholstery. The new Versipanel partitions are sold with a one-year warranty
covering materials and workmanship.
HEALTHCARE SEATING. The Company markets its healthcare seating products to
end users and care givers in healthcare markets through its own sales
representatives, distributors and retailers of durable medical equipment. The
Company currently employs 25 full-time sales and customer service employees
and 17 independent manufacturing representatives and distributors in its
healthcare seating operations. The Company's internal sales and customer
service employees are compensated with a base salary and may qualify for
commission, incentive or bonus pay. The Company promotes its products through
print advertising, trade shows, mass mailings and telephone solicitations
targeted to healthcare professionals. The Company has a sampling program and
provides many prospective purchasers with product samples for 14-day trial
periods. All of Broda's chairs carry a limited three-year warranty on the
steel frame and a limited one year warranty on the other components for
defects and failure in normal use.
7
INTERNATIONAL SALES
Since its inception in 1987, the Company has focused its marketing efforts
primarily on domestic markets. The Company has, however, sold its products in
Canada, South America, Europe, Asia, the Middle East and Australia. For the
fiscal years ended March 31, 2003, 2004, and 2005, the Company's international
sales accounted for 11.1 percent, 13.3 percent and 14.7 percent of the
Company's total sales, respectively. The Company has been successful in
establishing distributor relationships in Canada, Australia, Mexico, the
United Kingdom, France, Spain, and the United Arab Emirates. Approximately 31
percent of healthcare seating sales are in Canada, and 4 percent are in other
countries outside of the United States.
MANUFACTURING AND MATERIALS
MULTIPURPOSE ROOM FURNITURE. The Company's manufacturing process for its
plastic table products consists principally of bonding a thermoformed ABS
plastic shell to a wood core frame. Metal legs, which are manufactured and
painted in-house, and edge trim are then attached to the table to complete the
process. Since its inception, the Company has implemented a number of changes
to its manufacturing process and product design which have resulted in
increased production volumes, improved production quality and increased
on-time shipping performance. The Company has designed and manufactured
certain proprietary equipment used in its manufacturing process. The Company
believes that its manufacturing innovations give it a competitive advantage,
allowing the Company to reduce production costs and increase productivity.
The Company's typical order to delivery lead time is between three and five
weeks.
The Company's manufacturing process for its multipurpose chair products
consists principally of the manufacturing and painting of legs and frames,
upholstering seat and back cushions for the MityHost and SwiftSet upholstered
chairs, injection molding the seat and back for the SwiftSet chair, and final
assembly of the components. The MityTuff, MityStack, Chiavari, and Duramax
chairs are distributed by the Company under original equipment manufacturer
(OEM) arrangements with the chair manufacturers. The MityHost stacking chair,
SwiftSet folding chair, and SwiftSet stacking chair are manufactured in-house
at the Company's facility in Orem, Utah. The Company's manufacturing process
for its lectern products consists primarily of assembling electronic
components, attaching the laminated insert to the shell, and final assembly of
the components. The manufacturing process for the Company's portable
partitions involves principally cutting and forming an internal foamed
structure, laminating an acoustical fabric onto the structure and attaching
additional hardware components.
HEALTHCARE SEATING. The Company's manufacturing process for its healthcare
seating products includes such metal fabricating processes as welding,
bending, punching, drilling and painting. The Company also performs cut and
sew operations to produce its chair cushions and accessories. Metal
components are typically powder coated or painted for corrosion protection.
Components purchased for assembly into chairs includes casters, gas springs,
cables, vinyl fabric, strapping, and plastic parts.
8
Raw materials used in all of the Company's products such as plastic, wood,
metal and fabric are generally available from a number of suppliers. The
plastic used in the Company's multipurpose room products and tubing used in
the metal legs are manufactured according to the Company's specifications.
Certain parts of the multipurpose room operations operate without a
substantial raw materials inventory by depending on certain key suppliers to
provide raw materials on a "just-in-time" basis. Other raw material items are
purchased in larger quantities and stored at the Company's location in order
to take advantage of price discounts. Component parts are provided by a
number of suppliers to the Company's specifications. The Company's other raw
materials such as wood, formed metal, laminate, fabric and certain welding
compounds are commodity items. The Company believes that most of its raw
materials are available from alternative suppliers. However, any significant
interruption in delivery of such items could have a material adverse effect on
the Company's operations.
COMPETITION
The markets in which the Company participates are highly competitive. The
institutional furniture industry consists of a fragmented group of large
manufacturers and a host of smaller manufacturers. The healthcare seating
industry also includes a fragmented group of major medical device
manufacturers and many small manufacturers.
MULTIPURPOSE ROOM FURNITURE. The Company markets its table products based
primarily on product performance (lightweight and durable) and reputation, not
price. The Company's average table price is generally higher than the average
price of competing particle board, plywood, plastic or metal table products of
its competitors. The Company believes that it has a respected reputation for
product quality, convenience and customer service and that for these reasons,
end users often choose its table products over competitors' lower cost table
products. Because only certain elements of the Company's table design are
patented, the Company's tables may be reverse engineered and duplicated by
competitors who are able to develop the manufacturing equipment and processes
to do so. In the past few years, several competitors have introduced other
thermoformed plastic tables with many similar characteristics to the Company's
products. More recently, other competitors have introduced blow molded
plastic tables that, although not currently as durable, are cheaper than the
Company's table products. These introductions have increased price and profit
margin pressures on the Company's products. Further improvements in these
products or introductions of new competing products by lower cost producers
would put additional price and profit margin pressure on the Company which
could have a material adverse effect on the Company's results of operations.
Among the Company's primary competitors in the table market are Palmer-Snyder,
Inc., McCourt Manufacturing, Inc., Midwest Folding Products, Krueger
International, Inc., Falcon Products, Inc., SICO and Virco Manufacturing
Corporation, which market a thermoformed plastic table; Southern Aluminum,
Inc., which produces an aluminum table; Lifetime Products, McCourt
Manufacturing, Krueger International, Inc., which market a blow molded plastic
table; Krueger International, Inc., Bevis Custom Furniture, Inc., Globe
Business Furniture and Virco Manufacturing Corporation, Inc., which produce
particle board tables; and Falcon Products, Inc., Midwest Folding Products,
Maywood Furniture, Corp., and Palmer-Snyder, Inc., which produce plywood
tables.
9
Management believes that customers purchase the Company's multipurpose room
chair products primarily because of product performance, reputation, warranty
service and convenience. The market for institutional chairs is highly
competitive and fragmented. The Company believes that its SwiftSet folding
chair and stacking chair lines have technological and performance advantages
over its competitors. Although the Company's other chair lines do not offer
the same advances as the Company's table and SwiftSet chair products, the
Company believes they do have distinct selling features. Among the Company's
primary competitors in the multipurpose chair market are Falcon Products,
Inc., Virco Manufacturing Corporation, Artco-Bell Corporation, Globe Business
Furniture, Shelby Williams Industries, Inc., MTS Seating, Krueger
International, Inc., Clarin, a division of Greenwich Industries, Meco
Corporation, Gasser Chair Company, Inc., Bertolini, Inc., and Church Chair
Industries, Inc. Management believes that the primary competitors for its new
portable partition product include ScreenFlex, SICO, Bertolini, Inc.,
Panelfold, Inc., Curtition, Inc., Hufcor, Inc., Modernfold, Inc., and Clone
Office Cubicles.
HEALTHCARE SEATING. Management believes that customers purchase the Company's
healthcare seating products primarily because of product performance,
reputation and service, not price. The Company's average healthcare chair
price is generally higher than the average price of competing chairs. The
Company's chairs generally offer significantly greater performance in terms of
function and durability and for these reasons are chosen over lower cost
competitors' products. Among the Company's primary competitors in the
healthcare seating market are Invacare Corp., L.P.A. Medical Inc.,
Graham-Field Inc., Maple Leaf Wheelchair Manufacturing Inc., Sunrise Medical
Inc., Hillenbrand Industries Inc., Winco Inc., Dolomite, Homecrest Industries
Incorporated, and Future Mobility.
INTELLECTUAL PROPERTY
The Company has been granted two utility patents relating to the construction
of its table tops. A design patent and six utility patents have been granted
on the SwiftSet chair. A utility patent has been granted on a flex mechanism
for the Host chair. The Company has chosen not to apply for international
patent protection for any of these concepts. The Company does not believe
this will have a material adverse effect on the Company. The Company has a
utility patent pending related to its SwiftSet Stacking chair and has recently
applied for a design patent with this chair. The Company also has several
trademarks and trade names as referenced on the page preceding page 1 of this
report.
Utility patents relating to the function of one of its healthcare chair models
have been granted to the Company in the United States and Canada. A utility
patent on its flipdown footrest has been granted in the United States and is
pending in Canada. The Company does have international patents pending on
healthcare chairs in Canada, Japan, Germany, the United Kingdom, and France.
The Company has been granted design patents on its geriatric accessory tray,
healthcare chair back, flipdown footrest, and healthcare chair for Canada and
the United States. The stylized word "BRODA" has been trademarked for Canada
and the United States and trademark registration has been applied for in
Europe. Broda's "Comfort Tension Seating" has been trademarked in Canada and
the United States. The "Pedal Chair" trademark has been granted in the United
States and Canada.
10
The Company believes that aspects of its manufacturing processes are trade
secrets of the Company. The Company relies on trade secret law and
nondisclosure agreements to protect its trade secrets. The Company believes
that its patents and trade secrets provide it with competitive advantages.
GOVERNMENT REGULATION
The Company is subject to various local, state, provincial and federal laws
and regulations including, without limitation, regulations promulgated by
federal, state and provincial environmental and health agencies, the Federal
Occupational Safety and Health Administration, the Food and Drug
Administration, North American Free Trade Agreement, and laws pertaining to
the hiring, treatment, safety and discharge of employees. The Company's
manufacturing operations must also meet federal, state, provincial and local
regulatory standards in the areas of labor, safety and health. Historically,
the cost of regulatory compliance has not had a material adverse effect on the
Company's sales or operations.
EMPLOYEES
As of March 31, 2005, the Company had approximately 348 full-time and 16
part-time employees. No employees have union representation. The Company
believes that its relationship with its employees is good.
RISK FACTORS THAT MAY AFFECT FUTURE OPERATIONS
PRODUCT LINE EXPANSION STRATEGIES; ENTRY INTO NEW MARKETS. The Company's
expansion of its current product lines is contingent, among other things, upon
the Company's ability to develop and/or acquire additional lines of
complementary institutional furniture which can be purchased or manufactured
in a cost efficient manner and sold at competitive prices in the Company's
markets. Developing viable new products requires capital and takes time. The
Company may not be able to develop new products at a speed or cost that allow
us to timely capitalize on market opportunities or counter competition. Over
the past few years, the Company worked at developing a new generation
multipurpose room table and invested substantial capital resources in its
development. The Company ultimately was unsuccessful at developing a
cost-effective repeatable process to manufacture the table. The Company
anticipates continuing to market its existing table line as it continues to
look for other ways that it can expand its product line. The Company cannot
guarantee that it will be successful in developing new products to expand its
product line.
DOWN-TURN IN FURNITURE INDUSTRY. Beginning in fiscal 2002, and continuing
through fiscal 2004, the Company faced one of the most significant down-turns
ever in the global furniture industry. Industry analysts reported declines in
the United States office furniture market of 18% for calendar year 2001, 19%
in 2002, and 4% in 2003. These years constitute an unprecedented three
consecutive year decline in an industry that only had three down years between
1971 and 2000. Companies throughout the world reduced their spending across
many capital goods categories, including furniture. Revenue and order rates
across the industry fell throughout calendar 2001, 2002, and 2003 as customers
delayed and canceled orders. Demand for furniture products continued to
soften as corporate profits remained under pressure during recent years.
Demand for the Company's products was also adversely impacted by declines
after September 11, 2001 in the hospitality and recreational markets. Terror
11
threats, war, economic uncertainty, and related uncertainties contributed to
the downturn. However, during the past year, the furniture industry
experienced a recovery, increasing by 5 percent. The near term outlook for
the institutional furniture industry also is improving as industry experts
believes shipments increased by 17 percent in the first quarter of this year
and that the total increase for the year will be 11 percent. Although the
outlook is improving, if conditions do not improve, or begin to decline again,
the Company would be negatively impacted.
INFLATION AND INCREASING RAW MATERIAL COSTS. During the fiscal year ended
March 31, 2005, the Company experienced rapidly increasing costs in most of
its raw materials, including steel, plastic, and wood. In response to the
increase, the Company implemented two separate price increases on most of its
product lines. The Company has been able to achieve most of the price
increases in its table lines, but the price increases in its chair lines have
been slower in responding to the price increase. The Company still expects
that it can achieve the price increase in all of its product lines. However,
the Company cannot predict whether it will be able to achieve the implemented
price increases or what effects the price increases might have on sales
volumes. Sales may decline. Although the Company is unable to predict
whether the price of its raw materials will continue to increase, further
increases would erode the Company's gross margin without additional price
increases for the Company's products.
COMPETITION. The Company is facing increased competition because of
innovations in competitors' products and lower pricing brought on by the
general down-turn in the furniture industry. More of the Company's
competitors have begun introducing products that directly compete with the
products offered by the Company, including competitors who are manufacturing
their products offshore at a lower cost. The Company's products are generally
more expensive than products sold by the Company's competitors in the same
markets. The Company believes that competition for its products is generally
based on product quality and characteristics, service and price. Unless the
Company adapts and responds to these competitive threats, the Company will
face margin pressure from low cost producers. Only certain elements of the
Company's products are patented, so unpatented elements could be reverse
engineered and duplicated by competitors who are able to develop the
manufacturing equipment and processes to do so. The Company's continued
success will depend upon, among other things, its ability to continue to
manufacture and market high quality, high performance products at prices
competitive in the markets served by the Company. Although the Company is
developing new products, it is uncertain at this time what the marketplace
acceptance will be for these products.
POTENTIAL DECREASE IN DEMAND FOR HEALTHCARE SEATING PRODUCTS. During fiscal
2005, our Broda operations continued to become a more significant part of our
consolidated results of operations and contributed significantly to our net
income. Sales of our healthcare seating products may decline if insurance
funding for the purchase of such products is limited or eliminated or if
regulatory changes occur that adversely affect the funding or demand for such
products. In addition, the Company may be unable to expand its geographic
markets for healthcare seating products.
12
RECENT ACQUISITION. On April 1, 2004, the Company announced the acquisition
of the assets of Versipanel LLC, a manufacturer of portable partitions. The
Company believes that this product will allow it to expand its product line
and better penetrate the institutional furniture market. However, there can
be no assurance made that the Company will be successful in integrating this
product line into its existing product offering, or that the planned
objectives of the Company with respect to these new products will be achieved.
LOSS OF KEY CUSTOMERS. The loss of any key customers of the Company would
decrease the Company's revenue. Given the current environment in the
furniture industry, the Company cannot assure that it would be able to replace
such revenue or reduce its costs and, therefore, the Company's profitability
would be adversely impacted.
RAW MATERIAL SOURCES. Both the plastic used in the Company's products and the
tubing used in its table legs and chairs are manufactured according to Company
specifications. Portions of the Company's multipurpose room operations
operate without substantial inventory levels of raw materials by depending on
certain key suppliers to provide raw materials on a "just-in-time" basis. The
Company believes that necessary materials are generally available from
alternate suppliers. However, any shortages or significant interruptions in
the delivery of raw materials could have a material adverse effect on the
Company's production schedule and operations.
WARRANTY SERVICE COSTS. The Company intends to continue to offer warranties
covering materials and workmanship on its existing products and anticipates
providing a warranty covering materials and workmanship for all complementary
product lines developed or acquired by the Company. While the Company has
implemented improved quality control measures that it expects will reduce
warranty claims, it is possible that warranty servicing costs will increase in
future periods. Furthermore, the Company is not in a position to anticipate
the additional warranty service costs that may be incurred as a result of the
Company's expansion into new or complementary product lines.
FUTURE VARIATIONS IN OPERATING RESULTS. The Company's short-term
profitability could be adversely affected by its decision to develop or
acquire complementary product lines, hire additional sales staff, and pursue
additional acquisitions. Various factors, including acquisition related
expenses, the ability to find and train qualified personnel, operational
transitions, timing of new product introductions and the cost of penetrating
new markets and changes in product mix, may have an adverse effect on the
Company's results of operations. While the Company believes that the addition
of new product lines will increase the Company's long-term profitability,
there can be no assurance that the Company will continue to experience
profitability at historical rates. The Company may experience temporary
fluctuations in operations and quarterly variations in the future.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS. Forward-looking statements contained herein include plans and
objectives of management for future operations, including plans and objectives
relating to the products, marketing, customers, product line expansions,
warranty expense, and 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.
13
All forward-looking statements involve predictions and are subject to known
and unknown risks and uncertainties, including, without limitation, those
discussed above 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 described above and elsewhere in this filing
could affect the Company's financial performance and could cause the Company's
actual results for future periods to differ materially from any views or
statements expressed with respect to future periods. Important factors and
risks that might cause such differences, include, but are not limited to those
factors referenced above and in "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Forward Looking Statements
and Factors That May Affect Future Operating Results."
AVAILABLE INFORMATION
Information regarding the Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and any amendments to these
reports, will be made available, free of charge, at the Company's internet
website at www.mityenterprises.com, as soon as reasonably practicable after
the Company electronically files such reports with or furnishes them to the
Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company's corporate headquarters and multipurpose room furniture
manufacturing facilities are located in Orem, Utah (approximately 40 miles
south of Salt Lake City). The Company's headquarters and multipurpose room
table and cart manufacturing facility consists of approximately 71,000 square
feet of manufacturing, office, research and development and storage space
located on approximately four acres of land. In addition, the Company owns
approximately nine acres of land across the street from its corporate
headquarters. On a portion of this property, the Company has built a 79,000
square foot office and manufacturing facility to house its sales force and
multipurpose room chair operations. During the fiscal year ended March 31,
2004, the Company completed the construction of a new 63,000 square foot
facility which was anticipated to be used for the manufacturing of its next
generation of multipurpose room tables. However, with the decision to
discontinue development on that product line, the Company is evaluating
potential uses for this facility. The Company estimates this property
includes enough real estate to build approximately an additional 140,000
square feet of facility to support the future growth of the Company. The
Company also owns an adjacent 2,400 square foot building that sits on
approximately one acre of land. The Company believes that by adding
additional equipment and production shifts, its existing facilities will serve
its current product lines for the next year. However, if the operation adds
additional product lines and/or significantly modifies its existing products
lines, additional facilities may need to be constructed on the Company's
existing land.
14
The Company's healthcare seating manufacturing facilities are located in
Waterloo, Ontario, Canada (approximately 60 miles west of Toronto). These
facilities consist of two adjacent buildings with approximately 30,000 square
feet of leased manufacturing, office, research and development and storage
space. The facilities and related real estate are leased under an agreement
for a one-year term expiring in August 2005. The base monthly lease payment
is approximately $13,000. Broda pays all maintenance costs, taxes and
insurance. The Company believes that these facilities will serve its
healthcare seating manufacturing needs for the term of the lease.
The Company's portable partition manufacturing facility is located in Phoenix,
Arizona. This facility consists of approximately 14,000 square feet of leased
manufacturing, office and storage space. The facilities and related real
estate are leased under an agreement for a three-year term expiring in
September 2005. The base monthly lease payment is approximately $6,000 per
month. The Company pays all maintenance costs, taxes and insurance. The
Company believes that this facility will serve its portable partition
manufacturing needs for the term of the lease.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and other
claims arising in the ordinary course of its business. The Company maintains
insurance coverage against potential claims in an amount which it believes to
be adequate. The Company also has certain alleged obligations of up to $0.4
million related to a defined benefit pension plan and $0.2 million related to
a wage dispute resulting from exiting and selling its specialty office seating
and systems business in fiscal 2002. The Company does not believe that it is
liable for this amount and plans to vigorously defend its positions. At this
time, the Company is unable to determine what its liability will be. There
are no material pending legal proceedings against the Company, other than
routine litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2005.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded on the Nasdaq National Market System
under the symbol "MITY". The Company's common stock first began trading on
April 29, 1994. The following table outlines the Company's quarterly stock
price performance during the last two years.
High Low
------------- ------------
Fiscal Year Ended March 31, 2005:
First Quarter . . . . . . . . . . . $19.30 $16.52
Second Quarter. . . . . . . . . . . 17.95 15.05
Third Quarter . . . . . . . . . . . 16.75 14.25
Fourth Quarter. . . . . . . . . . . 16.22 13.36
Fiscal Year Ended March 31, 2004:
First Quarter . . . . . . . . . . . $12.15 $10.12
Second Quarter. . . . . . . . . . . 13.00 10.90
Third Quarter . . . . . . . . . . . 19.58 12.89
Fourth Quarter. . . . . . . . . . . 19.19 16.05
There were 145 security holders of record as of May 19, 2005. In addition,
management estimates that there were approximately 2,000 beneficial
shareholders. Since the closing of its public offering, the Company has not
declared dividends and does not currently anticipate paying dividends.
The following table presents information about the Company's common stock that
may be issued upon the exercise of options, warrants and rights under existing
equity compensation plans at March 31, 2005:
16
EQUITY COMPENSATION PLAN INFORMATION
Number of Weighted- Number of securities
securities average remaining available
to be exercise for future issuance
issued upon price of under equity compen-
exercise of outstanding sation plans (exclu-
outstanding options, ding securities
options, warrants reflected in column
Plan Category and rights and rights (a))
- -------------------------- ---------- ----------- ---------------
(a) (b) (c)
Equity compensation plans
approved by security holders 544,828 $11.27 2,606
Equity compensation plans not
approved by security holders -- -- --
-------- ------- -------
Total 544,828 $11.27 2,606
======== ======= =======
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and the Notes thereto included in this Form 10-K. The
statement of income data set forth below with respect to the fiscal years
ended March 31, 2005, 2004 and 2003 and the balance sheet data at March 31,
2005 and 2004 are derived from, and should be read in conjunction with the
audited Financial Statements included in this Form 10-K. The statement of
income data set forth below with respect to the fiscal year ended March 31,
2002 and 2001 and the balance sheet data at March 31, 2003, 2002 and 2001 are
derived from audited financial statements not included in this Form 10-K.
Certain reclassifications have been made to the prior years' amounts to
conform to the 2005 classifications.
17
STATEMENT OF INCOME DATA
Year Ended March 31, 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $50,272 $45,210 $40,965 $40,841 $42,881
Cost of products sold 33,537 28,037 24,457 24,485 26,182
- -----------------------------------------------------------------------------
Gross profit 16,735 17,173 16,508 16,356 16,699
Expenses:
Selling 7,427 6,452 6,172 6,363 6,595
General and administrative 1,980 1,787 2,504 2,028 1,960
Research and development 1,265 1,393 1,541 1,158 874
Asset impairment 2,226 - - - -
- -----------------------------------------------------------------------------
Income from continuing
operations 3,837 7,541 6,291 6,807 7,270
Interest and other, net 58 (101) 132 368 117
- -----------------------------------------------------------------------------
Income before provision for
income taxes 3,895 7,440 6,423 7,175 7,387
Provision for income taxes 1,448 2,766 2,367 2,772 2,836
- -----------------------------------------------------------------------------
Net income from continuing
operations before minority
interest 2,447 4,674 4,056 4,403 4,551
Minority interest 22 79 7 - -
- -----------------------------------------------------------------------------
Net income from continuing
operations 2,469 4,753 4,063 4,403 4,551
Earnings (loss) from
discontinued operations,
net of applicable income tax - - - (271) (4,547)
Estimated gain (loss) on
disposal, net of applicable
income tax - - 745 (3,256) -
- -----------------------------------------------------------------------------
Net income $2,469 $ 4,753 $ 4,808 $ 876 $ 4
=============================================================================
Basic earnings per share from
continuing operations $0.57 $1.14 $0.90 $0.86 $0.90
Basic earnings (loss) per share
from discontinued operations - - - (0.05) (0.90)
Basic gain (loss) per share on
disposal of discontinued
operations - - 0.17 (0.64) -
- -----------------------------------------------------------------------------
Basic earnings per share $0.57 $1.14 $1.07 $0.17 $0.00
=============================================================================
Weighted average common
shares outstanding - basic 4,296,525 4,157,081 4,501,342 5,071,125 5,076,456
=============================================================================
18
Diluted earnings per share
from continuing operations $0.55 $1.09 $0.86 $0.85 $0.87
Diluted earnings (loss) per
share from discontinued
operations - - - (0.05) (0.87)
Diluted gain (loss) per
share on disposal of
discontinued operations - - 0.16 (0.63) -
- -----------------------------------------------------------------------------
Diluted earnings per share $0.55 $1.09 $1.02 $0.17 $0.00
=============================================================================
Weighted average common and
common equivalent shares
outstanding - diluted 4,474,111 4,364,683 4,711,420 5,208,924 5,216,604
=============================================================================
BALANCE SHEET DATA
March 31, 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------
(in thousands)
Working capital $16,732 $13,060 $ 8,069 $18,365 $16,300
Total assets 35,616 31,956 25,402 33,369 32,287
Stockholders' equity 31,264 27,799 21,454 27,319 27,469
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company designs, manufactures, and markets institutional furniture. The
Company's current product lines consist of multipurpose room furniture and
healthcare seating. In addition, the Company continues to pursue development
of new products and the acquisitions of product lines or companies that will
be complementary to the Company's businesses.
MULTIPURPOSE ROOM FURNITURE. The Company's multipurpose room furniture line
consists of lightweight, durable, folding leg tables; stacking and 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 is largely dependent upon its ability to successfully introduce and
market new product lines of multipurpose room furniture and its ability to
profitably increase its market penetration into existing and new markets.
MULTIPURPOSE ROOM FURNITURE OUTLOOK. After three years of declines in the
office furniture marketplace due to the downturn in the domestic and
international economy, the office furniture marketplace started to grow again
in calendar year 2004. During 2004, industry shipments increased 5 percent
over calendar year 2003. This trend has continued in the first quarter of
calendar year 2005 with shipments increasing 17 percent for the office
furniture marketplace as compared to the March quarter of 2004. For the
Company's fiscal year ending March 31, 2005, the Company experienced growth of
11 percent which outpaced the industry growth during the same time period of 9
percent. This increase was particularly strong in the fourth quarter with
sales volumes increasing by 19 percent as compared to the fourth quarter of
the prior fiscal year. For the current calendar year, industry analysts are
estimating that shipments will slow down from the fast pace of the first
quarter and are estimating quarterly growth for the remainder of the year of
between 8 and 10 percent, bringing the total growth for calendar year 2005 to
about 11 percent as compared to calendar year 2004. The Company is encouraged
by these forecasts as well as the strengthening of the economy in general, and
is cautiously optimistic that the industry will continue its rebound and that
the Company's multipurpose room sales volumes will likewise continue to grow.
In January 2005, the Company announced its intention to cut off funding on its
current next generation table. The Company had been developing a table with
improved performance characteristics than its existing table. With the
decision to discontinue funding on the new table, the Company has refocused
its efforts on the existing table to enhance its performance as well as
attempt to further drive out costs. The Company is also pursuing uses for the
rotational molding facility that was invested in for the new table. The
Company believes that it will be able to use this facility initially for
contract manufacturing, but ultimately for products designed by the Company,
which may be outside of its current marketplace.
20
During the past few years, chair sales have begun to make up a larger portion
of the sales of the Company's multipurpose room operations. Although table
sales still predominate the volume of this operation, much of the increases
in sales can be attributed to increases in chair sales. During the upcoming
fiscal year, the Company anticipates launching four additional product lines
of chairs to complement its existing chair lines. Beyond the upcoming year,
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 lines of chairs. However, the
Company cannot guarantee that it will be able to successfully develop and
launch such chair lines or further penetrate its existing marketplace.
On April 1, 2004, the Company purchased the assets of Versipanel LLC, a
privately-owned designer, manufacturer and marketer of a variety of portable
partitions based in Phoenix, Arizona. For the year ended December 31, 2003,
Versipanel generated sales of approximately $1.5 million. The Company plans
to sell the Versipanel products through its existing sales system to current
customers. The Company believes that this product will allow it to expand its
product line and better penetrate the institutional furniture market.
HEALTHCARE SEATING. Through Broda, the Company markets a line of healthcare
seating products primarily 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 are serving a very
specific niche in the healthcare market and thus are not competing in the
commodity-oriented general healthcare seating market.
HEALTHCARE SEATING OUTLOOK. The Company believes that the specialty
healthcare seating market is less subject to economic pressures than the
Company's multipurpose room furniture operations. 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. market
and other foreign markets as well as its ability to successfully introduce new
product lines.
GENERAL NEAR-TERM OUTLOOK. Based on the reasons stated above, the Company
anticipates that sales volumes during the quarter ending June 30, 2005 will be
up to 15 percent higher as compared to the prior year's first quarter.
Despite these expectations, the Company, for a variety of reasons including
those described in "Risk Factors That May Affect Future Operations", may not
be successful in achieving this sales level in the first quarter.
21
DISCONTINUED OPERATIONS. In November 2002, the Company completed its plan
for exiting and selling the assets of the specialty office seating and systems
segment of its business (the CenterCore and DO Group businesses). This plan
was originally approved by the Company's Board of Directors on June 2001.
Since that time and in accordance with Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, the Company treated the DO
Group and CenterCore segment of its operations as a discontinued operation.
At the time that the plan was originally formulated, an estimated $3,256,000
loss was accrued for in the three months ended June 30, 2001 to account for
the expected losses on disposal and estimated operating losses through the
disposal date. After the completion of the plan, the actual net loss, after
tax was determined to be $2,511,000. Since the amount of loss that was
originally estimated and accrued for in the June 2001 quarter of $3,256,000
was higher than this amount, the Company recognized a gain, net of tax, of
$745,000, in the three month period ended December 31, 2002. The sale of the
assets of this segment was completed in three transactions. The first two
transactions took place in September and October 2001. The final transaction
occurred in November 2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of financial condition and results of operations
is based upon the Company's consolidated financial statements which have been
prepared in accordance with accounting principles generally accepted in the
United States. These principles require the use of estimates and assumptions
that affect amounts reported and disclosed in the financial statements and
footnotes. The critical accounting policies for the Company which require
management to make judgments and assumptions about matters that are uncertain
at the time of the estimate include the allowance for doubtful accounts
receivable, the reserve for obsolete inventory, accruals for warranty expense,
values for the discontinued operations, assets related to the discontinued
next generation table line (see Note 4, Impairment of Assets), goodwill and
other intangible assets, notes receivable, income taxes, pension liability and
wage dispute, and revenue recognition.
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 4 in the financial statements).
22
ACCRUALS FOR WARRANTY EXPENSE: The Company's warranty service costs for
fiscal years ended March 31, 2005, 2004, and 2003 totaled 1.3 percent of net
sales or $637,000, 1.4 percent of net sales or $619,000 and 1.0 percent of net
sales or $417,000, respectively. The Company provides for the estimated cost
of product warranties at the time revenue is recognized. This warranty
obligation is affected by failure rates, the introduction of new products, and
the costs of material and labor to repair or replace the product. The Company
regularly assesses the adequacy of its accrual for warranty expense based upon
historical warranty rates and anticipated future warranty rates.
VALUES FOR THE DISCONTINUED OPERATIONS: On November 8, 2002, the Company
completed its plan for exiting and selling the assets of the specialty office
seating and systems segment of its business. This plan was originally
approved by the Company's Board of Directors on June 29, 2001. During the
quarter ended June 30, 2001, the Company developed and approved a plan for
exiting and selling the specialty office seating and systems furniture segment
of its operations. Since that time and in accordance with APB 30, the Company
has treated the DO Group and CenterCore segment of its operations as a
discontinued operation. At the time that the plan was originally formulated,
an estimated $3,256,000 loss was accrued for in the three months ended June
30, 2001 to account for the expected losses on disposal and estimated
operating losses through the disposal date. After the completion of the plan,
the actual net loss, after tax has been determined to be $2,511,000. Since
the amount of loss that was originally estimated and accrued for in the June
2001 quarter of $3,256,000 was higher than this amount, the Company recognized
a gain, net of tax, of $745,000, in the period ended December 31, 2002. The
Company did retain certain assets and liabilities of the segment after
completion of the sales plan. Considerable judgment was used to estimate the
value of these assets and liabilities based on many factors including the net
expected realizable value of the remaining accounts receivable, the
realization of tax benefits, and potential remaining expenses.
ASSETS RELATED TO THE DISCONTINUED NEXT GENERATION TABLE LINE: Due to the
decision by the board of directors in January 2005 to discontinue the next
generation table project, the Company has impaired certain long-term assets
during the quarter ending March 31, 2005. This resulted in an impairment
charge of $2.0 million related to the fixed assets (see Note 4, Impairment of
Assets). The Company utilized an outside specialist to help establish the
fair value of the assets which involved considerable judgment.
23
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 and Versipanel acquisitions. The other intangible asset
at March 31, 2004 was 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 by calculating the present value of estimated 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 the Broda or Versipanel goodwill. However, due to the
decision by the board of directors in January 2005 to discontinue the next
generation table project, the Company has fully impaired the other intangible
asset related to this intellectual property during the quarter ended March 31,
2005. This resulted in an impairment charge of $227,000 related to other
intangible assets (in addition to the $2.0 million related to fixed assets -
see Note 4 to the financial statements).
NOTES RECEIVABLE: The Company reviews its notes receivable to determine likely
collectability. Since the notes are with entities without a long history of
an ability to create future cash flows, the Company bases its belief in their
collectability upon its understanding of what the liquidation value of the
operation would be and the likelihood of the Company being able to recover the
outstanding balances. At this time, the Company has created reserves on one
of these notes receivable. Due to the level of uncertainty in the success of
these entities, these notes receivable ultimately may not be fully realized.
INCOME TAXES: 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 AND WAGE DISPUTE: The Company has certain alleged
obligations of up to $0.4 million related to a defined benefit pension plan
and $0.2 million related to a wage dispute resulting from exiting and selling
its specialty office seating and systems business. The Company does not
believe that it is liable for these amounts and plans to vigorously defend its
positions. At this time, the Company is unable to determine what its
liability will be.
REVENUE RECOGNITION: The Company recognizes revenue in accordance with Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition," as revised by SAB
No. 104. Sales are recorded when title passes and collectability is reasonably
assured under its various shipping terms. Revenue is normally recognized upon
shipment of goods to customers. In certain circumstances revenue is not
recognized until the goods are received by the customer based on the terms of
the sale agreement. Discounts directly related to the sale are recorded as a
reduction to net sales.
24
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 123(R) 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 shown
in Note 1 to the financial statements. 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, as amended by the SEC, will be effective for the Company's fiscal
year beginning April 1, 2006, 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.
25
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. The Company intends
to adopt SFAS No. 151 on April 1, 2006. The adoption of SFAS No. 151 is not
expected to have a material impact on the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", ("FIN No. 46") an interpretation of ARB No. 51.
FIN No. 46, as amended, addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. FIN No.
46 applies in the first year or interim period ending after December 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company does not have an
interest in any variable interest entity and therefore the adoption of FIN No.
46 did not impact the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity", which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity in its
statement of financial position. SFAS No. 150 is effective for new or
modified financial instruments beginning June 1, 2003, and for existing
instruments beginning August 1, 2003. The adoption of SFAS No. 150 did not
have an impact on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The Company does not have any derivative instruments and therefore, the
adoption of SFAS No. 149 did not have an impact on our consolidated financial
statements.
26
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net sales represented by items included in or derived from the Company's
Statements of Income.
Year Ended March 31, 2005 2004 2003 2002 2001
- -----------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold 66.7 62.0 59.7 60.0 61.1
- -----------------------------------------------------------------------------
Gross profit 33.3 38.0 40.3 40.0 38.9
Operating expenses:
Selling 14.9 14.2 15.1 15.5 15.3
General and administrative 3.9 4.0 6.1 5.0 4.6
Research and development 2.5 3.1 3.7 2.8 2.0
Asset impairment 4.4 - - - -
- -----------------------------------------------------------------------------
Income from continuing
operations 7.6 16.7 15.4 16.7 17.0
Interest and other, net 0.2 (0.1) 0.3 0.9 0.3
- -----------------------------------------------------------------------------
Income before tax 7.8 16.6 15.7 17.6 17.3
Provision for income taxes 2.9 6.1 5.8 6.8 6.7
- -----------------------------------------------------------------------------
Net income from continuing
operations 4.9% 10.5% 9.9% 10.8% 10.6%
=============================================================================
COMPARISON OF FISCAL YEARS 2005, 2004 AND 2003
NET SALES
The Company's fiscal 2005 net sales of $50.3 million were up $5.1 million as
compared to net sales in fiscal 2004. The 11 percent increase in sales in
fiscal 2005 resulted from increased sales in most of the Company's product
lines. The Company's healthcare seating segment increased by 16 percent and
the Company's multipurpose room furniture segment increased 10 percent. For
fiscal 2005, the multipurpose room furniture segments increase was due to an 8
percent increase in table sales, a 7 percent increase in chair sales, and a 61
percent increase in other sales, primarily due to sales of portable partitions
related to the acquisition of Versipanel in April of 2004. International
sales for all product lines represented 15 percent and 13 percent of net sales
for fiscal 2005 and 2004, respectively.
The Company's fiscal 2004 net sales of $45.2 million were up 10 percent or
$4.2 million as compared to net sales in fiscal 2003. The increase in sales
in 2004 resulted primarily from increased sales in both the Company's
healthcare seating segment and the Company's multipurpose room furniture
segment. For fiscal 2004, the multipurpose room furniture segment experienced
a sales increase of almost 9 percent and the healthcare seating segment
experienced sales growth of over 22 percent. Within the multipurpose room
furniture segment, chair sales accounted for most of the increase, as sales of
this product line were 28 percent higher than the prior year. Table sales
also increased by 3 percent. International sales for all product lines
represented 13 percent and 11 percent of net sales for fiscal 2004 and 2003,
respectively.
27
GROSS PROFIT
Fiscal 2005 gross profit as a percentage of net sales decreased to 33 percent
as compared to 38 percent in the prior year. The decrease in gross profit was
due primarily to three factors. The first was higher labor and overhead costs
associated with the attempted startup of manufacturing operations for the
Company's next generation table. Prior to the decision in January 2005 to
discontinue the funding on this operation, a considerable amount of labor and
overhead costs related to this potential new product line were expended.
These costs account for approximately 5 percentage points of the deterioration
in gross margin in the current year as compared to 3 percentage points in the
prior year. The second factor was higher material costs due to increases in
almost all of the Company's raw materials. These increases were partially
offset by sales price increases that were implemented earlier in the year, but
were not enough to fully offset the costs. Material costs as a percentage of
sales increased by 2 percentage points. The third factor was a charge to
inventory related to the next generation table project. This charge reduced
its value from cost to its market valuation resulting from the Company's
decision to discontinue funding this operation. This charge totaled $324,000
and represents an additional 1 percentage point in reduced margin.
Fiscal 2004 gross profit as a percentage of net sales decreased to 38 percent
from 40 percent in the prior fiscal year. 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 overhead costs
in the healthcare seating operations. This decrease was partially offset by
lower material costs in both the multipurpose room operations and the
Company's healthcare seating operations.
OPERATING EXPENSES
For fiscal 2005, selling expenses were up at 15 percent of net sales as
compared to 14 percent in the prior fiscal year. Actual expenses increased by
$0.97 million, or 15 percent. Multipurpose room furniture selling costs
increased by $0.83 million compared to the prior fiscal year. This increase
resulted primarily from increased personnel and commission costs due to the
higher sales volume. Selling expenses in the healthcare seating operations
increased by $0.14 million compared to the prior fiscal year due primarily to
increased personnel costs.
For fiscal 2004, selling expenses were down at 14 percent of net sales as
compared to 15 percent in the prior fiscal year. Actual expenses increased by
$0.28 million, or 5 percent. Virtually all of this increase was attributable
to increases in expenses in the healthcare seating operation primarily due to
higher personnel and commission costs on the increased sales volume and higher
travel and vehicle expenses. Multipurpose room furniture selling costs were
essentially unchanged compared to the prior fiscal year. Higher commission
costs on the increased sales volume were offset by lower advertising,
literature, and trade show costs.
General and administrative expenses were 4 percent of net sales in fiscal 2005
compared to 4 percent in fiscal 2004 and 6 percent in 2003. Actual expenses
increased by 11 percent or $0.20 million in fiscal 2005 over fiscal 2004. The
increase was 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. This increase
was partially offset by lower insurance costs.
28
Actual general and administrative expenses decreased by 29 percent, or $0.72
million in fiscal 2004 over fiscal 2003. The decrease was primarily due to a
charge in the prior fiscal year of $0.74 million fully reserving a note
receivable to a startup development company. The decrease was also due to the
receipt of a settlement in a law suit as well as lower professional fees.
Research and development expenses were 3 percent of sales in fiscal 2005, 3
percent of sales in fiscal 2004, and 4 percent of sales in fiscal 2003. For
fiscal 2005, actual spending decreased by 9 percent, or $0.13 million, as
compared to fiscal 2004. This decrease resulted mainly from lower costs for
personnel at the Company's multipurpose room operations. This decrease was
partially offset by increased spending at the Company's healthcare seating
operations related to new products.
For fiscal 2004, actual research and development spending decreased by 10
percent, or $0.15 million, as compared to fiscal 2003. This decrease resulted
mainly from lower costs for personnel, outside services and production
supplies at the Company's multipurpose room operations. This decrease was
partially offset by increased spending at the Company's healthcare seating
operations related to new products.
For fiscal 2005, the Company realized an impairment charge of $2.2 million
related to the Company's decision to discontinue funding its next generation
table. The Company realized an impairment on some of the assets involved in
the project to reduce their carrying amounts to their estimated fair value.
The fair value was determined by the amount at which the assets could be
bought or sold in a current transaction between willing parties. The Company
utilized an outside specialist to help establish the fair value of the assets.
The impairment consisted of $2.0 million in impairment of fixed assets and
$0.2 million in impairment of other intangible asset.
OTHER INCOME/EXPENSE
Other income and expenses netted to $0.06 million in fiscal 2005. Investment
income was $0.17 million, an increase of $0.09 million from the prior fiscal
year due to a higher average balance of cash and cash equivalents and
available-for-sale securities in the current fiscal year as well as higher
rates of return. Other expenses in fiscal 2005, which totaled $0.11 million,
consisted of $0.13 million in realized foreign currency exchange losses, which
were partially offset by $0.02 million in other income.
Other income and expenses netted to $0.10 million in expenses in fiscal 2004.
Investment income was $0.08 million, a decrease of $0.15 million from the
prior fiscal year due to a lower average balance of cash and cash equivalents
and available-for-sale securities in the current fiscal year as well as lower
rates of return. Other expenses in fiscal 2004, which totaled $0.18 million,
consisted of $0.07 million in realized foreign currency exchange losses and
$0.11 million in net losses on asset disposals.
29
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, for the year ended March 31, 2005,
$37,000 was fully recognized, while $34,000, or $22,000 after-tax, was
allocated to the minority interest.
For the year ended March 31, 2004, the startup development company realized a
net loss of $249,000. Upon consolidation, 50 percent of the loss, or
$125,000, was allocated to the minority interest. Tax effected, this amount
nets to $79,000 and compares with $7,000 reported in the prior fiscal year.
NET INCOME FROM CONTINUING OPERATIONS
For reasons stated above, the Company's net income from continuing operations
for fiscal 2005 was $2.47 million, a decrease of $2.28 million or 48 percent
compared to fiscal 2004. For fiscal 2004, net income from continuing
operations was $4.75 million, an increase of $0.69 million or 17 percent
compared to net income in fiscal 2003.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial data for
the most recent twelve quarters. This quarterly financial data reflects, in
the opinion of management, all adjustments necessary to present fairly the
results of operations for such periods. The operating results for any
quarter are not necessarily indicative of results for any future period. The
Company anticipates that operating results may fluctuate on a quarterly basis
depending upon a number of factors including those described in "Risk Factors
That May Affect Future Operations." Earnings per share information may not
add to match annual earnings per share information due to rounding.
UNAUDITED QUARTERLY FINANCIAL INFORMATION:
(in thousands, except per share amounts)
Q1 2003 Q2 2003 Q3 2003 Q4 2003
------------------------------------------------------------------------
Net sales $10,768 $10,975 $10,561 $ 8,661
Gross profit 4,491 4,505 4,243 3,269
Income before provision
for income tax 1,649 1,978 1,627 1,169
Net income from
continuing operations 1,005 1,203 1,004 851
Basic earnings per share* 0.20 0.25 0.24 0.21
Diluted earnings per share* 0.19 0.24 0.23 0.20
30
Q1 2004 Q2 2004 Q3 2004 Q4 2004
------------------------------------------------------------------------
Net sales $11,562 $11,497 $11,199 $10,952
Gross profit 4,441 4,489 4,212 4,031
Income before provision for
income tax 2,026 2,070 1,836 1,508
Net income from continuing
operations 1,262 1,303 1,146 1,042
Basic earnings per share 0.31 0.32 0.28 0.25
Diluted earnings per share 0.29 0.30 0.26 0.23
Q1 2005 Q2 2005 Q3 2005 Q4 2005
------------------------------------------------------------------------
Net sales $12,046 $13,378 $11,872 $12,976
Gross profit 4,141 4,602 4,005 3,987
Income before provision
for income tax 1,666 1,815 1,254 (840)
Net income (loss) from
continuing operations 1,071 1,140 795 (537)
Basic earnings (loss) per
share 0.25 0.27 0.18 (0.12)
Diluted earnings (loss) per
share 0.24 0.25 0.18 (0.12)
*Basic and diluted earnings per share information are for earnings from
continuing operations.
The Company's quarterly operating results can fluctuate significantly
depending on factors such as timing of new product introductions, market
acceptance of new products, increased competitive pressures, growth in the
institutional furniture market, acquisitions, expansion of international
operations, timing and expansion into complementary products such as chairs,
changes in raw material sources and costs, and adverse changes in general
economic conditions in any of the countries in which the Company does
business. The Company may experience quarterly variations in operating
results in the future.
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 $3.94 million at March 31, 2005 which compared to $6.38 million at
March 31, 2004. In addition, the Company held available-for-sale securities
which totaled $7.15 million at March 31, 2005 as compared to $1.05 million at
March 31, 2004.
The following table highlights certain key cash flow and capital information
pertinent to the discussion that follows:
31
Year Ended March 31, 2005 2004
- -----------------------------------------------------------------------------
Net cash provided by continuing operations $6,364,000 $5,294,000
Net sales (purchases) of available-for-sale
securities (6,113,000) 1,287,000
Purchases of property and equipment (2,142,000) (3,270,000)
Purchase of Versipanel (1,201,000) -
Net proceeds from exercise of stock options
and issuance of shares to the 401(k) plan 614,000 1,181,000
Purchase and retirement of common stock - (336,000)
The decrease in cash and cash equivalents for fiscal 2005 as compared to
fiscal 2004 was due primarily to net purchases of available-for-sale
securities of $6.11 million, purchases of property and equipment of $2.14
million, and the purchase of Versipanel for $1.20 million. This decrease was
partially offset by cash of $6.36 million generated from continuing
operations, and the net proceeds related to the exercise of stock options of
$0.60 million.
Historically, the Company has financed its growth primarily through cash from
operations. The Company's subsidiary, Broda Enterprises, has a line of
credit. The limit on this facility is $0.82 million. As of March 31, 2005,
no amount was drawn under this facility. Among other restrictions, this
credit facility requires the maintenance of certain financial ratios and
levels of working capital. As of March 31, 2005, the Company was in full
compliance with the loan covenants related to this credit facility.
The Company's material cash commitments at March 31, 2005 consisted primarily
of current liabilities of $4.35 million to be paid from funds generated from
operations. Current liabilities consisted of the following:
Year Ended March 31, 2005 2004
- -----------------------------------------------------------------------------
Accounts payable $1,736,000 $2,088,000
Accrued payroll and payroll taxes 1,155,000 1,236,000
Accrued warranty 439,000 416,000
Deferred revenue 374,000 -
Income taxes payable 152,000 -
Other 496,000 383,000
- -----------------------------------------------------------------------------
Total current liabilities $4,352,000 $4,123,000
=============================================================================
The Company's contractual commitments consisted of two 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 also leases a building in Phoenix, Arizona related to its
Versipanel operations which requires lease payments of $6,000 per month
through September 2005. As of March 31, 2005, the Company had no operating
leases with terms in excess of one year. At March 31, 2005, the Company also
has committed to purchasing $247,000 in raw material inventory during the
following year.
32
The Company currently believes that cash flow from its current operations
together with existing cash reserves and available lines of credit will be
sufficient to support its working capital requirements for its existing
operations for at least the next 12 months. The Company cannot guarantee that
its working capital will be sufficient to support the Company's operations.
If the existing cash reserves, cash flow from operations and debt financing
are insufficient or if working capital requirements are greater than currently
estimated, the Company could be required to raise additional capital. The
Company may not be capable of raising additional capital or the terms upon
which such capital may be available to the Company may not be acceptable.
Additional sources of equity capital are available to the Company through the
exercise by holders of outstanding options. At March 31, 2005, the proceeds
which would have been received by the Company upon exercise of outstanding
options which were exercisable on that date were approximately $3.78 million.
There is no assurance that such options will be exercised.
IMPACT OF INFLATION AND ENVIRONMENTAL REGULATIONS
During the fiscal year ended March 31, 2005, the Company has experienced
inflation on several of its raw materials including steel, plastic and wood.
Transportation costs have also increased as fuel prices have increased. The
Company has implemented price increases on its products in response to these
increases and has been able to recover part of its increased costs. However,
the Company has been unable to fully maintain its previous margins. The
Company plans to continue to implement these price increases and is hopeful to
regain its previous position with respect to margins, but can give no
assurance that it will be successful in doing so. The Company estimates that
the effects of inflation on its material costs has been to increase the costs
of materials as a percent of sales by 2 percentage points during the fiscal
year ended March 31, 2005 as compared to the prior fiscal year. At the
current time, pricing of the Company's raw materials has seemed generally to
stabilize. However, significant increases in the price of raw materials could
reignite and have a material adverse impact on the Company's results of
operations.
The Company believes that compliance with environmental laws and regulations
has not materially affected the Company's operations.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS
Certain statements made above in this filing that are not historical facts are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). In addition, when used in
this filing, the words or phrases "may," "will," "Management believes,"
"Company believes," "Company intends," "estimates," "projects," "anticipates,"
"expects" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Reform Act.
Forward-looking statements contained in this Annual Report on Form 10-K
include plans and objectives of management for future operations, including
plans and objectives relating to the products, marketing, customers, product
line expansions, liquidity and capital resources, and 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. These forward-looking statements relate to:
33
- references to predicted increases in the institutional
furniture and United States office furniture markets and the Company's belief
of a rebound in the office furniture business;
- statements that the Company anticipates that its sales
volumes during the first quarter of fiscal 2006 may increase by up to 15
percent as compared to the sales levels of the prior year's first quarter;
- statements that the Company anticipates developing
additional complementary chair lines and further penetrating its existing
marketplace with its current line of chairs;
- statements that the Company plans to sell Versipanel
products through its existing sales system to current customers and that such
products will allow the Company to expand its product line and better
penetrate the institutional furniture markets;
- 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; and
- statements related to anticipated capital expenditures.
All forward-looking statements involve predictions and are subject to known
and unknown risks and uncertainties, that could cause actual results to differ
materially from historical results and those presently anticipated or
projected. Readers should not place undue reliance on any such
forward-looking statements, which speak only as of the date made. The
considerations listed below and elsewhere in this filing could affect the
Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any views or statements expressed
with respect to future periods. Important factors and risks that might cause
such differences, include, but are not limited to:
- a repeated downturn in domestic and international economies and business
conditions, specifically in the institutional furniture industry;
- war, terrorist acts, and threats of war and terrorist acts;
- 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 core
businesses;
- lower than expected revenue, revenue growth, cash flow and gross margins
from the multipurpose room and healthcare seating operations, higher materials
and labor costs, or the Company's inability, for any reason, to profitably
introduce new products or implement its marketing strategies in the healthcare
seating and multipurpose room markets;
- the Company's inability for any reason to develop new products and
expand successfully into new markets;
- 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;
34
- 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 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
and $0.2 million related to a wage dispute resulting from exiting and selling
its specialty office seating and systems business;
- regulatory developments that adversely affect demand for the Company's
products, particularly the Company's healthcare seating products; and
- other factors noted in "Item 1. Business-Risk Factors That May Affect
Future Results of Operations."
In light of the significant uncertainties inherent in forward-looking
statements, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company disclaims any obligation or
intent to update any such factors or forward-looking statements to reflect
future events or developments.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company 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. For the year ended March 31, 2005, approximately 5 percent of the
Company's net sales, 7 percent of the Company's cost of products sold, and 12
percent of the Company's operating expenses were denominated in currencies
other than the U.S. dollar. For the year ended March 31, 2004, approximately
7 percent of the Company's net sales, 7 percent of the Company's cost of
products sold, and 14 percent of the Company's operating expenses were
denominated in currencies other than the U.S. dollar. For the year ended
March 31, 2003, approximately 5 percent of the Company's net sales, 7 percent
of the Company's cost of products sold, and 14 percent of the Company's
operating expenses were denominated in currencies other than the U.S. dollar.
Foreign currency exchange rate fluctuations did not have a material impact on
the financial results of the Company during fiscal 2005. The Company's
healthcare chair operations have occasionally entered into forward contracts
for specific U.S. dollar denominated accounts receivable. As of March 31,
2005, 2004, and 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. The
Company estimates that a 10 percent adverse change in foreign exchange rates
could have reduced operating profit by as much as $148,000, $96,000 and
$101,000 for the fiscal years ended March 31, 2005, 2004 and 2003. As
mentioned above, this quantitative measure has inherent limitations and the
sensitivity analysis disregards the possibility of other effects that may
offset such adverse change.
35
MANAGEMENT'S STATEMENT
The Company's financial statements were prepared by management. Management is
responsible for the integrity and objectivity of the financial information
presented, including amounts that must necessarily be based on judgments and
estimates. The Company's financial statements were prepared in accordance
with accounting principles generally accepted in the United States of America.
The Company's independent registered public accounting firm, Deloitte & Touche
LLP, have audited these financial statements in accordance with auditing
standards generally accepted in the United States of America.
The Audit Committee of the Board of Directors is composed of directors who are
free of any relationship or personal interest that, in the opinion of the
Board of Directors, would interfere with their ability to exercise sound
judgment as a committee member. The purpose of the Audit Committee is to
provide assistance to the overall Board of Directors in fulfilling the Board's
responsibility to the shareholders, potential shareholders, and investment
community relating to corporate accounting, reporting practices of the
corporation, and the quality and integrity of the financial reports of the
corporation. In so doing, it is the responsibility of the Audit Committee to
establish and maintain free and open means of communication between the
directors, the independent auditor, and the financial management of the
Company.
Based on a review and discussions of the Company's 2005 audited consolidated
financial statements with management and discussions with the independent
registered public accounting firm, the Audit Committee recommended to the
Board of Directors that the Company's fiscal 2005 audited financial statements
be included in the Company's annual report on Form 10-K. The Board of
Directors concurred.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm. . . . . 37
Consolidated Balance Sheets as of March 31, 2005 and 2004. . . . 38
Consolidated Statements of Income for the fiscal years ended
March 31, 2005, 2004, and 2003 . . . . . . . . . . . . . . . . 39
Consolidated Statements of Stockholders' Equity for the
fiscal years ended March 31, 2005, 2004, and 2003. . . . . . . 40
Consolidated Statements of Cash Flows for the fiscal years
ended March 31, 2005, 2004, and 2003 . . . . . . . . . . . . . 41
Notes to Consolidated Financial Statements . . . . . . . . . . . 44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of MITY Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of MITY
Enterprises, Inc. and subsidiaries as of March 31, 2005 and 2004, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MITY Enterprises, Inc. and
subsidiaries as of March 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
May 27, 2005
38
CONSOLIDATED BALANCE SHEETS
March 31, 2005 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,940,000 $ 6,382,000
Available-for-sale securities 7,151,000 1,050,000
Accounts receivable, less allowances of
$263,000 at March 31, 2005 and $339,000
at March 31, 2004 6,463,000 5,586,000
Inventories 2,518,000 2,339,000
Tax receivable - 781,000
Prepaid expenses and other current assets 311,000 477,000
Deferred income tax assets 701,000 568,000
----------- -----------
Total current assets 21,084,000 17,183,000
Property and equipment, net 11,714,000 13,230,000
Deferred income tax assets 403,000 63,000
Goodwill, net 2,306,000 1,136,000
Other intangible assets, net - 264,000
Notes receivable, net 109,000 80,000
----------- -----------
$35,616,000 $31,956,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,736,000 $ 2,088,000
Accrued expenses and other current liabilities 2,616,000 2,035,000
----------- -----------
Total current liabilities 4,352,000 4,123,000
Minority interest - 34,000
----------- -----------
Total liabilities 4,352,000 4,157,000
----------- -----------
Commitments and contingencies (Note 12)
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 4,325,434 shares at March 31, 2005
and 4,258,590 shares at March 31, 2004 43,000 43,000
Additional paid-in capital 12,208,000 11,469,000
Retained earnings 18,337,000 15,868,000
Accumulated other comprehensive income 676,000 419,000
----------- -----------
Total stockholders' equity 31,264,000 27,799,000
----------- -----------
$35,616,000 $31,956,000
=========== ===========
(See accompanying notes to consolidated financial statements)
39
CONSOLIDATED STATEMENTS OF INCOME
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Net sales $50,272,000 $45,210,000 $40,965,000
Cost of products sold 33,537,000 28,037,000 24,457,000
----------- ----------- -----------
Gross profit 16,735,000 17,173,000 16,508,000
----------- ----------- -----------
Operating expenses:
Selling 7,427,000 6,452,000 6,172,000
General and administrative 1,980,000 1,787,000 2,504,000
Research and development 1,265,000 1,393,000 1,541,000
Asset impairment 2,226,000 - -
----------- ----------- -----------
Total operating expenses 12,898,000 9,632,000 10,217,000
----------- ----------- -----------
Income from continuing operations 3,837,000 7,541,000 6,291,000
Other income (expense):
Investment income 171,000 79,000 229,000
Other (113,000) (180,000) (97,000)
----------- ----------- -----------
Total other income (expense), net 58,000 (101,000) 132,000
----------- ----------- -----------
Income before provision for income
taxes and minority interest 3,895,000 7,440,000 6,423,000
Provision for income taxes 1,448,000 2,766,000 2,367,000
----------- ----------- -----------
Net income before minority interest 2,447,000 4,674,000 4,056,000
Minority interest 22,000 79,000 7,000
----------- ----------- -----------
Net income from continuing operations 2,469,000 4,753,000 4,063,000
Discontinued operations (Note 5):
Gain on disposal (net of applicable
income tax expense of $457,000) - - 745,000
----------- ----------- -----------
Net income $ 2,469,000 $ 4,753,000 $ 4,808,000
=========== =========== ===========
Basic earnings per share from
continuing operations $0.57 $1.14 $0.90
Basic gain per share on disposal of
discontinued operations - - 0.17
----------- ----------- -----------
Basic earnings per share $0.57 $1.14 $1.07
=========== =========== ===========
Weighted average number of common
shares-basic 4,296,525 4,157,081 4,501,342
=========== =========== ===========
Diluted earnings per share from
continuing operations $0.55 $1.09 $0.86
Diluted gain per share on disposal of
discontinued operations - - 0.16
----------- ----------- -----------
Diluted earnings per share $0.55 $1.09 $1.02
=========== =========== ===========
Weighted average number of common and
common equivalent shares - diluted 4,474,111 4,364,683 4,711,420
=========== =========== ===========
(See accompanying notes to consolidated financial statements)
40
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Stockholders'
Stock Capital Earnings Income(Loss) Equity
------- ----------- ----------- ------------- -----------
Balance at April 1, 2002 $50,000 $11,755,000 $15,615,000 ($101,000) $27,319,000
Comprehensive income:
Net income 4,808,000
Unrealized gains on available-
for-sale securities 16,000
Foreign currency translation 197,000
----------
Total comprehensive income 5,021,000
Issuance of 42,698 shares of common
stock from the exercise of options 227,000 227,000
Issuance of 17,913 shares of common
stock to the Company's 401(k) plan 152,000 152,000
Purchase and retirement of 945,773
shares of common stock (9,000) (2,246,000) (9,047,000) (11,302,000)
Tax benefit of employee stock options 37,000 37,000
------- ----------- ----------- ------------- -----------
Balance at March 31, 2003 41,000 9,925,000 11,376,000 112,000 21,454,000
Comprehensive income:
Net income 4,753,000
Unrealized gains on available-
for-sale securities 2,000
Foreign currency translation 305,000
----------
Total comprehensive income 5,060,000
Issuance of 166,493 shares of common
stock from the exercise of options 2,000 1,076,000 1,078,000
Issuance of 7,916 shares of common
stock to the Company's 401(k) plan 103,000 103,000
Purchase and retirement of 31,000
shares of common stock (75,000) (261,000) (336,000)
Tax benefit of employee stock options 440,000 440,000
------- ----------- ----------- ------------- -----------
Balance at March 31, 2004 43,000 11,469,000 15,868,000 419,000 27,799,000
Comprehensive income:
Net income 2,469,000
Unrealized losses on available-
for-sale securities (12,000)
Foreign currency translation 269,000
----------
Total comprehensive income 2,726,000
Issuance of 63,189 shares of common
stock from the exercise of options 555,000 555,000
Issuance of 3,655 shares of common
stock to the Company's 401(k) plan 59,000 59,000
Tax benefit of employee stock options 125,000 125,000
------- ----------- ----------- ------------- -----------
Balance at March 31, 2005 $43,000 $12,208,000 $18,337,000 $676,000 $31,264,000
======= =========== =========== ============= ===========
(See accompanying notes to consolidated financial statements)
41
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,469,000 $ 4,753,000 $ 4,808,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Net gain on disposal of discontinued
operations - - (745,000)
Asset impairment 2,226,000 - -
Depreciation and amortization 1,830,000 1,634,000 1,191,000
Deferred taxes (473,000) 383,000 2,511,000
Loss (gain) on disposal of property
and equipment (6,000) 114,000 27,000
Tax benefit from exercise of stock
options 125,000 440,000 37,000
Changes in assets and liabilities:
Accounts receivable (652,000) (1,667,000) 666,000
Inventories (88,000) (913,000) (99,000)
Tax receivable 784,000 508,000 (1,120,000)
Prepaid expenses and other current
assets 107,000 (194,000) 165,000
Accounts payable (420,000) (137,000) 511,000
Accrued expenses and other current
liabilities 462,000 373,000 (2,775,000)
----------- ----------- -----------
Net cash provided by continuing
operations 6,364,000 5,294,000 5,177,000
Net cash provided by discontinued
operations - - 2,902,000
----------- ----------- -----------
Net cash provided by operating
activities 6,364,000 5,294,000 8,079,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (7,591,000) (1,463,000) (2,787,000)
Sales and maturities of available-for-
sale securities 1,478,000 2,750,000 5,060,000
Proceeds from sale of property and
equipment 85,000 1,000 14,000
Purchases of property and equipment (2,142,000) (3,270,000) (6,577,000)
Purchase of Versipanel (1,201,000) - -
Decrease (increase) in notes receivable (30,000) 87,000 232,000
Purchase of intellectual property - - (82,000)
----------- ----------- -----------
Net cash used in continuing operations (9,401,000) (1,895,000) (4,140,000)
Net cash provided by discontinued
operations - - 250,000
----------- ----------- -----------
Net cash used in investing activities (9,401,000) (1,895,000) (3,890,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock
options and issuance of shares to the
401(k) plan 614,000 1,181,000 379,000
Minority interest (34,000) (91,000) (7,000)
Purchase and retirement of common stock - (336,000) (11,302,000)
----------- ----------- -----------
42
Net cash provided by (used in) financing
activities 580,000 754,000 (10,930,000)
----------- ----------- -----------
Effect of exchange rate changes on cash 15,000 26,000 18,000
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (2,442,000) 4,179,000 (6,723,000)
Cash and cash equivalents at beginning
of year 6,382,000 2,203,000 8,926,000
----------- ----------- -----------
Cash and cash equivalents at end of year $3,940,000 $6,382,000 $2,203,000
=========== =========== ===========
(See accompanying notes to consolidated financial statements)
(continued)
43
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Cash paid during the year for income
taxes $ 772,000 $1,701,000 $1,395,000
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
==========
(See accompanying notes to consolidated financial statements)
(concluded)
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED MARCH 31, 2005
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MITY Enterprises, Inc. (the Company) designs and manufactures multipurpose
room furniture and healthcare seating and markets these products in niche
markets. In addition, the Company continues to pursue acquisitions of product
lines or companies that will be complementary to the Company's businesses.
The Company markets its products throughout the United States, Canada and in
certain foreign countries.
DISCONTINUED OPERATIONS
During the quarter ended June 30, 2001, the Company developed and approved a
plan for exiting and selling the specialty office seating and systems
furniture segment of its operations. This segment consists of the CenterCore
and DO Group businesses. As a result of these actions, the Company has
treated DO Group and CenterCore as a discontinued operation. On November 8,
2002, the Company completed the sale of the assets of the specialty office
seating and systems furniture segment of its operations (See Note 5,
Discontinued Operations).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
MITY Enterprises, Inc. and all wholly owned and partially owned subsidiaries
for which the Company exercises control. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments which have an
original maturity not greater than three months.
AVAILABLE-FOR-SALE SECURITIES
Debt securities, which consist of corporate bonds and government agency
securities, are classified as available-for-sale and are recorded at their
fair value. When the fair value of available-for-sale securities differs from
the amortized cost, the resulting unrealized gain or loss is recorded as a
component of comprehensive income. The amortization of premiums and discounts
on debt securities in this category are included in investment income and
reflected in the net carrying amount of the debt securities. The cost of
securities sold during the period is based on the specific identification
method. Interest on securities in this category are included in investment
income. As of March 31, 2005, the Company had unrealized holding losses on
available-for-sale securities of $19,000. These losses were related to
fluctuations in interest rates and are not considered to be other than a
temporary loss. As of March 31, 2004 there were no unrealized holding gains
or losses on available-for-sale securities.
The contractual maturities of the available-for-sale securities held are
summarized below:
45
March 31, 2005 2004
---------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Due in one year or less $1,950,000 $1,942,000 - -
Due after one through five
years 2,220,000 2,209,000 $1,050,000 $1,050,000
Due after five through ten
years - - - -
Due after ten years 3,000,000 3,000,000 - -
---------- ---------- ---------- ----------
$7,170,000 $7,151,000 $1,050,000 $1,050,000
========== ========== ========== ==========
These available-for-sale securities consisted of the following (at fair
value):
Gross Gross
March 31, 2005 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. government securities $2,920,000 - $19,000 $2,901,000
Asset-backed securities 200,000 - - 200,000
Auction rate notes 4,050,000 - - 4,050,000
---------- ---------- ---------- ----------
Balance at end of period $7,170,000 - $19,000 $7,151,000
========== ========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 2004 Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. government securities $1,050,000 - - $1,050,000
---------- ---------- ---------- ----------
Balance at end of period $1,050,000 - - $1,050,000
========== ========== ========== ==========
Investments that have been in a continuous unrealized loss position for more
than 12 months as of March 31, 2005 and 2004 were not significant. For the
years ended March 31, 2005 and 2004, proceeds from the sale of securities
available-for-sale amounted to $1,490,000 and $2,748,000, respectively. Gross
realized losses amounted to $0 and $1,000 for the years ended March 31, 2005
and 2004, respectively. There were no gross realized gains for the years
ended March 31, 2005 and 2004.
INVENTORIES
Inventories are stated at the lower of cost, on a first in, first out basis,
or market. The Company has established a reserve on this inventory of
$372,000 and $31,000 as of March 31, 2005 and 2004, respectively (See Note 4,
Impairment of Assets).
46
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred, whereas major replacements and improvements
are capitalized and subsequently depreciated. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the lease term.
Depreciation and amortization on the Company's property and equipment are
provided on a straight-line basis over the estimated useful lives of the
related assets as follows:
Estimated Useful
Life (in years)
----------------
Machinery and equipment 3 to 10
Furniture and fixtures 3 to 5
Leasehold improvements 2 to 15
Buildings and improvements 30
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company reviews annually the carrying value of its goodwill and other
intangible assets during the first quarter of each fiscal year. The goodwill
arose from its acquisitions of Broda Enterprises and Versipanel and the other
intangible asset is 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 other intangible asset and determined at
that time that there was no impairment. 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.
However, due to the decision by the board of directors in January 2005 to
discontinue the next generation table project, the Company has fully impaired
the other intangible assets related to the intellectual property during the
quarter ending March 31, 2005. This resulted in an impairment charge of
$227,000 related to the other intangible assets (See Note 4, Impairment of
Assets).
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition," as revised by SAB No. 104. Sales are
recorded when title passes and collectability is reasonably assured under its
various shipping terms. Revenue is normally recognized upon shipment of goods
to customers. In certain circumstances revenue is not recognized until the
goods are received by the customer based on the terms of the sale agreement.
Discounts directly related to the sale are recorded as a reduction to net
sales.
SHIPPING COSTS
In accordance with Emerging Issues Task Force (EITF) 00-10, "Accounting for
Shipping and Handling Fees and Costs," the Company classifies shipping costs
billed to customers as revenue.
47
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist primarily of trade receivables and cash equivalents.
In the normal course of business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing credit evaluations of
its customers and maintains allowances for possible losses which, when
realized, have been within the range of management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Available-for-sale securities are carried at fair value. The carrying amount
reported in the balance sheets for cash and cash equivalents, accounts
receivable, and accounts payable approximates fair value because of the
immediate or short-term maturity of these financial instruments.
INCOME TAXES
The Company uses an asset and liability approach for financial accounting and
reporting for income taxes. Deferred income taxes are provided for temporary
differences in the bases of assets and liabilities as reported for financial
statement purposes and income tax purposes.
STOCK-BASED COMPENSATION
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 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 Accounting Principle 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 notes to 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:
48
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Net income:
As reported $ 2,469,000 $ 4,753,000 $ 4,808,000
Deduct stock-based employee
compensation expense determined
under the fair-value based
method net of related tax effects 254,000 156,000 218,000
----------- ----------- -----------
Pro forma $ 2,215,000 $ 4,597,000 $ 4,590,000
=========== =========== ===========
Earnings per share - basic:
As reported $0.57 $1.14 $1.07
Pro forma $0.52 $1.11 $1.02
Earnings per share - diluted:
As reported $0.55 $1.09 $1.02
Pro forma $0.49 $1.05 $0.98
USE OF ESTIMATES
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Significant estimates
subject to change include the allowance for doubtful accounts receivable, the
reserve for obsolete inventory, accruals for warranty expense, goodwill and
intangible assets, reserve on notes receivable, litigation reserves, and
valuation of the discontinued operations and the assets related to its
discontinued next generation table line (see Note 4, Impairment of Assets).
Actual results could differ from these estimates.
LONG-LIVED ASSETS
On April 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," but retains its fundamental provision
for recognizing and measuring impairment of long-lived assets to be held and
used. This Statement requires that all long-lived assets to be disposed of by
sale be carried at the lower of carrying amount or fair value less cost to
sell, and that depreciation cease to be recorded on such assets. Fair market
value is determined primarily using the anticipated cash flows discounted at a
rate commensurate with the risk involved. Long-lived assets to be disposed of
other than by sale are considered held and used until disposed of. SFAS No.
144 standardizes the accounting and presentation requirements for all
long-lived assets to be disposed of by sale, and supersedes previous guidance
for discontinued operations of business segments. Due to the decision by the
board of directors in January 2005 to discontinue the next generation table
project, the Company has impaired certain long-term assets during the quarter
ending March 31, 2005. This resulted in an impairment charge of $2.2 million,
including $2.0 million related to fixed assets and $0.2 million related to
other intangible assets (See Note 4, Impairment of Assets). There were no
long-lived assets which were considered impaired as of March 31, 2004.
49
COMPREHENSIVE INCOME
The Company's comprehensive income consists of foreign currency adjustments,
unrealized holding gains and losses on available-for-sale securities, and net
income.
ACCRUED WARRANTY
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. Activity associated with the accrued
warranty is as follows:
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Balance at beginning of period $415,000 $365,000 $375,000
Accruals for warranties issued
during the period 661,000 669,000 407,000
Settlements made during the period (637,000) (619,000) (417,000)
----------- ----------- -----------
Balance at end of period $439,000 $415,000 $365,000
=========== =========== ===========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
The financial statements of the Company's foreign subsidiary is measured using
the Canadian dollar as the functional currency. Assets and liabilities are
translated into U.S. dollars at year-end rates of exchange and results of
operations are translated at average rates for the year. Gains and losses
resulting from these translations are included in accumulated other
comprehensive income as a separate component of stockholders' equity.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net income by the
weighted average shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income by the weighted average number of
common shares used in the basic earnings per share calculation plus the number
of common shares that would be issued assuming exercise or conversion of all
potentially dilutive common shares outstanding. The Company excludes equity
instruments from the calculation of diluted weighted average shares
outstanding if the effect of including such instruments is antidilutive to
earnings per share. The following table sets forth the computation of basic
and diluted earnings per share for each of the past three fiscal years:
50
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Numerator:
Net income $ 2,469,000 $ 4,753,000 $ 4,808,000
=========== =========== ===========
Denominator:
Weighted average shares outstanding:
Basic 4,296,525 4,157,081 4,501,342
Employee stock options and other 177,586 207,602 210,078
----------- ----------- -----------
Diluted 4,474,111 4,364,683 4,711,420
=========== =========== ===========
Earnings per common share:
Basic $0.57 $1.14 $1.07
Diluted $0.55 $1.09 $1.02
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year amounts to conform
to the 2005 classifications.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
which replaces SFAS no. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
SFAS No. 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. 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.
51
SFAS 123R, as amended by the SEC, will be effective for the Company's fiscal
year beginning April 1, 2006, 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.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No.
151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. SFAS No. 151 requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. SFAS No. 151 is
effective for fiscal years beginning after June 15, 2005. The Company intends
to adopt SFAS No. 151 on April 1, 2006. The adoption of SFAS No. 151 is not
expected to have a material impact on the Company's consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", ("FIN No. 46") an interpretation of ARB No. 51.
FIN No. 46, as amended, addresses consolidation by business enterprises of
variable interest entities. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. FIN No.
46 applies in the first year or interim period ending after December 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company does not have an
interest in any variable interest entity and therefore the adoption of FIN No.
46 did not impact the consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity", which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liability and equity in its
statement of financial position. SFAS No. 150 is effective for new or
modified financial instruments beginning June 1, 2003, and for existing
instruments beginning August 1, 2003. The adoption of SFAS No. 150 did not
have an impact on our consolidated financial statements.
52
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have an impact on our consolidated
financial statements.
2. INVENTORIES
Inventories consisted of the following:
March 31, 2005 2004
----------- -----------
Materials and supplies $ 1,522,000 $ 1,486,000
Work-in-progress 161,000 265,000
Finished goods 835,000 588,000
----------- -----------
$ 2,518,000 $ 2,339,000
=========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, 2005 2004
----------- -----------
Land and improvements $ 2,179,000 $ 2,179,000
Machinery and equipment 7,994,000 8,115,000
Furniture and fixtures 2,279,000 2,187,000
Leasehold improvements 960,000 775,000
Building and improvements 6,818,000 6,818,000
----------- -----------
$20,230,000 $20,074,000
Less accumulated depreciation and amortization (8,516,000) (6,844,000)
----------- -----------
$11,714,000 $13,230,000
=========== ===========
4. IMPAIRMENT OF ASSETS
During a meeting of the Company'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 is in the process of developing a specific plan for the use of these
assets and can give no assurance that it will be successful in its efforts.
53
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 realized 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 was determined by the amount at which the assets could
be bought or sold in a current transaction between willing parties. The
Company utilized an outside specialist to establish the fair value of the
assets. The impairment totaled $2,226,000 and consisted of $1,999,000 in
impairment of fixed assets and $227,000 in impairment of other intangible
asset.
In connection with the decision to discontinue the next generation table line,
it was determined that the the value of the inventory associated with the
project was less than its cost. So, in accordance with Accounting Research
Bulletin 43 (ARB 43), paragraph 5, this inventory was revalued at market value
through a reserve which resulted in an adjustment down in the value of
inventory of $324,000. This charge was included in the cost of products sold.
The fair value of the assets previously associated with the next generation
table project that will now be redirected on other processes, consists of
$2,528,000 in building, $1,045,000 for equipment, and $272,000 in inventory.
The Company believes that it will be able to fully realize the value of these
assets.
5. DISCONTINUED OPERATIONS
In November 2002, the Company completed its plan for exiting and selling the
assets of the specialty office seating and systems segment of its business
(the CenterCore and DO Group businesses). This plan was originally approved
by the Company's Board of Directors in June 2001. Since that time and in
accordance with Accounting Principles Board (APB) Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, the Company treated the DO Group and CenterCore segment of its
operations as a discontinued operation. At the time that the plan was
originally formulated, an estimated $3,256,000 loss was accrued for in the
three months ended June 30, 2001 to account for the expected losses on
disposal and estimated operating losses through the disposal date. After the
completion of the plan, the actual net loss, after tax was determined to be
$2,511,000. Since the amount of loss that was originally estimated and
accrued for in the June 2001 quarter of $3,256,000 was higher than this
amount, the Company recognized a gain, net of tax, of $745,000, in the three
month period ended December 31, 2002. The sale of the assets of this segment
was completed in three transactions. The first two transactions took place in
September and October 2001. The final transaction occurred in November 2002.
54
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 retained most of the tangible assets and liabilities of the startup
development company including cash, inventory, fixed assets, and accounts
payable. Due to the decision by the board of directors in January 2005 to
discontinue funding the Company's initiative to develop its next generation
table, the Company has impaired certain of the remaining assets (See Note 4,
Impairment of Assets).
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 a reserve
of $20,000 and $150,000, for this note receivable as of March 31, 2005 and
2004, respectively. At March 31, 2005 and 2004, the gross value of this
note receivable was $159,000 and $248,000, respectively. At March 31, 2005,
$54,000 was the current portion of this note receivable, which is included in
prepaid expenses and other current assets. As of March 31, 2005, the dealer
was current on payments on this note receivable.
7. LINE OF CREDIT
The Company's wholly-owned subsidiary, Broda Enterprises, had a line of
credit, bearing interest at Canadian prime (4.25 percent at March 31, 2005)
which is secured by a General Security Agreement, an assignment of insurance
and guarantees by the Company. The limit on this line is $822,000. At March
31, 2005 and 2004, no balance was outstanding. Among other restrictions, this
credit facility requires the maintenance of certain financial ratios and
levels of working capital. As of March 31, 2005, the Company was in full
compliance with the loan covenants related to this credit facility.
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
March 31, 2005 2004
----------- -----------
Accrued payroll and payroll taxes $ 1,155,000 $ 1,236,000
Accrued warranty 439,000 415,000
Deferred revenue 374,000 -
Tax payable 152,000 -
Other 496,000 384,000
----------- -----------
$ 2,616,000 $ 2,035,000
=========== ===========
55
9. COMMON STOCK OPTIONS
At March 31, 2005, the Company has two stock incentive plans, the 1990 Stock
Option Plan (the "1990 Plan") and the 1997 Stock Incentive Plan (the "1997
Plan"). The Company authorized and reserved 750,000 shares of common stock
for issuance under the 1990 Plan and 900,000 shares of common stock for
issuance under the 1997 Plan. The purchase price for the shares under the
Plans is equal to the fair value of the common stock at the date the options
are granted as determined by the closing price listed on the Nasdaq Stock
Exchange except for shareholders holding more than ten percent of the
outstanding stock, whose options are issued at a ten percent premium to the
then current market value. A table of stock option activity is shown below:
Number Weighted Average
of Options Exercise Price
----------- --------------------
Outstanding at April 1, 2002 729,573 $8.09
Granted 36,025 12.14
Exercised (42,698) 5.33
Forfeited (94,152) 8.63
----------- --------------------
Outstanding at March 31, 2003 628,748 8.43
Granted 115,000 17.02
Exercised (166,493) 6.47
Forfeited (13,893) 11.23
----------- --------------------
Outstanding at March 31, 2004 563,362 10.70
Granted 58,499 14.92
Exercised (63,189) 8.78
Forfeited (13,844) 14.64
----------- --------------------
Outstanding at March 31, 2005 544,828 $11.27
=========== ====================
Options exercisable at March 31, 2005, 2004 and 2003 were 405,679, 387,138,
and 484,170, respectively. Options vest over a one- to four-year period and
are generally exercisable over ten-years.
The following table summarizes the combined information of the 1990 and 1997
Plans' options outstanding at March 31, 2005:
56
Options Outstanding Options Exercisable
------------------------------------------------- --------------------
Weighted
Average
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Exercis- Exercise
(in years) Price able Price
------------- ----------- ----------- -------- -------- --------
$4.08-$5.75 50,001 0.87 $ 5.08 50,001 $ 5.08
6.78-8.20 111,172 5.56 6.96 111,172 6.96
9.70-11.75 169,705 4.47 10.29 163,805 10.29
12.10-12.15 28,368 7.90 12.13 16,774 12.13
12.96-15.50 89,700 8.25 14.72 39,750 15.13
16.55-17.90 95,882 9.09 17.76 24,177 17.90
------------- ----------- ----------- -------- -------- --------
$4.08-$17.90 544,828 5.97 $ 11.27 405,679 $ 9.74
============= =========== =========== ======== ======== ========
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2005, 2004 and 2003, respectively: expected
volatility of 41 percent, 44 percent, and 45 percent, risk free interest rates
of 3.31 percent, 2.24 percent and 2.29 percent, and expected lives of one to
four years. Under SFAS No. 148, the weighted average fair value per share of
options issued during the years ended March 31, 2005, 2004 and 2003 was $4.72,
$6.00, and $4.21, respectively.
10. EMPLOYEE BENEFIT PLANS
In January 1995, the Company established a defined contribution plan which
qualifies under Section 401(k) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting minimum age and service
requirements. Participants may contribute up to 20 percent of their gross
wages, subject to certain limitations. The plan provides for discretionary
matching contributions by the Company, as determined by the Board of
Directors. The discretionary amounts contributed to the plan for the years
ended March 31, 2005, 2004 and 2003 were $125,000, $107,000, and $86,000,
respectively.
In October 1996, the Board of Directors reserved up to 37,500 shares of MITY
Enterprises common stock to be issued under the provisions of the 401(k) plan.
An additional 50,000 shares of common stock were reserved in January 2000 and
an additional 100,000 shares of common stock were reserved in March 2002.
Shares are issued to the plan on a quarterly basis. The amounts issued to the
plan in MITY Enterprises common stock for the years ended March 31, 2005, 2004
and 2003 were $60,000, $103,000, and $152,000, respectively. As of March 31,
2005, 123,545 shares had been issued under the provisions of the plan.
57
11. INCOME TAXES
Income tax expense (benefit) from continuing operations consisted of the
following components:
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Current:
Federal $ 1,392,000 $ 1,708,000 $ (455,000)
State 211,000 244,000 (29,000)
Foreign 318,000 431,000 340,000
----------- ----------- -----------
Total current 1,921,000 2,383,000 (144,000)
----------- ----------- -----------
Deferred:
Federal (430,000) 359,000 2,295,000
State (42,000) 35,000 204,000
Foreign (1,000) (11,000) 12,000
----------- ----------- -----------
Total deferred (473,000) 383,000 2,511,000
----------- ----------- -----------
$ 1,448,000 $ 2,766,000 $ 2,367,000
=========== =========== ===========
The amount of the Company's foreign pre-tax income for the years ended March
31, 2005, 2004 and 2003 was $834,000, $361,000, and $927,000, respectively.
The tax provisions for continuing operations were at effective rates as
follows:
Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Federal statutory tax rates 35.0% 35.0% 35.0%
State / provincial income
taxes, net of federal
benefit 3.3 3.3 3.3
Meals and entertainment 0.4 0.2 0.2
Foreign sales (0.6) (0.5) (0.8)
Other (0.9) (0.8) (0.8)
----------- ----------- -----------
37.2% 37.2% 36.9%
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
58
March 31, 2005 2004
Current Long Term Current Long Term
-------- --------- -------- ---------
Deferred tax assets:
Allowance for doubtful accounts $ 55,000 $ 94,000
Inventory 134,000 2,000
Vacation accrual 60,000 47,000
Warranty reserve and accrual 196,000 217,000
Discontinued operations 77,000 69,000
Net operating loss carryforward 105,000 121,000 $105,000
AMT credit $ 30,000 30,000
Reserve on notes receivable 56,000
Depreciation and amortization 373,000
Other accruals 74,000 18,000
-------- --------- -------- ---------
Total 701,000 403,000 568,000 191,000
Deferred tax liabilities:
Depreciation and amortization (128,000)
-------- --------- -------- ---------
Net deferred tax asset $701,000 $403,000 $568,000 $ 63,000
======== ========= ======== =========
At March 31, 2005, the Company had $281,000 of consolidated net operating loss
carryforwards for federal income tax purposes which expire through 2011. The
utilization of tax net operating losses may be subject to specified
limitation. Management believes it is more likely than not that its deferred
tax assets will be realized and, accordingly, no valuation allowance is
necessary.
12. COMMITMENTS AND CONTINGENCIES
The Company leases two buildings in its Waterloo, Ontario, Canada location
under an operating lease which expires in August 2005. The current agreement
requires lease payments of $16,000 Canadian (approximately US $13,000) per
month through August 2005. The Company also leases a building in Phoenix,
Arizona related to its Versipanel operations which requires lease payments of
$6,000 per month through September 2005.
Total rent expense was $147,000, $132,000, and $148,000 for the years ended
March 31, 2005, 2004 and 2003, respectively.
At March 31, 2005, the Company has committed to purchasing $247,000 in raw
materials inventory.
The Company has certain alleged obligations of up to $0.4 million related to a
defined benefit pension plan and $0.2 million related to a wage dispute
resulting from exiting and selling its specialty office seating and systems
business. The Company does not believe that it is liable for these amounts and
plans to vigorously defend its positions. At this time, the Company is unable
to determine what its liability will be.
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.
59
13. BUSINESS SEGMENT INFORMATION
Management views the Company as being two business segments: multipurpose room
furniture and healthcare seating. 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
includes all of the Company's foreign-based sales.
Reportable segment data reconciled to the consolidated financial statements
for the fiscal years ended March 31, 2005, 2004 and 2003 is as follows:
Fiscal Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Net sales:
Multipurpose room furniture $43,040,000 $39,002,000 $35,895,000
Healthcare seating 7,232,000 6,208,000 5,070,000
----------- ----------- -----------
$50,272,000 $45,210,000 $40,965,000
=========== =========== ===========
Income from continuing operations:
Multipurpose room furniture $ 2,332,000 $ 6,238,000 $ 5,198,000
Healthcare seating 1,505,000 1,303,000 1,093,000
----------- ----------- -----------
$ 3,837,000 $ 7,541,000 $ 6,291,000
=========== =========== ===========
Depreciation & amortization expense:
Multipurpose room furniture $ 1,661,000 $ 1,502,000 $ 1,116,000
Healthcare seating 169,000 132,000 75,000
----------- ----------- -----------
$ 1,830,000 $ 1,634,000 $ 1,191,000
=========== =========== ===========
Capital expenditures, net:
Multipurpose room furniture $ 1,900,000 $ 3,101,000 $ 6,370,000
Healthcare seating 242,000 169,000 207,000
----------- ----------- -----------
$ 2,142,000 $ 3,270,000 $ 6,577,000
=========== =========== ===========
March 31, 2005 2004
----------- ------------
Total assets:
Multipurpose room furniture $30,626,000 $28,042,000
Healthcare seating 4,990,000 3,914,000
----------- ------------
$35,616,000 $31,956,000
=========== ===========
60
14. 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.
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 was
contingently payable based on obtaining certain sales growth targets on the
Versipanel product line through April 26, 2005. These growth targets were not
achieved.
The unaudited pro forma results of operations of the Company for the year
ended March 31, 2005, 2004 and 2003 (assuming the acquisition of Versipanel
had occurred as of April 1, 2002) are as follows:
Fiscal Year Ended March 31, 2005 2004 2003
----------- ----------- -----------
Net sales $50,272,000 $46,689,000 $42,375,000
Net income 2,469,000 4,878,000 4,849,000
Basic earnings per share $0.57 $1.17 $1.08
Diluted earnings per share $0.55 $1.12 $1.03
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None to report.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Under the supervision and
with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (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, our disclosure controls and procedures were effective.
Changes in internal control over financial reporting. During the most recent
fiscal quarter ended March 31, 2005, there has been no change in our internal
control over financial reporting (as defined in Rule 13a(f) under the Exchange
Act) that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None to report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to the
sections of the Company's Proxy Statement filed in connection with its 2005
Annual Meeting of Stockholders entitled "Nominees" and "Directors and
Executive Officers."
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of the Company has determined that each of Hal B.
Heaton, Chair of the Audit Committee, and Audit Committee member Ralph E.
Crump is an audit committee financial expert as defined by Item 401(h) of
Regulations S-K of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and is independent within the meaning of Item 7(d)(3)(iv) of
Schedule 14A of the Exchange Act. The Board of Directors of the Company has
designated Hal B. Heaton, Chair of the Audit Committee as its audit committee
financial expert.
CODE OF ETHICS
The Company has adopted a code of business conduct and ethics for directors,
officers and executives. The Code of Ethics is available on the Company's
website at www.mityinc.com. Shareholders may request a free copy of the Code
of Ethics from the Company at MITY Enterprises, Inc., Attn: Investor
Relations, 1301 West 400 North, Orem, UT 84057.
62
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section of the Company's Proxy Statement filed in connection with its 2005
Annual Meeting of Stockholders entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section of the Company's Proxy Statement filed in connection with its 2005
Annual Meeting of Stockholders entitled "Security Ownership of Management and
Others."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
sections of the Company's Proxy Statement filed in connection with its 2005
Annual Meeting of Stockholders entitled "Executive Compensation" and "Certain
Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference to the
sections of the Company's Proxy Statement filed in connection with its 2005
Annual Meeting of Stockholders entitled "Auditor's Fees."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) All financial statements
(2) Financial statement schedule: Valuation and Qualifying Accounts
for the three fiscal years ended March 31, 2005
(3) Exhibits are incorporated herein by reference or are filed with
this report as indicated below
63
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1
Contribution Agreement dated as of March 24, 1997 by and among Estate of
Chester E. Dekko, David Kebrdle, Dennis and Mary M. Kebrdle, Domenic and
Martha S. Federico, ChiCol Group, Inc., DO Group, Inc., Sican Corp., Sican II
Corp., DO Group Holding, Inc. and Mity-Lite, Inc. incorporated by reference to
the referenced exhibit number to the Company's Form 8-K dated March 31, 1997.
2.2
Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite, Inc.
and Xaio, Inc. incorporated by reference to the referenced exhibit number to
the Company's Form 8-K dated March 31, 1997.
2.3
Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite, Inc.
and Ellman Equities, Inc. incorporated by reference to the referenced exhibit
number to the Company's Form 8-K dated March 31, 1997.
2.4
Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite, Inc.
and Key Equity Capital Corporation incorporated by reference to the referenced
exhibit number to the Company's Form 8-K dated March 31, 1997.
2.5
Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite, Inc.
and National City Capital Corporation incorporated by reference to the
referenced exhibit number to the Company's Form 8-K dated March 31, 1997.
2.6
Stock Purchase Agreement dated as of March 13, 1997 between Mity-Lite, Inc.
and Cardinal Development Capital Fund I incorporated by reference to the
referenced exhibit number to the Company's Form 8-K dated March 31, 1997.
2.7
Term Loan Agreement dated as of March 24, 1997 between Mity-Lite, Inc. and
Sican Corp. incorporated by reference to the referenced exhibit number to the
Company's Form 8-K dated March 31, 1997.
2.8
Put Agreement dated as of March 24, 1997 by and among Mity-Lite, Inc. and
Dennis Kebrdle, David Kebrdle, Domenic Federico, ChiCol Group, Inc., Sican II
Corp., and DO Group, Inc. incorporated by reference to the referenced exhibit
number to the Company's Form 8-K dated March 31, 1997.
2.9
Stock Purchase Agreement dated as of November 20, 1998, by and among Mity-Lite
Acquisition Corp. and Stephen E. Brotherston, Glenn C. Brotherston, Ian D.
Brotherston, Margaret E. Brotherston and Sandra L. Brotherston incorporated by
reference to the referenced exhibit number to the Company's Form 8-K dated
November 25, 1998.
64
2.10
Asset Purchase Agreement dated as of April 9, 1999, by and among The
CenterCore Group, Inc., a Delaware Corporation, Fleet Capital Corporation, a
Rhode Island Corporation, and C Core, Inc., a Utah Corporation and wholly
owned subsidiary of Mity-Lite, Inc. incorporated by reference to the
referenced exhibit number to the Company's Form 8-K dated April 9, 1999.
2.11
Form of Assignment Agreement by and among BOCCC, Inc., a Utah Corporation and
wholly owned subsidiary of Mity-Lite, Inc., and various parties holding
subordinated debt instruments of The CenterCore Group, Inc. This form of
Assignment Agreement is substantially the same agreement that was signed by
BOCCC, Inc. and nine different subordinated debt holders incorporated by
reference to the referenced exhibit number to the Company's Form 8-K dated
April 9, 1999.
2.12
Stock Purchase Agreement, By and Among DO Group Holding, Inc., David Kebrdle,
Mary M. Kebrdle, Martha S. Federico, Estate of Chester E. Dekko, Dennis
Kebrdle, Domenic Federico and Mity-Lite, Inc. dated March 17, 2000
incorporated by reference to the referenced exhibit number to the Company's
Form 8-K dated April 1, 2000.
3.1
Amended and Restated Articles of Incorporation of the Registrant incorporated
by reference to the referenced exhibit number to the Company's Registration
Statement on Form SB-2, Reg. No. 33-76758-D.
3.2
Amended and Restated Bylaws of the Registrant incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on Form
SB-2, Reg. No. 33-76758-D.
3.3
First Amendment to the Amended and Restated Bylaws of Registrant incorporated
by reference to the referenced exhibit number to the Company's Registration
Statement on Form SB-2, Reg. No. 33-76758-D.
4.1
Form of Stock Certificate incorporated by reference to the referenced exhibit
number to the Company's Registration Statement on Form SB-2, Reg. No.
33-76758-D.
10.1
Revolving Note dated March 16, 1992 and Revolving Loan Agreement dated March
16, 1992 between the Registrant and First Security Bank of Utah, N.A.
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.2
Modification Agreement dated March 16, 1993 between the Registrant and First
Security Bank of Utah, N.A. incorporated by reference to the referenced
exhibit number to the Company's Registration Statement on Form SB-2, Reg. No.
33-76758-D.
65
10.3
Lease Agreement dated November 1, 1993 between the Registrant and the Walter
M. and Orpha M. Lewis Family Trust incorporated by reference to the referenced
exhibit number to the Company's Registration Statement on Form SB-2, Reg. No.
33-76758-D.
10.4
Trademark License dated November 23, 1993 between the Registrant and R.D.
Werner Co., Inc. incorporated by reference to the referenced exhibit number to
the Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.5
Solicitation, Offer and Award Contract between the Registrant and the General
Services Administration Federal Supply Service dated January 27, 1992 (issued
March 6, 1990) and Amendments thereto dated January 27, 1992 (effective July
16, 1990), January 27, 1992 (effective December 1, 1990), January 27, 1992
(effective December 28, 1991) and the Revision of August 24, 1992 incorporated
by reference to the referenced exhibit number to the Company's Registration
Statement on Form SB-2, Reg. No. 33-76758-D.
10.6
Notice of Contract Award dated June 23, 1993 between the Registrant and the
Commonwealth of Virginia, Department of General Services Division of Purchases
and Supply incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.7
Agreement dated July 26, 1990 between the Registrant and the State of Utah,
Department of Administrative Services and Revisions thereto dated March 8,
1991, June 5, 1991, and May 19, 1992 and March 10, 1993 incorporated by
reference to the referenced exhibit number to the Company's Registration
Statement on Form SB-2, Reg. No. 33-76758-D.
10.8
Agreement dated December 17, 1991 between the Registrant and the Air Force
Nonappropriated Fund Purchasing Office incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on Form
SB-2, Reg. No. 33-76758-D.
10.9
Purchasing Contract effective October 1, 1993 between the Registrant and The
Corporation of the Presiding Bishop of The Church of Jesus Christ of
Latter-Day Saints incorporated by reference to the referenced exhibit number
to the Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.10
Employment Agreement with attached Proprietary Information Agreement dated
effective as of May 21, 1993 between Registrant and Gregory L. Wilson
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.11
Employment Agreement with attached Proprietary Information Agreement dated
effective as of May 21, 1993 between Registrant and Stanley L. Pool
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
66
10.12
Employment Agreement with attached Proprietary Information Agreement dated
effective as of May 21, 1993 between Registrant and Kenneth A. Law
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.13
Employment Agreement with attached Proprietary Information Agreement dated
effective as of February 16, 1994 between Registrant and Brent Bonham
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.14
Employment Agreement with attached Proprietary Information Agreement dated
effective as of February 16, 1994 between Registrant and Bradley T Nielson
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.15
1990 Stock Option Plan, as amended and Form of Stock Option Agreements
incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.16
Form of Indemnification Agreements between Registrant and officers and
directors of Registrant incorporated by reference to the referenced exhibit
number to the Company's Registration Statement on Form SB-2, Reg. No.
33-76758-D.
10.17
Form of Lock-up Agreements with Shareholders incorporated by reference to the
referenced exhibit number to the Company's Registration Statement on Form
SB-2, Reg. No. 33-76758-D.
10.18
Form of Confidentiality Agreement entered into with employees of the
Registrant incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.19
Key-Man Insurance Policy between the Company and Chubb Sovereign Life
Insurance Company incorporated by reference to the referenced exhibit number
to the Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
10.20
Distributor Agreement between the Company and Sebel Furniture Limited dated
February 14, 1994 incorporated by reference to the referenced exhibit number
to the Company's Form 10-KSB for the year ended March 31, 1994.
10.21
Lease Agreement dated March 31, 1995 between the Company and the Walter M. and
Orpha M. Lewis Family Trust incorporated by reference to the referenced
exhibit number to the Company's Form 10-KSB for the year ended March 31, 1995.
67
10.22
Exclusive Distributor Agreement between the Company and Mobilite International
Limited (aka Mity-Lite (Europe) Limited) incorporated by reference to the
referenced exhibit number to the Company's Form 10-KSB for the year ended
March 31, 1995.
10.23
Purchasing Contract effective October 1, 1995 between the Registrant and The
Corporation of the Presiding Bishop of The Church of Jesus Christ of
Latter-Day Saints incorporated by reference to the referenced exhibit number
to the Company's Form 10-QSB for the quarter ended December 31, 1995.
10.24
Promissory Note dated December 6, 1995 between the Registrant and Zions First
National Bank incorporated by reference to the referenced exhibit number to
the Company's Form 10-QSB for the quarter ended December 31, 1995.
10.25
Promissory Note dated October 27, 1995 between Registrant and First Security
Bank incorporated by reference to the referenced exhibit to the Company's Form
10-KSB for the year ended March 31, 1996.
10.26
Summary Plan Description and Basic Plan Document for the 1995 Mity-Lite,Inc.
Employee Retirement Plan incorporated by reference to the referenced exhibit
number to the Company's Form 10-KSB for the year ended March 31, 1996.
10.27
Promissory Note dated January 23, 1997 between the Registrant and Zions First
National Bank incorporated by reference to the referenced exhibit number to
the Company's Form 10-KSB for the year ended March 31, 1997.
10.28
Modification Agreement (dated October 27, 1996) to Promissory Note dated
October 27, 1995 between the Registrant and First Security Bank incorporated
by reference to the referenced exhibit number to the Company's Form 10-KSB for
the year ended March 31, 1997.
10.29
Lease Agreement Amendment dated October 31, 1996 between the Company and the
Walter M. and Orpha M. Lewis Family Trust incorporated by reference to the
referenced exhibit number to the Company's Form 10-KSB for the year ended
March 31, 1997.
10.30
Promissory Note dated December 15, 1997 between the Registrant and Zions
First National Bank incorporated by reference to the referenced exhibit number
to the Company's Form 10-KSB for the year ended March 31, 1998.
10.31
Modification Agreement (dated October 25, 1997) to Promissory Note dated
October 27, 1995 between the Registrant and First Security Bank incorporated
by reference to the referenced exhibit number to the Company's Form 10-KSB for
the year ended March 31, 1998.
68
10.32
1997 Stock Incentive Plan and Form of Agreements incorporated by reference to
the referenced exhibit number to the Company's Form 10-KSB for the year ended
March 31, 1998.
10.33
Promissory Note dated November 18, 1998 between the Registrant and Zions First
National Bank incorporated by reference to the referenced exhibit number to
the Company's Form 10-K for the year ended March 31, 1999.
10.34
Promissory Note dated May 26, 2000 between the Registrant and Zions First
National Bank incorporated by reference to the referenced exhibit number to
the Company's Form 10-K for the year ended March 31, 2000.
10.35
Form of Employment Agreement between the Company and its Executive Officers
incorporated by reference to the referenced exhibit number to the Company's
Form 10-K for the year ended March 31, 2001.
11.1
Statement Regarding Computation of Per Share Earnings.
21
Subsidiaries of Registrant.
23.1
Consent of Deloitte & Touche LLP.
31.1
Certification of CEO 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 CFO 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 CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
69
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not
required, not applicable, or the information is otherwise set forth in the
financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of MITY Enterprises, Inc.:
We have audited the consolidated financial statements of MITY Enterprises,
Inc. and subsidiaries (the Company) as of March 31, 2005 and 2004, and for
each of the three years in the period ended March 31, 2005, and have issued
our report thereon dated May 27, 2005; such consolidated financial statements
and report are included elsewhere in this Form 10-K. Our audits also included
the consolidated financial statement schedules of the Company, listed in Item
15. These consolidated financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion
based on our audits. In our opinion, such consolidated financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Deloitte & Touche LLP
Salt Lake City, Utah
May 27, 2005
70
MITY ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003
Additions
Balance Charged
at to Costs Deductions Balance
Beginning and from at End
of Period Expenses Reserves of Period
ACCOUNTS RECEIVABLE ALLOWANCE:
Year ended:
March 31, 2005 $ 339,000 $ 20,000 $ 96,000 $ 263,000
March 31, 2004 235,000 133,000 29,000 339,000
March 31, 2003 346,000 77,000 188,000 235,000
INVENTORY RESERVES:
Year ended:
March 31, 2005 $ 31,000 $ 341,000 - $ 372,000
March 31, 2004 28,000 3,000 - 31,000
March 31, 2003 50,000 - $ 22,000 28,000
RESERVES ON NOTES RECEIVABLE
Year Ended:
March 31, 2005 $ 150,000 $(140,000) $ 10,000 $ 20,000
March 31, 2004 180,000 (30,000) - 150,000
March 31, 2003 110,000 805,000 735,000 180,000
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MITY ENTERPRISES, INC.
By:/s/ Bradley T Nielson
Bradley T Nielson, President,
Chief Executive Officer
Date: May 27, 2005
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Gregory L. Wilson Chairman of the Board and May 27, 2005
- ---------------------- Director
Gregory L. Wilson
/s/ Bradley T Nielson President and Chief Executive May 27, 2005
- ---------------------- Officer (Principal Executive
Bradley T Nielson Officer)
/s/ Paul R. Killpack Chief Financial Officer May 27, 2005
- ---------------------- (Principal Financial and
Paul R. Killpack Accounting Officer)
/s/ Ralph E. Crump Director May 27, 2005
- ----------------------
Ralph E. Crump
/s/ Peter Najar Director May 27, 2005
- ----------------------
Peter Najar
/s/ C. Lewis Wilson Director May 27, 2005
- ----------------------
C. Lewis Wilson
/s/ Hal B. Heaton Director May 27, 2005
- ----------------------
Hal B. Heaton