-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BZ5ml+gf2lSro1l7K449RuWFbMXjbbeoJF+Yz+obR26WSIaKgkQVyhX/I+S2u0JR c9waoYBlfOzDQb3q3uyyQQ== 0000056151-01-500004.txt : 20010214 0000056151-01-500004.hdr.sgml : 20010214 ACCESSION NUMBER: 0000056151-01-500004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIT MANUFACTURING CO CENTRAL INDEX KEY: 0000056151 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] IRS NUMBER: 951525261 STATE OF INCORPORATION: CA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06257 FILM NUMBER: 1538001 BUSINESS ADDRESS: STREET 1: 530 E WARDLOW RD STREET 2: P O BOX 848 CITY: LONG BEACH STATE: CA ZIP: 90801 BUSINESS PHONE: 5625957451 MAIL ADDRESS: STREET 1: 530 EAST WARDLOW ROAD CITY: LONG BEACH STATE: CA ZIP: 90801 10-K 1 form10k_103100.txt FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended October 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . Commission file Number 2-31520 KIT MANUFACTURING COMPANY (Exact name of registrant as specified in its charter) California 95-1525261 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 530 East Wardlow Road, Long Beach, California 90807 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (562) 595-7451 Securities registered pursuant to Section 12(b) of the Act: Title of class: Common Stock, no par value Name of each exchange on which registered: American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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] The approximate aggregate market value of voting stock held by non-affiliates of Registrant was $1,745,784 as of January 26, 2001. 1,027,334 (Number of shares of Common Stock outstanding as of January 26, 2001) Certain information called for by Parts I, II and IV is incorporated by reference to the Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000 and the information called for by Part III is incorporated by reference to the Registrant's definitive proxy statement to be filed with the Commission within 120 days after October 31, 2000. The Index to Exhibits appears on page 16. 18 pages in total. 1 PART I Item 1. Business Introductory Note Regarding Forward Looking Statements This Annual Report on Form 10-K contains statements which, to the extent they do not recite historical fact, may constitute "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the use of words such as "may," "will," "could," "should," "project," "believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend," "continue," and variations of these words or comparable words. Forward-looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward-looking statements suggest for various reasons, including those discussed under the caption "Business" in Item 1 of this Report on Form 10-K and in the Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000. These forward looking statements are made only as of the date of this Report. The Registrant does not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. General KIT Manufacturing Company ("Registrant") was incorporated in California in 1947, as the successor to a business founded in 1945. A description of Registrant's business during the last fiscal year appears on page 2 of Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, which is incorporated herein by reference. Principal Products Produced and Industry Segments Registrant designs, manufactures and sells manufactured housing (mobile homes) which are relocatable, factory-built dwellings of single and multi-unit design. Constructed on wheel undercarriages, they are towed by truck to locations where they are set up and connected to utilities. Registrant also produces recreational vehicles designed as short-period accommodations for vacationers and travelers. These products are travel trailers designed to be towed behind pickup trucks and fifth wheel travel trailers designed to be towed behind and attached to special couplers in the beds of pickup trucks. Set forth below are the percentages of revenues contributed by each class of similar products for the last three fiscal years: Products Class Fiscal Year Manufactured Recreational Ended October 31, Housing Vehicles 1998 43% 57% 1999 49% 51% 2000 45% 55% 2 Item 1. Continued Certain information regarding industry segments is set forth on page 10 of Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, which is incorporated herein by reference. Method of Product Distribution Registrant sells its products to approximately 122 dealers in 23 states, and 12 dealers in Canada. Exclusive dealerships are not the pattern of the industry, and virtually all dealers also sell competing products. Registrant generally produces manufactured housing products only against orders received from dealers. Recreational vehicles are built for inventory particularly during the winter months in anticipation of increased demand during the spring months. (See "Seasonal Considerations" below.) A significant portion of the cost of Registrant's products is attributable to charges incurred in their distribution. Specifically, distribution charges are the function of several factors including the distance to the various markets and competitive conditions within these markets. (See Item 2, "Properties," for the locations of Registrant's principal plants.) Registrant is not dependent upon a single customer or a few customers and no dealer or group of dealers accounts for a substantial amount of Registrant's total sales. Competitive Conditions The recreational vehicle and manufactured housing industries are highly competitive. Registrant believes that the principal methods of competition in these industries are based upon quality, price, styling, warranty and service of products being offered. Registrant also believes that it competes favorably with respect to these factors in the manufactured housing group and the recreational vehicle product line to ensure it remains competitive in the marketplace. There are many firms manufacturing and marketing products similar to those of Registrant within the geographical area in which Registrant's products are marketed. Several of the manufacturers within these industries are larger than Registrant in terms of total revenue and resources. Backlog Registrant does not consider the existence and level of backlog at any given date to be a significant factor affecting its business, except in establishing its production schedules. This is primarily due to the fact that orders may be cancelled up until the time the dealer takes delivery, although such cancellations have not been significant to date. The dollar amount of backlog, subject to 3 Item 1. Continued the above described cancellation provision, was $1,227,911 and $2,374,613 at October 31, 2000 and 1999, respectively. All of the backlog existing at October 31, 2000 is expected to be filled within the current fiscal year. Sources and Availability of Raw Materials Registrant purchases raw materials and components from a number of alternative sources and is not dependent upon any particular supplier. Patents Although Registrant's products are marketed under various trade names, Registrant does not believe that patents, trademarks, licenses, franchises and concessions are of material importance to its business. Research and Development Registrant periodically revises and redesigns its models in response to consumer demand. These revisions and redesigns can be extensive, if necessary, in order to obtain market acceptance. Registrant manufactures and sells manufactured housing and recreational vehicles only and does not engage in new product development. Number of Employees On October 31, 2000, Registrant had 450 employees at its manufacturing plants and executive offices. Seasonal Considerations Registrant's sales and production volume traditionally increase during the second and third quarters of the fiscal year. During fiscal 2000, fifty-nine percent of sales were achieved during the second and third fiscal quarters. Government Regulation The manufacture and distribution of Registrant's manufactured housing and recreational vehicle products are subject to governmental regulation in the United States and Canada at the federal, state, provincial and local levels. Compliance with those governmental regulations, including provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment, is not currently expected to have a material adverse effect on Registrant. 4 Item 1. Continued Business Risks Demand for Registrant's products is dependent upon the availability and cost of gasoline, weather conditions, available consumer credit and economic conditions. Tightened consumer credit and the tenuous economy have unfavorably affected dealers and retail purchasers of Registrant's manufactured housing products in fiscal 2000. Although KIT's 2001 recreational vehicles models have been well received by the dealers, higher interest rates and gasoline prices have recently depressed the retail market. Working Capital Accounts receivable balances fluctuate generally with the timing of shipments during the month since the majority of sales are either on C.O.D. terms or are financed by dealers through flooring arrangements with financial institutions. Recreational vehicle finished goods inventory balances are subject to seasonal variations. (See "Method of Product Distribution" and "Seasonal Considerations" above.) A short delivery lead time exists for the majority of recreational vehicle and manufactured housing raw material purchases, thereby allowing Registrant to maintain low levels of raw materials inventory. Registrant is a party to an unsecured revolving credit agreement with a bank that provides financing of seasonal working capital requirements. 5 Item 2. Properties Registrant leases general executive and administrative offices in Long Beach, California. The lease expires on May 14, 2001. Registrant owns an 11,160 square foot building, situated on 1.2 acres, housing operational offices in Caldwell, Idaho. The following table sets forth certain information about the property and facilities utilized by Registrant for manufacturing and plant administrative purposes, (all property is owned by Registrant unless otherwise noted): Approximate Approximate Facility and Location Acres Square Feet Recreational vehicle plants: Caldwell, Idaho (R2) 15.7 55,200 Caldwell, Idaho (R1) 15.8 53,000 Caldwell, Idaho (RSA) 10.9 67,800 (1) Caldwell, Idaho (Chassis) .5 9,000 Manufactured housing plants: Caldwell, Idaho 9.5 99,100 (2) Caldwell, Idaho 2.1 13,200 (1) Retail sales partnership location: Fruitland, Idaho 1.5 1,780 (1)81,000 square foot Production Facility is being utilized for both a recreational vehicles plant and a manufactured housing plant. (2)In 1997, 6,600 square foot storage area was added and a 28,500 square foot building addition was also added to the existing 64,000 square foot Production Facility. 6 Item 3. Legal Proceedings In the ordinary course of business, Registrant is subject to occasional lawsuits, investigations and claims. Although Registrant cannot predict the ultimate resolution of lawsuits, investigations and claims asserted against it, Registrant does not believe that any currently pending legal proceeding to which it is a party will have a material adverse effect on its business, results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information in response to this item is incorporated by reference from the information appearing in Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, at pages 2 and 15. DIVIDEND POLICY KIT has a recent history of not paying cash dividends on its common stock. KIT currently anticipates retaining future earnings, if any, for general working capital purposes. Payment of dividends in the future, if at all, will depend upon KIT's earnings and financial condition and various other factors our directors may deem appropriate at the time. Item 6. Selected Financial Data Information in response to this item is incorporated by reference from the information appearing in Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, at page 14. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information in response to this item is incorporated by reference from the information appearing in Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, at pages 4 and 5. Item 7A Quantitative and Qualitative Disclosures About Market Risk Registrant does not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. Registrant's only assets or liabilities that are subject to risks from interest rate changes is the Registrant's bank credit line. Registrant's bank credit line incurs interest at the lesser of the bank's prime rate or market rate. Registrant does not believe that it is subject to material risks from reasonably possible near-term changes in market interest rates. Item 8. Financial Statements and Supplementary Data Information in response to this item is incorporated by reference from the Financial Statements and the Notes to Financial Statements in Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, at pages 6 through 11 and pages 13 through 15. 8 Item 9. Disagreements on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant Information with respect to this item is incorporated by reference from Registrant's definitive Proxy Statement to be filed with the Commission within 120 days after the close of Registrant's fiscal year. Item 11. Executive Compensation Information with respect to this item is incorporated by reference from Registrant's definitive Proxy Statement to be filed with the Commission within 120 days after the close of Registrant's fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to this item is incorporated by reference from Registrant's definitive Proxy Statement to be filed with the Commission within 120 days after the close of Registrant's fiscal year. Item 13. Certain Relationships and Related Transactions Information with respect to this item is incorporated by reference from Registrant's definitive Proxy Statement to be filed with the Commission within 120 days after the close of Registrant's fiscal year. 9 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements Annual Report Page(s) Balance Sheets at October 31, 2000 and 1999 6 Statements of Income for each of the three years in the period ended October 31, 2000 7 Statements of Shareholders' Equity for each of the three years in the period ended October 31, 2000 7 Statements of Cash Flows for each of the three years in the period ended October 31, 2000 8 Notes To Financial Statements 9-11 Report of Independent Accountants 12 The financial statements and the Report of Independent Accountants listed in the above index, which are included in Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000, are hereby incorporated by reference. With the exception of the items referred to above and in Items 1, 5, 6, 7 and 8, Registrant's Annual Report to Shareholders for the fiscal year ended October 31, 2000 is not to be deemed filed as part of this report. 10 Item 14. Continued (a) (2) Financial Statement Schedules FORM 10-K PAGE Report of Independent Accountants on Schedules 12 Schedules: For each of the three years in the period ended October 31, 2000 VIII Valuation and Qualifying Accounts 13 IX Short-Term Borrowings 14 Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable. (a) (3) Exhibits (3) Articles of Incorporation and By-Laws adopted by Registrant. (10) Material Contracts. 1. Incentive Bonus Plan. 2. Indemnification Agreement 3. Schedule of Indemnification Agreements (13) Annual report to security holders. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fiscal quarter ended October 31, 2000. 11 REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULES To the Shareholders and Board of Directors of KIT Manufacturing Company Our audits of the financial statements referred to in our report dated December 11, 2000, appearing in the 2000 Annual Report to Shareholders of KIT Manufacturing Company (which report and financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. /s/PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Los Angeles, California December 11, 2000 12 KIT MANUFACTURING COMPANY SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS For The Years Ended October 31, 2000, 1999 And 1998
Col. A Col. B Col. C Col. D Col. E Col. F Additions (1) (2) Charged To Charged To Balance At Costs Other Balance At Beginning Of And Accounts Deductions End Of Description Period Expenses Describe Describe Period Allowance for doubtful accounts: Year ended October 31, 1998 $42,000 - $5,000(A) $37,000 Year ended October 31, 1999 $37,000 - $2,000(A) $35,000 Year ended October 31, 2000 $35,000 $6,000(A) $29,000 (A)Write-off of uncollectible accounts.
13 KIT MANUFACTURING COMPANY SCHEDULE IX SHORT-TERM BORROWINGS For The Years Ended October 31, 2000, 1999 and 1998
Col.A Col.B Col.C Col.D Col.E Col.F Balance At Maximum Amount Weighted Average Weighted Average Category Of Aggregate End Of Weighted Average Outstanding Outstanding Interest Rate Borrowings Period Interest Rate During The Period(B) During The Period(C) During The Period(C) Year ended October 31, 1998: Unsecured revolving credit agreement (A) -0- * $2,917,000 $1,395,000 8.5% Year ended October 31, 1999: Unsecured revolving credit agreement (A) -0- * $2,901,000 $1,148,000 7.8% Year ended October 31, 2000: Unsecured revolving credit agreement (A) -0- * $3,117,000 $2,009,000 9.2% (A)The Registrant is party to an unsecured revolving credit agreement with a bank that provides financing of seasonal working capital requirements. There are no compensating balance requirements under the agreement. Major provisions of the agreement include interest at the bank's prime rate and certain minimum requirements as to the Registrant's working capital and debt to equity relationships. The maximum borrowing permitted is the lesser of $4,500,000 or the sum of 80% of eligible trade receivables and 50% of inventories, less any commercial and standby letters of credit outstanding up to a maximum of $1,000,000. (B)Based on month-end balances. (C)Based on the daily balances and interest rates during the year. *Not applicable.
14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KIT Manufacturing Company By:/s/Dan Pocapalia Dan Pocapalia Chairman of the Board, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: /s/Dan Pocapalia Feb. 13, 2001 /s/John W.H. Hinrichs Feb. 13, 2001 Dan Pocapalia John W.H. Hinrichs Chairman of the Board, Director Chief Executive Officer and President (Principal Executive Officer) /s/John F. Zaccaro Feb. 13, 2001 /s/Frank S. Chan Feb. 13, 2001 John F. Zaccaro Frank S. Chan Director Director /s/Bruce K. Skinner Feb. 13, 2001 /s/Fred W. Chel Feb. 13, 2001 Bruce K. Skinner Fred W. Chel Vice President and Treasurer Director (Principal Financial and Accounting Officer) 15 INDEX TO EXHIBITS EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K Sequential Page Number (3) Articles of Incorporation and By-Laws adopted by Registrant 17 (10) Material Contracts 1. Incentive Bonus Plan 18 2. Indemnification Agreement 18 3. Schedule of Indemnification Agreements 22 (13) Annual Report to Shareholders 16 (3) Articles of Incorporation and By-Laws The amended and restated Articles of Incorporation and By-Laws of the Registrant are hereby incorporated by reference from the exhibits to Form 10-K (File No. 2-31520) as filed for the fiscal year ended October 31, 1987. 17 (10) Material Contracts (A) 1. Incentive Bonus Plan Registrant maintains an Incentive Bonus Plan under which incentive bonuses may be paid to key management personnel pursuant to individual agreements relating to the profitability of the participant's area of responsibility. The amount of the bonus paid generally increases as the profitability of the area of responsibility increases. Time periods for which performance is measured include fiscal quarters and in some cases fiscal years. Payments are typically made within 75 days after the time period for which performance is measured. The agreements are reviewed annually and may be terminated at will by either party. (A) 2. Indemnification Agreement THIS INDEMNIFICATION AGREEMENT is made as of the 1st day of June, 1999, by and between KIT MANUFACTURING COMPANY, a California corporation (the "Company"), and HAROLD D. BREACH ("Indemnitee"). R E C I T A L S A. Indemnitee is currently serving as President and General Manager of the Company and in such capacity has rendered and is expected to render valuable services to the Company. B. The Company has investigated the availability and sufficiency of liability insurance and California statutory indemnification provisions to provide its directors and officers with adequate protection against various legal risks and potential liabilities to which such individuals are subject due to their position with the Company and has concluded that such insurance may provide inadequate and unacceptable protection to certain individuals requested to serve as its directors and officers. C. In order to induce and encourage highly experienced and capable persons such as Indemnitee to continue to serve as a director of the Company, the Board of Directors has determined, after due consideration and investigation of the terms and provisions of this Agreement and the various other options available to the Company and Indemnitee in lieu hereof, that this Agreement is not only reasonable and prudent, but necessary to promote and ensure the best interests of the Company and its shareholders. NOW, THEREFORE, in consideration of the continued services of Indemnitee and in order to induce Indemnitee to continue to serve as an officer, the Company and Indemnitee do hereby agree as follows: 1. Definitions. 18 (a) The term "Expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification. (b) The term "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative. 5. Agreement to Serve. Indemnitee agrees to serve or continue to serve as a director, officer or employee of the Company, as the case may be, at the will of the Company for so long as Indemnitee is duly elected or appointed or until such time as Indemnitee tenders his or her resignation in writing. 5. Indemnification in Third Party Proceedings. Subject to Section 5 hereof, the Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is a party to or is threatened to be made a party to any Proceeding (other than an action by or in the right of the Company to procure a judgement in its favor) by reason of the fact that Indemnitee was or is a director of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against Expenses, judgements, fine, settlements and other amounts actually and reasonably incurred in connection with such Proceeding, to the fullest extent permitted by California law. 5. Indemnification in Proceedings By or in the Right of the Company. Subject to Section 5 hereof, the Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the Company to procure a judgement in its favor by reason of the fact that Indemnitee was or is a director of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another enterprise, against Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action to the fullest extent permitted by California law. 5. Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company: (a) To indemnify or advance Expenses to Indemnitee with respect to Proceedings initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to Proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under California law, but such indemnification or advancement or Expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) To indemnify Indemnitee for any Expenses, judgements, fines, settlements and other amounts for which payment is actually made to Indemnitee under a valid and collectible insurance policy, except in respect of any excess beyond the amount of payment under such insurance; (c) To indemnify Indemnitee for any Expenses, judgements, fines, settlements or other amount sustained in any Proceeding for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of 16(b) of the Securities Exchange Act of 1934, the rules and regulations promulgated thereunder and amendments thereto or similar provisions of any federal, state or local statutory law; 19 (d) To indemnify Indemnitee for any Expenses, judgements fines, settlements or other amounts resulting from Indemnitee's conduct which is finally adjudged to have been willful misconduct, knowingly fraudulent or deliberately dishonest; or (e) If a court of competent jurisdiction shall finally determine that any indemnification hereunder is unlawful. 6. Indemnification of Expenses of Successful Party. Notwithstanding any other provisions of this Agreement, to the extent that Indemnitee has been successful on the merits in defense of any Proceeding, Indemnitee shall be indemnified against Expenses actually and reasonably incurred by Indemnitee in connection therewith. 7. Advances of Expenses. Expenses incurred by Indemnitee in defending any Proceeding shall be advanced by the Company prior to the final disposition of such Proceeding upon receipt by the Company of an undertaking by Indemnitee to repay such amount unless it is ultimately determined that Indemnitee is entitled to indemnification hereunder. 8. Right of Indemnitee to Indemnification Upon Application; Procedure Upon Application. Upon receipt of notice from Indemnitee requesting indemnification or an advance of Expenses pursuant to Section 3, 4 or 7 hereof, the Company agrees that a meeting of the Board of Directors shall be held (or that action shall be taken by the Board of Directors by written consent) within forty-five (45) days of receipt by the Company of such notice. At such meeting, the Board of Directors shall determine whether or not Indemnitee has satisfied the requisite standard of care and is entitled to the indemnification or advance requested in the notice under California law. If the Board of Directors is unable to make such determination because there is not a quorum of directors who are not parties to the Proceeding, the Company agrees to take such action as is necessary to present the question of the propriety of the requested indemnification or advance to the shareholders for their determination. The right to indemnification or advances as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. Neither the failure of the Company (including its Board of Directors or shareholders) to have made such a determination prior to the commencement of such action that indemnification or advances are proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors or shareholders) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. 9. Maintenance of Liability Insurance. (a) The Company hereby covenants and agrees that, as long as the Indemnitee shall continue to serve as an officer of the Company and thereafter so long as the Indemnitee shall be subject to any possible Proceeding, the Company, subject to subsection (c), shall promptly, obtain and maintain in full force and effect directors and officers liability insurance ( D&O Insurance ) in reasonable amounts from established and reputable insurers. 20 (b) In all D&O Insurance policies, the Indemnitee shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's officers. (c) Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D & O Insurance if the Company determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is so limited by exclusions that it provides an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 10. Indemnification Hereunder Not Exclusive. The indemnification provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may legally be entitled under the Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the General Corporation Law of the State of California, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The indemnification under this Agreement shall continue as to Indemnitee even though he may have ceased to be a director, officer, employee or agent of the Company and shall inure to the benefit of the heirs and personal representatives of Indemnitee. 11. Partial Indemnification. If Indemnitee is entitled under any provisions of this Agreement to indemnification by the Company for some or a portion of any Expenses, judgements, fines, settlements and other amounts incurred in connection with defending or settling a Proceeding but not entitled, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses, judgements, fines, settlements and other amounts to which Indemnitee is entitled. 12. Savings Clause. If this Agreement or any portion thereof is invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee as to any Expenses, judgements, fines, settlements and other amount incurred in connection with defending or settling a Proceeding to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated or by any other applicable law. 13. Notices. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give to the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnifications will or could be sought under this Agreement. Notice to the Company shall be directed to KIT Manufacturing Company, 530 East Wardlow Road, P.O. Box 848, Long Beach, California 90801, Attention: Chairman and Chief Executive Officer (or such other address as the Company shall designate in writing to Indemnitee). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. 21 KIT MANUFACTURING COMPANY By Dan Pocapalia, Chairman and Chief Executive Officer INDEMNITEE By Harold D. Breach (A) 3. Schedule of Indemnification Agreements The following is a list of parties to indemnification agreements that are substantially identical to the indemnification agreement filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31,2000: NAME DATE EXECUTED Dan Pocapalia March 10, 1987 Fred Chel March 10, 1987 Frank S. Chan, Jr. March 9, 1993 John W. H. Hinrichs March 29, 1994 John F.Zaccaro March 29, 1994 Bruce K. Skinner September 15, 1998 Matthew S. Pulizzi March 10, 1987 Marlyce A. Faldetta March 10, 1987 22 KIT Manufacturing Company 2000 Annual Report 23 KIT Manufacturing Company Financial Highlights (Dollars in thousands except per share amounts) Operating Results for the Year Ended October 31 2000 1999 1998 1997 1996 Sales $47,919 $63,251 $61,030 $76,465 $97,158 Net income (loss) $ (269)(1) $373 $(357) $(2,312) $1,431(2) Net income (loss) per share: Basic ($0.25)(1) $0.34 ($0.32) ($2.08) $1.29(2) Diluted ($0.25)(1) $0.34 ($0.32) ($2.08) $1.27(2) Weighted-average shares outstanding: Basic 1,064,212 1,110,934 1,110,934 1,110,934 1,110,934 Diluted 1,064,212 1,110,934 1,110,934 1,110,934 1,130,433 Working capital $7,532 $7,476 $6,861 $7,215 $9,984 (1) Includes gain on sale of business property in Chino, California of $853,000, net of related income taxes, or $0.81 per share and gain on sale of business property in McPherson, Kansas of $402,000, net of related income taxes, or $0.38 per share. (2) Includes gain on business interruption claim of $373,000, net of related income taxes, or $0.34 per share.
About the Company: KIT Manufacturing Company produces manufactured housing and recreational vehicles (towable trailers) marketed by an independent dealer network in 23 states in the West, Midwest, South and Southeast, and Canada. KIT homes are permanent living structures that are built utilizing materials similar to conventional housing. KIT recreational vehicle products are used primarily for camping or vacation travel and provide a variety of living accommodations. 24 To Our Shareholders: Declining operating results for fiscal 2000 were the result of a 24% decrease in sales compared to fiscal 1999. The sales decrease was the result of several national economic factors affecting both recreational vehicle and manufactured home sales. Softening retail demand due to the rise in interest rates coupled with increased fuel costs in the Spring of 2000 directly affected the normal retail selling season for our recreational vehicle dealers. Manufactured home sales decreased due to difficult market conditions caused by an oversupply of finished product at the retail level and restrictive retail financing environment as lenders reacted to interest rate increases and an increase in dealer insolvencies. Despite the uncertainty of the economic horizon, the National RV show in Louisville, Kentucky held in early December 2000 provided management with a realistic view of what lies ahead for fiscal 2001. The dealer body agreed that the improvements and enhancements made to the RV lines as well as the expansion of the model mix and product pricing, have made the RV products more exciting and present an attractive business opportunity to potential and existing dealers. Management is confident that our continuing commitment to trouble-free quality standards and high-value RV's will continue to reward the Company through market expansion in meeting the demands of this highly competitive business. During the fiscal year, the recreational vehicle division redesigned several product lines and introduced new models. The redesigned travel trailers and fifth wheels have been well received by the dealer body and the rail consumer. As well as the changes made to the RV product, significant operational cost cutting measures and personnel realignments have been implemented. Both of these forward looking actions should position the RV segment of our business to be extremely competitive and more responsive to the needs of the marketplace as the current economic conditions improve. The manufactured homes division sales dollars decreased 30%, from $31.1 million in fiscal 1999 to $21.7 million in fiscal 2000. The number of manufactured homes sold decreased 31% from 858 homes in fiscal 1999 to 595 homes in fiscal 2000. Industry wide, sales to dealers were down nearly 32% from 1999. The overall industry sales decline was the result of an oversupply of homes on the market, as well as the fact that national retail sales were down 23%. The manufactured homes division continued its participation in the retail sales partnership located in Nampa and Fruitland, Idaho during fiscal 2000. These KIT Courtyard ventures have had a positive impact on the operations of KIT from the standpoint of increased factory production from increased home sales. The joint venture now markets their multi-sectional homes under "land package" deals. This technique bundles the manufactured home with developed land in a subdivision setting and allows the rail customer the option of purchasing basically a "site" home. This makes the home and the land under it eligible for a conventional real estate mortgage loan in most states. The Company's financial position remains strong. KIT had no long-term debt and its line of credit remained unused at fiscal year-end. Working capital was $7.5 million and management believes that it is sufficient to provide the Company with funds necessary for operational maintenance and anticipated growth. We anticipate that the first six months of fiscal 2001 will be a difficult 25 time for the manufactured home industry, as the unfavorable market conditions remain. Management anticipates, however, that KIT should perform better than the industry to some degree because of the favorable results of the KIT Courtyard "land package" marketing concept described above. With respect to the recreational vehicle division and the RV industry, it appears that the economy will continue to present this business sector with a challenging business environment. Fuel prices and interest rates continue to remain high while consumer confidence remains tentative. First quarter operations will see our normal seasonal slowdown in RV sales, however, management believes that the business strategies that KIT has implemented as noted above should help give rise to a much improved operational profit figure as fiscal 2001 progresses. Sincerely, /s/Dan Pocapalia Dan Pocapalia Chairman of the Board and Chief Executive Officer 26 Recreational Vehicles Having consistently produced and delivered high quality, high value products to our customers for 55 years, KIT remains one of the m4 or manufacturers of towable travel trailers and fifth-wheels in the United States. KIT products are well known for their reliability and their retained value at "trade-in" time. KIT RV's are in high demand for the second-time, entry-level buyer as well as the more knowledgeable buyer. Over the past few years, the baby-boomer generation and younger families have begun discovering the affordability and comfort of recreational vehicle travel. The Company's philosophy of uncompromising quality control standards along with a value-driven price tag has carried KIT to new heights in retail customer loyalty from the oldest to the newest members of the RV life-style. KIT's RV products incorporate high quality, reliable name-brand appliances, along with stylish interior components and accessories. With the onset of model year 2000, the Company introduced several new models in addition to new innovations in our existing model lineup and improved our competitive position by design in response to our customers' demands. KIT produces a wide range of recreational vehicle products in its manufacturing facilities in Caldwell, Idaho under the brand names of Road Ranger, Companion, Millennium, Patio Hauler and our entry level models, the RoadRanger LE and Companion LE. KIT RV's measure from 19 to 39 feet in length, are more than eight feet wide and provide sleeping accommodations for 2 to 10 persons. The entry level Road Ranger and Companion LE brands have been extremely well received by the dealer body. KIT expects the retail buyers' enthusiastic reaction will be to choose these products for the many quality features provided at a low price point. The Road Ranger and Companion lines, with fifteen different floor plan models, are positioned for the mid-priced market. These models are configured with a wide range of features and now include an LXG Plus lineup of trailers, which consists of four 32' and above floor plans. In a positive move to position its products through all price points of the RV market, KIT recently began offering the all-new Millennium as our high-end product offering. This line, which consists of three different models, provides the largest living and storage areas and feature befits available in their price range. This new RV appeals to the discerning buyer and full-time RVers with a vast selection of features as standard equipment. Designed for adventure, the Company's unique PatioHauler features a cargo area for hauling off-road vehicles and other sporting equipment. The cargo area then converts to an enclosed patio when the "toys" are removed. The four available floor plans all feature the patio concept as well as provide the buyer with a fully appointed living area separate from the patio. In addition to its current model lineup, KIT will begin offering several new options to the trailer and fifth-wheel market, including two cargo-style travel trailers, and three different `Lite' models. These new units will be available sometime during the spring selling season of 2001. 27 Retail prices for the more than 50 KIT floor plans range from $8,500 to $58,000. This range covers approximately 80 percent of the travel trailer and fifth-wheel market. More than 100 independent dealers now distribute KIT recreational vehicles to the retail consumer throughout the western United States and Western Canada. The Millennium and PatioHauler models are retailed throughout 23 states in the continental United States. KIT provides its dealer network system with national media advertising, sales literature, training and special support programs, along with its national reputation for product quality and service. Manufactured Housing The manufactured homes division is currently experiencing unfavorable economic factors also affecting the entire manufactured homes industry. Value pricing and marketing innovation, coupled with a continuing emphasis on reducing operating costs, have positioned this division for a profitable turn-around. Manufactured homes builds both single and multi-sectioned dwellings designed to be transported to a prepared home site. Multi-sectioned homes offer the appearance and living space of traditional site-built homes and have become the dominant portion of our sales. KIT homes are built in a controlled environment, which minimizes the variables inherent in outdoor construction. By standardizing construction methods, we can build homes with greater efficiency, and consequently at lower cost, than site-built homes with the same features. The manufactured homes division continues to aggressively develop new products that incorporate innovative floor plans, modem colors and functional design. KIT manufactured homes are distributed from production facilities in Caldwell, Idaho through a network of approximately 34 dealers located in eight Western states. KIT homes are marketed in four product lines. Our Cypress homes offer the budget conscious entry-level buyer an ideal way to purchase their first home. The Sunrise residential series has recently bean introduced primarily for placement in sub-divisions and offers all of the amenities of a site-built home at a better value point. This series shows great promise and is expected to be a major share of KIT's business in the future. Our SierraXL homes are generally larger and provide a wide array of styles and custom features. The Golden State line, our most elegant series of homes, provides outstanding value for individuals who place a premium on comfort and luxury. Living space in the 42 available floor plans range from about 800 to more than 2,500 square feet. Retail prices, exclusive of land costs, range from approximately $25,000 to $120,000. As the nation continues to search for solutions to the problem of affordable, single-family housing, KIT stands ready to provide attractive, energy-efficient homes at competitive prices. 28 KIT Manufacturing Company Management's Discussion And Analysis of Results of Operations and Financial Condition Results of Operations Fiscal 2000 Compared to Fiscal 1999 Sales declined 24% to $47.9 million compared to fiscal 1999 when sales were $63.3 million. The net loss for the period was $269,000, or $0.25 per share, in comparison to net income in fiscal 1999 of $373,000, or $0.34 per share. Sales decreases in the RV division have been significantly impacted from rising interest rates and higher fuel costs. Sales of manufactured homes have been impacted unfavorably by lender's tightened credit standards as well as industry-wide excess finished goods inventory levels. Recreational vehicle division sales decreased 18% to $26.2 million from sales of $32.2 million in fiscal 1999. The overall decrease in RV shipments was 21%, down from 2,293 units in fiscal 1999 to 1,816 units in fiscal 2000. This decline consisted of a decrease in fifth-wheel model shipments from 788 units in fiscal 1999 to 558 units in fiscal 2000 and a decrease in travel trailer shipments from 1,505 units in fiscal 1999 to 1,258 shipped in fiscal 2000. The model mix tended toward higher priced units in fiscal 2000. Because of the results of operations during fiscal 2000, the Company made key management changes and realigned the RV operations to be more competitive in fiscal 2001. Manufactured homes sales decreased 30% to $21.7 million in fiscal 2000 from sales of $31.1 million in fiscal 1999. This decrease reflected a 37% decline in shipments of single-section homes from 84 units in fiscal 1999 to 53 units in fiscal 2000 and a 30% decrease in shipments of multi-section homes from 774 units in fiscal 1999 to 542 units in fiscal 2000. Total unit shipments decreased 31% from 858 homes in fiscal 1999 to 595 homes in fiscal 2000. The manufactured homes division implemented modest price increases in fiscal 2000 and fiscal 1999 to counter increases in raw material costs. Gross profit as a percent of sales decreased to 7% in fiscal 2000 in comparison to 10% in fiscal 1999. The gross profit dollars decreased 47%, or $3,060,000, from $6,507,000 in fiscal 1999 to $3,447,000 in fiscal 2000. The primary reason for the decrease was a decrease in operating efficiencies in both divisions due to lower production volumes. Selling, general and administrative expenses increased to 11% of sales in comparison to 9% of sales in fiscal 1999. The selling, general and administrative dollars decreased 6%, or $373,000, from $5,837,000 in fiscal 1999 to $5,464,000 in fiscal 2000 due to continued planned reductions in marketing and administrative costs. Equity in the loss of the retail sales partnership increased 317% from $156,000 in fiscal 1999 to $651,000 in fiscal 2000. The increase in losses was the result of the unfavorable environment for the retail sales of the manufactured housing that existed during much of fiscal 2000. During February 2000, the Company sold land and buildings located in Chino, California for consideration of $1,652,000, resulting in a gain of $1,455,000. During June 2000, the Company sold land and buildings located in McPherson, Kansas for consideration of $1,187,000, resulting in a gain of $621,000. The 29 total gain resulting from these two sales is $2,076,000. Net interest income of $61,000 in fiscal 2000, as compared to net interest income of $58,000 in fiscal 1999, was the result of higher average cash investments, partially offset by higher average borrowings in fiscal 2000 as compared to fiscal 1999. Fiscal 1999 compared to Fiscal 1998 Sales rose 4% to $63.3 million compared to $61.0 million in fiscal 1998. Net income was $373,000, or $0.34 per share, in comparison to a net loss in fiscal 1998 of $357,000, or $0.32 per share. Net income was primarily derived from improved operations in the manufactured homes division. Operational profits in this division were primarily the result of the sales increase from increased trailer sales. Recreational vehicle division sales decreased 7% to $32.2 million from $34.6 million in fiscal 1998. The overall decrease in RV shipments was 9%, down from 2,511 units in fiscal 1998 to 2,293 units in fiscal 1999. This decline consisted of a decrease in fifth-wheel model shipments from 1,056 units in fiscal 1998 to 788 units in fiscal 1999 and travel trailer shipments of 1,505 units up from 1,455 shipped in fiscal 1998. The model mix tended toward lower priced units in fiscal 1999. Manufactured homes sales increased 18% to $31.1 million in fiscal 1999 from sales of $26.4 million in fiscal 1998. This increase reflected an 18% decline in shipments of single-section homes from 103 units in fiscal 1998 to 84 units in fiscal 1999 and a 14% increase in shipments of multi-section homes from 677 units in fiscal 1998 to 774 units in fiscal 1999. Total unit shipments increased 10% from 780 homes in fiscal 1998 to 858 homes in fiscal 1999. Gross profit as a percent of sales increased to 10% in fiscal 1999 in comparison to 8% in fiscal 1998. The gross profit dollars increased 27%, or $1,397,000, from $5,110,000 in fiscal 1998 to $6,507,000 in fiscal 1999. The primary reasons for the percentage increase to sales were an increase in operating efficiencies in both divisions and increased sales volume in the Manufactured Housing Division. Selling, general and administrative expenses remained at 9% of sales in comparison to fiscal 1998. The Company increased its selling costs as a percentage of sales in RV's in order to maintain market share as competition increased, which were offset by decreases in administrative costs. Equity in the loss of the retail sales partnership increased 189% from $54,000 in fiscal 1998 to $156,000 in fiscal 1999. This increase is due to the establishment of a second retail sales location in Fruitland, Idaho. Net interest income of $58,000 in fiscal 1999, as compared to net interest income of $55,000 in fiscal 1998, was the result of higher average cash investments and lower average borrowings in fiscal 1999 compared to fiscal 1998. Liquidity and Capital Resources The current ratio at fiscal year-end 2000 rose to 2.9 in comparison to 2.3 at the end of fiscal 1999. The current ratio is the result of dividing current 30 assets by current liabilities. It is a financial measure that indicates the ability of the Company to pay its current obligations with its current assets. The improvement in the current ratio comes about as a result of the receipt of proceeds from the sale of idle plant facilities in Chino, California and McPherson, Kansas. The sales of these plant facilities increased available cash, which was partially utilized to pay down current accounts payable. In addition to funding capital requirements with available cash, the Company, through financing activities, funds seasonal working capital requirements with respect to the build-up of inventories from periodic borrowings on its revolving line of credit. In addition, funding for the retail sales partnership's operations is expected to come primarily from cash provided by operating activities. See Note 5 of the Notes to Financial Statements for discussion of the line of credit. There were no borrowings against the line of credit at fiscal year-end 2000 or 1999. The Company believes that available cash, supplemented as needed with funds available on its line of credit, will provide it with sufficient resources to meet present and reasonably foreseeable working capital requirements and other cash needs over the next twelve months. Common Stock Buyback Program In September 1999, the Company approved the repurchase of up to 100,000 shares of the Company's common stock on the open market during a period of not more than 12 months. The 100,000 common shares authorized for repurchase represent 9% of the outstanding stock of the Company. The Company's management believes the shares, from time to time, are undervalued by the market and open market purchases should have the effect of enhancing the potential for earnings growth on a per share basis and thus, enhancing the Company's value to shareholders. During fiscal 2000, under the common stock buyback program, the Company purchased 83,600 shares of common stock at an average price of $5.98 per share, exclusive of fees and commissions. 31 KIT Manufacturing Company Balance Sheets
October 31, 2000 1999 ASSETS Current Assets Cash and cash investments $4,489,000 $4,731,000 Accounts receivable, net of allowance for doubtful accounts of $29,000 in 2000 and $35,000 in 1999 2,446,000 4,768,000 Accounts receivable from retail sales partnership 341,000 179,000 Inventories 2,798,000 2,454,000 Prepaids and other assets 324,000 269,000 Deferred income taxes 1,025,000 721,000 Total Current Assets 11,423,000 13,122,000 Property, Plant and Equipment, at cost Land 576,000 745,000 Buildings and improvements 6,759,000 8,281,000 Machinery and equipment 3,939,000 3,939,000 Construction in progress 20,000 72,000 11,294,000 13,037,000 Less: accumulated depreciation (5,657,000) (6,488,000) 5,637,000 6,549,000 Other assets 286,000 90,000 $17,346,000 $19,761,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 818,000 $2,538,000 Accrued payroll and payroll related liabilities 903,000 1,191,000 Accrued marketing programs 471,000 402,000 Accrued expenses 1,699,000 1,515,000 Total Current Liabilities 3,891,000 5,646,000 Deferred income taxes 1,487,000 1,474,000 Losses in excess of investments in and advances to retail sales partnership 96,000 - - 5,474,000 7,120,000 Commitments and Contingencies Shareholders' Equity Preferred stock, $1 par value; authorized 1,000,000 shares; none issued Common stock, without par value; authorized 5,000,000 shares; issued and outstanding 1,027,334 shares in 2000 and 1,110,934 shares in 1999 694,000 750,000 Additional paid-in capital 775,000 842,000 Retained earnings 10,403,000 11,049,000 Total Shareholders' Equity 11,872,000 12,641,000 $17,346,000 $19,761,000 The accompanying notes are an integral part of these financial statements.
32 KIT Manufacturing Company Statements of Income
For the Years Ended October 31, 2000 1999 1998 Sales $46,391,000 $61,101,000 $60,992,000 Sales to retail sales partnership 1,528,000 2,150,000 38,000 47,919,000 63,251,000 61,030,000 Costs and expenses Cost of sales 43,373,000 55,179,000 55,893,000 Cost of sales to retail sales partnership 1,099,000 1,565,000 27,000 Selling, general and admin. expenses 5,464,000 5,837,000 5,583,000 Equity in loss of retail sales partnership 651,000 156,000 54,000 50,587,000 62,737,000 61,557,000 Operating (loss) income (2,668,000) 514,000 (527,000) Other income (expense) Gain on sale of property, plant and equipment 2,076,000 - - - Interest income 246,000 165,000 166,000 Interest expense (185,000) (107,000) (111,000) (Loss) income before income taxes (531,000) 572,000 (472,000) (Benefit) provision for income taxes (262,000) 199,000 (115,000) Net (loss) income $(269,000) $ 373,000 $ (357,000) Net (loss) income per share: Basic ($0.25) $0.34 ($0.32) Diluted ($0.25) $0.34 ($0.32) Weighted-average shares outstanding: Basic 1,064,212 1,110,934 1,110,934 Diluted 1,064,212 1,110,934 1,110,934
Statements of Shareholders' Equity Common Stock Additional Retained Shares Amount Paid-In Capital Earnings Total Balance, October 31, 1997 1,110,934 $750,000 $842,000 $11,033,000 $12,625,000 Net loss (357,000) (357,000) Balance, October 31, 1998 1,110,934 $750,000 $842,000 $10,676,000 $12,268,000 Net income 373,000 373,000 Balance, October 31, 1999 1,110,934 $750,000 $842,000 $11,049,000 $12,641,000 Purchase of common stock (83,600) (56,000) (67,000) (377,000) (500,000) Net loss (269,000) (269,000) Balance, October 31, 2000 1,027,334 $694,000 $775,000 $10,403,000 $11,872,000 The accompanying notes are an integral part of these financial statements.
33 KIT Manufacturing Company Statements of Cash Flows
For the Years Ended October 31, 2000 1999 1998 Cash Flows From Operating Activities: Cash received from customers $ 47,664,000 $62,344,000 $61,523,000 Interest received 246,000 165,000 166,000 Income taxes received -- 107,000 1,263,000 Cash paid to suppliers and employees (49,367,000) (60,505,000) (62,614,000) Interest paid (185,000) (107,000) (111,000) Income taxes paid (78,000) - - - Net cash (used in) provided by operating activities (1,720,000) 2,004,000 227,000 Cash Flows From Investing Activities: Purchase of property, plant and equipment (316,000) (455,000) (578,000) Proceeds from disposals of property, plant and equipment 2,839,000 32,000 48,000 Investment in and advances to retail sales partnership (545,000) (80,000) (140,000) Net cash provided by (used in) investing activities 1,978,000 (503,000) (670,000) Cash Flows From Financing Activities: Proceeds from line-of-credit borrowings 16,806,000 14,693,000 17,790,000 Principal payments on line-of-credit borrowings (16,806,000) (14,693,000) (17,790,000) Purchase of treasury stock (500,000) -- - -- Net cash used in financing activities (500,000) -- - -- Net (decrease) increase in cash (242,000) 1,501,000 (443,000) Cash and cash investments at beginning of year 4,731,000 3,230,000 3,673,000 Cash and cash investments at end of year $4,489,000 $4,731,000 $3,230,000 Reconciliation of Net (Loss) Income to Net Cash (Used in) Provided by Operating Activities: Net (loss) income $ (269,000) $373,000 $(357,000) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 465,000 609,000 639,000 Gain on sale of property, plant and equipment (2,076,000) -- - -- Deferred income taxes (291,000) 168,000 (57,000) Equity in loss of retail sales partnership 651,000 156,000 54,000 Changes in operating assets and liabilities: Accounts receivable 2,160,000 (906,000) 492,000 Inventories (344,000) 2,367,000 (1,419,000) Prepaids and other assets (263,000) 103,000 92,000 Accounts payable and accruals (1,755,000) (957,000) (422,000) Accrued income taxes 2,000 91,000 1,205,000 Net cash (used in) provided by operating activities $(1,720,000) $2,004,000 $227,000 The accompanying notes are an integral part of these financial statements.
34 KIT Manufacturing Company Notes to Financial Statements 1. Summary of Significant Accounting Policies Cash and Cash Investments The Company invests its cash in high quality financial instruments, all of which are considered cash equivalents. The Company considers all highly liquid financial instruments with a maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents are carried at cost, which approximates market. The Company also maintains deposits at financial institutions in amounts in excess of federally insured limits. Risks and Uncertainties The Company sustained losses from operations in the current year of $2,668,000 as a result of decreased sales and lower margins. Management believes the overall industry slowdown and unfavorable market conditions were the primary contributors to these results. While management cannot predict market conditions for fiscal 2001, management believes cash flows from operations, cash reserves on-hand and availability under its line of credit are sufficient to meet present and reasonably foreseeable working capital requirements over the next twelve months. Valuation of Inventories Inventories are stated at the lower of cost (last-in, first-out for material and first-in, first-out for labor and overhead) or market. Investments The Company maintains a 70% interest in Housing Solutions LLC (the "retail sales partnership") whose principal business is selling manufactured homes to private individuals through retail dealerships. The Company's relationship with each respective retail dealership is governed by 5 year operating agreements that provide few protective and no participating rights to the Company. As such, the Company's investment in the retail sales partnership is accounted for under the equity method of accounting. Property, Plant and Equipment For financial reporting purposes, depreciation and amortization of property, plant and equipment is generally provided for on a straight-line basis, using estimated useful lives of 10 years for land improvements, 20 to 33-1/3 years for buildings and improvements, 3 to 10 years for equipment and lease terms for leasehold improvements. Upon sale or disposition of assets, any gain or loss is included in the Statement of Income. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred; expenditures for betterments and major renewals are capitalized. Assessments whether there has been a permanent impairment in the value of property, plant and equipment are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred. 35 Income Taxes The Company follows Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"), which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Basic and Diluted Loss or Income Per Share Basic loss or income per share is computed based on the weighted-average number of shares outstanding during each year. Diluted loss or income per share is computed based on the sum of the weighted-average number of shares outstanding plus potential common shares arising out of stock options, unless the inclusion of such options would result in antidilution. The Company's loss and income amounts used for per share calculations are the same for both the basic and diluted methods. There were no potential common shares included in the calculation of diluted per share amounts for the years ended October 31, 2000, 1999 and 1998 because the effect would have been antidilutive. Insurance The Company is self-insured for workers' compensation for its plant locations, officers' and directors' liability, and product liability. The Company has recognized an estimated potential liability for known cliams and incurred but not reported claims. Estimates The preparation of financial statements in accordance with generally accepted accounting principles 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. Actual results could differ from these estimates. Stock Options The Company has adopted the disclosure-only provisions under Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation ("SFAS No. 123"). Pro forma information is required by SFAS No. 123, and has been determined as if the Company accounted for stock options under the fair value method as prescribed in the statement. The Company computed the compensation expense of the option granted using the methodology described in SFAS No. 123 and determined the result to be immaterial. Reclassifications Certain amounts in the prior period financial statements have been reclassified to conform to the current year's presentation. 36
2. Investments The Company's investment in and advances to the retail sales partnership, net of the Company's pro rata share of cumulative equity in losses, is reflected as a noncurrent liability totaling $96,000 at October 31, 2000 and a component of other assets equal to $10,000 at October 31, 1999. The retail sales partnership has reflected all advances from the Company as a component of current liabilities equal to $625,000 and $80,000 at October 31, 2000 and 1999 respectively. The condensed financial information of the partnership is as follows for the years ended October 31, 2000 and 1999, and for the period from inception, August 31, 1998, to October 31, 1998. 2000 1999 1998 (unaudited) Condensed Statement of Income Information: Sales $3,720,000 $3,912,000 $77,000 Cost of sales 3,317,000 3,173,000 38,000 Selling, general and administrative expenses 823,000 813,000 110,000 Interest expense 201,000 149,000 6,000 Net loss $ (621,000) $(223,000) $(77,000) Condensed Balance Sheet Information: Current assets $2,602,000 $2,127,000 Noncurrent assets 389,000 446,000 $2,991,000 $2,573,000 Current liabilities $3,681,000 $2,623,000 Noncurrent liabilities 31,000 50,000 Members' deficit (721,000) (100,000) $2,991,000 $2,573,000
3. Inventories Inventories are summarized as follows: October 31, 2000 1999 Raw material $1,664,000 $1,792,000 Work in process 597,000 654,000 Finished goods 537,000 8,000 $2,798,000 $2,454,000 The excess of current replacement cost over last-in, first-out cost was $649,000 at October 31, 2000 and $730,000 at October 31, 1999.
37 4. Shareholders' Equity Stock Options In June 1994, the Company granted to five officers of the Company, options to purchase up to 96,944 shares of the Company's common stock, at 100% of the then fair value, or $10.38 per share. Also in June 1994, the Company granted to one such officer an additional option to purchase up to 35,056 shares of the Company's common stock, at 110% of the then fair value, or $11.41 per share. In June 1999, the Company granted to one officer of the Company, options to purchase up to 40,000 shares of the Company's common stock, at 100% of the then fair value, or $7.00 per share. Options granted vest in four equal annual installments beginning one year after the date of grant and remain outstanding (subject to termination of employment, death or permanent disability of the holder, as set forth in the option agreements) for a period of 7 years. Of the initial grants, options to purchase 55,000 shares have been retired due to the termination of one grantee and the death of a second grantee. The option to purchase the 35,056 additional shares of the Company's common stock was also retired in June 1999. On October 31, 2000, 1999 and 1998, total unexercised options were 81,944, 81,944 and 112,000, of which 51,944, 41,944 and 112,000 options, respectively, were exercisable. Stock Repurchase On September 14, 1999, the Board of Directors authorized the Company to repurchase up to 100,000 common shares on the open market during a period of not more than 12 months. The 100,000 common shares authorized for repurchase represent 9% of the outstanding common stock of the Company. Through October 31, 2000, the Company, under the repurchase plan, purchased 83,600 common shares. 5. Bank Credit Line The Company is party to a revolving credit agreement with a bank, which expires in April 2001, that provides financing of seasonal working capital requirements. There are no compensating balance requirements under the agreement. Major provisions of the agreement include interest at the lesser of the bank's prime rate or market rate, and certain minimum requirements as to the Company's working capital and debt-to-equity relationships. At October 31, 2000, there was no outstanding balance on the revolving credit line, and the maximum borrowing permitted was the lesser of $4,500,000 or the sum of 80% of eligible trade receivables and 50% of inventories, less any commercial and standby letters of credit outstanding up to a maximum of $1,000,000. Interest costs charged to expense for the fiscal years 2000, 1999 and 1998 were $185,000, $107,000 and $111,000, respectively. 6. Commitments and Contingencies The Company was contingently liable at October 31, 2000 to various financial institutions on repurchase agreements in connection with wholesale inventory financing. In general, inventory is repurchased by the Company upon customer default with a financing institution and then resold through normal distribution channels. Historically, the net gain or loss on such resales has not been significant. The total selling value of finished units subject to such agreements as of October 31, 2000 and 1999 was approximately $7,715,000 and $10,184,000, respectively. In addition, the Company is contingently liable to financial institutions for standby letters of credit totaling $153,000 and $305,000 as of October 31, 2000 and 1999, respectively. These letters of credit were established 38 to satisfy the self-insured workers' compensation regulations of the states in which the Company conducted manufacturing operations. The Company also guarantees the indebtedness of the retail sales partner- ship related to a $300,000 note payable to a bank. The note payable is due in full, plus accrued interest thereon, by March 15, 2001. On December 15, 1998, the Company was named as a defendant in a lawsuit filed by one of its former dealers. A jury awarded the plaintiff $370,000 in damages, however, the verdict is currently under appeal with the Idaho State Supreme Court. The outcome of the appeal is not known at this time but the Company intends to defend it position vigorously. The Company was named as a defendant in a class-action lawsuit filed by certain former employees on May 15, 2000. This case was subsequently settled in the amount of $70,000 and this amount has been reflected on both the balance sheet and as a component of profit and loss at October 31, 2000. The Company, in its normal course of business is party to other pending lawsuits or may be subject to other threatened lawsuits. While the outcome of pending or threatened lawsuits cannot be predicted with certainty, and an unfavorable outcome could have a negative impact on the Company, at this time, in the opinion of management, the ultimate resolution of these matters will not have a material effect on the Company's financial position, results of operation or liquidity. Management does not expect that losses, if any, from the contingencies described above will be of material importance to the financial condition or future earnings of the Company. 39 KIT Manufacturing Company Notes to Financial Statements
7. Income Taxes The components of the provision (benefit) for income taxes are as follows: For the year ended October 31, 2000 1999 1998 Current: Federal $(1,000) $26,000 $(58,000) State 30,000 5,000 29,000 31,000 (58,000)
Deferred: Federal (242,000) 125,000 (46,000) State (49,000) 43,000 (11,000) (291,000) 168,000 (57,000) $ (262,000) $ 199,000 $(115,000)
The sources of deferred taxes were as follows: October 31, 2000 1999 1998 Inventory cost capitalization $(162,000) 77,000 $(44,000) Sales to retail sales partnership (22,000) (63,000) (37,000) Accrued warranty costs (24,000) $68,000 197,000 Workers' compensation reserves 53,000 78,000 76,000 Non-deductible reserve (148,000) State income and franchise taxes 64,000 (11,000) (102,000) Net operating loss carryforwards 19,000 (55,000) Other (52,000) (92,000) $ (291,000) $168,000 $(57,000)
Reconciliation of the effective tax rates and the U.S. statutory tax rate is summarized as follows: October 31, 2000 1999 1998 Statutory tax rate (34.0%) 34.0% (34.0%) Tax exempt interest (16.6) (7.2) (8.3) State tax provision, net of federal tax effect (2.4) 5.5 (1.5) Business meals and entertainment 1.6 1.9 1.8 Officer's life insurance 1.0 Adjustment of prior years income tax accruals 16.9 Other 1.1 0.6 0.7 (49.3%) 34.8% (24.4%)
40
The components of the deferred tax asset and liability are as follows : October 31, 2000 1999 Deferred tax asset: Allowance for doubtful accounts $ 15,000 $15,000 Inventory cost capitalization 162,000 - Sales to retail sales partnership 122,000 100,000 Accrued warranty costs 218,000 194,000 Workers' compensation reserves 140,000 193,000 Non-deductible reserve 148,000 State income and franchise taxes 43,000 Net state operating loss carryforwards 165,000 165,000 Other 55,000 11,000 $1,025,000 $721,000 Deferred tax liability: State income and franchise taxes $ 21,000 $ - Accelerated depreciation 371,000 379,000 Involuntary conversion of plant facility and equipment 1,095,000 1,095,000 $1,487,000 $1,474,000 The Company's state net operating loss carryforwards begin to expire in 2002.
41 8. Segment Information The Company designs, manufactures and sells manufactured homes, which are relocatable, factory-built dwellings of single and multi-unit design. The Company also produces recreational vehicles designed as short-period accommodations for vacationers and truckers. As such, the Company's reportable segments are based on product lines. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to Financial Statements. The Company evaluates the performance of its operating segments based on operating income or losses. Each segment records expenses related and allocable to its employees and its operations. The Company does not allocate income taxes, interest income, interest expense or gains or losses on the sales of plant facilities to operating segments. Identifiable assets are primarily those directly used in the operations of each segment. No individual customer accounted for greater than 10% of net sales or accounts receivable for any year or year-end presented.
October 31, 2000 1999 1998 (Dollars in thousands) SALES Manufactured homes $21,672 $31,088 $26,410 Recreational vehicles 26,247 32,163 34,620 Total sales $47,919 $63,251 $61,030 INCOME (LOSS) BEFORE INCOME TAXES Operating income (loss) Manufactured homes $ (1,375) $2,445 $2,021 Recreational vehicles (1,293) (1,931) (2,548) Total operating income (loss) (2,668) 514 (527) Gain on sale of property, plant and equipment (2,076) - - - Interest income 246 165 166 Interest expense (185) (107) (111) (Loss) income before income taxes $ (531) $572 $(472) IDENTIFIABLE ASSETS Manufactured homes $9,849 $9,916 $8,983 Recreational vehicles 7,497 9,845 11,368 Total assets $17,346 $19,761 $20,351 DEPRECIATION AND AMORTIZATION Manufactured homes $276 $308 $289 Recreational vehicles 189 301 350 Total depreciation and amortization $465 $609 $639
42 Report of Independent Accountants To the Shareholders and Board of Directors KIT Manufacturing Company In our opinion, the accompanying balance sheets and the related statements of income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of KIT Manufacturing Company at October 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California December 11, 2000 43 KIT Manufacturing Company Selected Financial Data
October 31, 2000 1999 1998 1997 1996 (Dollars in thousands except per share amounts) FISCAL YEAR Sales $47,919 $63,251 $61,030 $76,465 $97,158 Net (loss) income $ (269)(1) $373 $(357) $(2,312) $1,431(2) Cash dividends paid $ 0 $ 0 $ 0 $ 0 $ 0 Capital expenditures $316 $455 $578 $1,227 $434 Depreciation $465 $609 $639 $677 $670 AT YEAR-END Working capital $7,532 $7,476 $6,861 $7,215 $9,984 Current ratio 2.9:1 2.3:1 2.0:1 2.0:1 2.1:1 Ppty, plnt & equip, net $5,637 $6,549 $6,735 $6,844 $6,319 Total assets $17,346 $19,761 $20,351 $21,137 $25,139 Long-term obligations $0 $0 $0 $0 $0 Shareholders' equity $11,872 $12,641 $12,268 $12,625 $14,937 PER SHARE Basic net (loss) income $(0.25)(1) $0.34 $(0.32) $(2.08) $1.29(2) Diluted net (loss) income $(0.25)(1) $0.34 $(0.32) $(2.08) $1.27(2) Shareholders' equity $11.16 $11.38 $11.04 $11.36 $13.45 (1) Includes gain on sale of business property in Chino, California of $853,000, net of related income taxes, or $0.81 per share and gain on sale of business property in McPherson, Kansas of $402,000, net of related income taxes, or $0.38 per share. (2) Includes gain on a business interruption claim of $373,000, net of related income taxes, or $0.34 per share.
44 KIT Manufacturing Company Quarterly Statistics (Dollars in thousands except per share amounts) (Unaudited)
Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter Sales $10,966 $14,908 $13,559 $ 8,486 Gross profit (loss) 1,348 1,224 974 (30) Income (loss) before income taxes 273 1,476 91 (2,371) Net income (loss) 177 865 53 (1,364) Basic and diluted net income (loss) per share $0.16 $0.80 $0.05 ($1.26) Fiscal 1999 Sales $12,644 $16,184 $16,411 $18,012 Gross profit 1,350 1,711 1,942 1,504 Income (loss) before income taxes 188 225 282 (123) Net income (loss) 127 150 112 (16) Basic and diluted net income (loss) per share $0.11 $0.14 $0.10 ($0.01)
Market Prices of Common Stock Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter High 5 5/8 6 7/8 7 3/16 6 3/4 Low 4 1/4 5 1/4 6 3/8 4 7/8 Dividends 0 0 0 0 Fiscal 1999 High 6 1/8 6 7/8 7 1/2 7 Low 4 5/8 5 1/2 5 7/8 3 7/8 Dividends 0 0 0 0 KIT common stock is traded on the American Stock Exchange. The above table reflects the high and low sales prices for each quarterly fiscal period in the past two years. There were approximately 346 shareholders of record on January 5, 2001.
45 Corporate Information Directors Stock Registrar and Transfer Agent Dan Pocapalia ChaseMellon Shareholder Services, Chairman of the Board, L.L.C., Ridgefield Park, New Jersey Chief Executive Officer of KIT Fred W. Chel Legal Counsel Business Consultant, O'Melveny & Myers, LLP Custom Fibreglass Los Angeles, California Manufacturing Company Frank S. Chan, Jr. Certified Public Accountant, Partner, Accountants Frank S. Chan & Company PricewaterhouseCoopers LLP Los Angeles, California John W. H. Hinrichs Senior Vice President & Cashier, Farmers & Merchants Bank of Long Beach Form 10-K A copy of the Company's current annual John F.Zaccaro report filed with the Securities and President Academy of Medical Exchange Commission (SEC) on Form 10- K, Films since 1991. exclusive of exhibits, will be furnish- ed to shareholders without charge upon written request to Marlyce A. Faldetta, Corporate Secretary, KIT Manufacturing Officers Company, Post Office Box 848, Long Dan Pocapalia Beach, California 90801. Chairman of the Board and Chief Executive Officer Executive Offices Harold D. Breach KIT Manufacturing Company President and General Manager 530 East Wardlow Road, P.O. Box 848 Long Beach, California 90801 Bruce K. Skinner (562) 595-7451 Vice President and Treasurer Website: www.kitmfg.com Matthew S. Pulizzi Annual Meeting of Shareholders Vice President - Customer Relations Tuesday, March 13, 2001, 9:00 A.M. Long Beach Marriott Marlyce A. Faldetta 4700 Airport Plaza Drive Corporate Secretary Long Beach, California 46 Addendum Housing Solutions LLC Financial Statements 47 Report of Independent Accountants To the Members Housing Solutions LLC In our opinion, the accompanying balance sheets and the related statements of income and cash flows present fairly, in all material respects, the financial position of Housing Solutions LLC at October 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Los Angeles, California February 9, 2001 48 Housing Solutions LLC Balance Sheets At October 31, 2000 and 1999
October 31, 2000 1999 ASSETS Current Assets Cash $ 94,000 $ 58,000 Accounts receivable 235,000 227,000 Inventories 2,264,000 1,842,000 Prepaids and other assets 9,000 - -- Total Current Assets 2,602,000 2,127,000 Property and Equipment, at cost Leasehold improvements 345,000 345,000 Furniture and equipment 170,000 163,000 515,000 508,000 Less: accumulated depreciation (126,000) (62,000) 389,000 446,000 $ 2,991,000 $ 2,573,000 LIABILITIES AND MEMBERS' DEFICIT Current Liabilities Accounts payable $ 420,000 $ 376,000 Notes payable 319,000 52,000 Notes payable - related party 625,000 80,000 Retail flooring liability 2,123,000 1,788,000 Accrued expenses and other liabilities 194,000 327,000 Total Current Liabilities 3,681,000 2,623,000 Notes payable 31,000 50,000 3,712,000 2,673,000 Commitments and Contingencies Members' deficit (721,000) (100,000) $ 2,991,000 $2,573,000 The accompanying notes are an integral part of these financial statements.
49 Housing Solutions LLC Statements of Income For the Years Ended October 31, 2000 and 1999, and For the Period from Inception, August 31, 1998, To October 31, 1998
2000 1999 1998 (Unaudited) Sales $ 3,720,000 $ 3,912,000 $ 77,000 Costs and expenses Cost of sales 3,317,000 3,173,000 38,000 Selling, general and admin. expenses 823,000 813,000 110,000 4,140,000 3,986,000 148,000 Operating loss (420,000) (74,000) (71,000) Interest expense 201,000 149,000 6,000 Net loss $ (621,000) $ (223,000) $ (77,000) Members' (deficit) equity, beginning $ (100,000) $ 123,000 $ 200,000 Members' (deficit) equity, ending $ (721,000) $ (100,000) $ 123,000 The accompanying notes are an integral part of these financial statements.
50 Housing Solutions LLC Statements of Cash Flows For the Years Ended October 31, 2000 and 1999, and For the Period from Inception, August 31, 1998, To October 31, 1998
2000 1999 1998 (Unaudited) Cash Flows From Operating Activities: Net loss $ (621,000) $ (223,000) $ (77,000) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 64,000 56,000 6,000 Changes in operating assets and liabilities: Accounts receivable (8,000) (193,000) (34,000) Inventory (422,000) (1,251,000) (591,000) Prepaids and other assets (9,000) 20,000 (20,000) Accounts payable 44,000 119,000 257,000 Retail flooring liability 335,000 1,159,000 629,000 Accrued expenses (133,000) 308,000 19,000 Net cash (used in) provided by operating activities (750,000) (5,000) 189,000 Cash Flows Used In Investing Activities: Purchase of property and equipment (7,000) (206,000) (302,000) Cash Flows From Financing Activities: Proceeds from notes payable 300,000 111,000 - -- Payments on notes payable (52,000) (9,000) - -- Proceeds from notes payable - related party 545,000 80,000 - -- Capital contribution from members 200,000 Net cash provided by financing activities 793,000 182,000 200,000 Net (decrease) increase in cash 36,000 (29,000) 87,000 Cash at beginning of year 58,000 87,000 - -- Cash at end of year $ 94,000 $ 58,000 $ 87,000 The accompanying notes are an integral part of these financial statements.
51 Housing Solutions LLC Notes to Financial Statements 1. Summary of Significant Accounting Policies Business Housing Solutions LLC (the "Company") is a retailer of manufactured homes with two sales centers located in Idaho. Valuation of Inventories Inventories are valued at the lower of cost or market, with cost determined using the specific identification method for manufactured homes and the first-in, first-out method for all other items. Property and Equipment For financial reporting purposes, depreciation and amortization of property, and equipment is generally provided for on a straight-line basis, using estimated useful lives of 3 to 10 years for furniture and equipment and lease terms for leasehold improvements. Upon sale or disposition of assets, any gain or loss is included in the Statement of Income. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred; expenditures for betterments and major renewals are capitalized. Assessments whether there has been a permanent impairment in the value of property and equipment are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Management believes no permanent impairment has occurred. Revenue Recognition Retail home sales consist of manufactured homes as well as installed options and set-up and delivery. Retail home sales are recognized upon passage of title and, in the case of credit sales (which represent the majority of the Company's retail sales), upon the execution of the loan agreement and other required documentation and receipt of a designated minimum down payment. For those sales in which the home remains personal property, rather than being converted to real property (i.e., sales under retail installment contracts), the closing (and subsequent revenue recognition) generally takes place while the home is being delivered to and installed on the customer's site. For such sales, delivery and installation typically are straightforward and involve minimal preparation of the customer's site. Sales transactions in which the home is converted from personal property to real property are financed as traditional mortgages rather than under retail installment contracts. Such sales typically involve significant preparation of the customer's site, which may include installation of utilities, wells, extensive foundations, etc., and also require completion of mortgage financing documentation, including title searches and appraisals. As a consequence, the closing (and subsequent revenue recognition) of these transactions occurs after the home has been delivered and installed. Income Taxes The members have elected "limited liability corporation" status for both federal and state income tax purposes. No provision for federal or state income taxes has been made since any liability is that of the members. 52 Estimates The preparation of financial statements in accordance with generally accepted accounting principles 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. Actual results could differ from these estimates. 2. Retail Flooring Liability Retail flooring liability represents amounts borrowed by the sales centers to finance inventory purchases of manufactured homes. The entire amount outstanding was financed under agreements with floor plan lenders that provide for a security interest in the units financed and repayment at the time the units are sold. Substantially all amounts outstanding bear interest at the prime rate plus one to three percent (prime rate was 8.25% and 9.5% at October 31, 2000 and 1999, respectively). Interest expense related to the retail flooring liability for the years ended October 31, 2000 and 1999, and for the period from inception, August 31 1998, to October 31, 1998, totaled $171,000, $121,000 and $6,000 (unaudited), respectively. 3. Notes Payable Notes payable and notes payable consist of the following at October 31, 2000 1999 Note payable to a bank bearing interest at the prime rate plus 1%, interest payable in monthly instalments, principal balance due on demand on or before March 15, 2001, outstanding balance guaranteed by members $300,000 $ -- Note payable to a bank bearing interest at the prime rate plus 2%, interest payable in monthly instalments, principal balance due on demand and as was paid in 2000 -- 35,000 Note payable to a bank bearing interest at 11%, principal and interest payable in monthly instalments of $1,975 through May 2003 50,000 67,000 350,000 102,000 Less current portion (319,000) (52,000) $ 31,000 $ 50,000 53 Scheduled maturities of notes payable and notes payable outstanding at October 31, 2000 are as follows: 2001 $319,000 2002 21,000 2003 10,000 $350,000 4. Related Party Transactions The Company purchases primarily all manufactured homes inventory from a related party (majority member owner). Such purchases totaled $3,739,000, $5,053,000 and 629,000 (unaudited), respectively, for the years ended October 31, 2000, 1999 and for the period from inception, August 31, 1998, to October 31, 1998. Accounts payable at October 31, 2000 and 1999 related to such purchases were $341,000 and $179,000, respectively. The Company relies on its majority member owner for financial support to fund operations and general working capital requirements. Borrowings from this related party under various noninterest bearing notes, due on demand, totaled $625,000 and $80,000 at October 31, 2000 and 1999, respectively. In addition, the Company has obtained a letter of support from its majority member owner, which commits this related party to provide such financial support for a period of no less than twelve months from the most recent balance sheet date, October 31, 2000. 5. Commitments and Contingencies Lease Commitments Future minimum rental commitments under noncancellable leases related to building leases and an equipment leases at October 31, 2000 are as follows: 2001 $ 66,000 2002 65,000 2003 25,000 $ 156,000 Rent expense for the years ended October 31, 2000 and 1999 and, for the period from inception, August 31, 1998, to October 31, 1998 was $77,000, $63,000 and $15,000 (unaudited), respectively. Litigation The Company is involved, from time to time, in various legal matters which, when ultimately determined, will not, in the opinion of management, have a material effect on the financial position, results of operations or cash flows of the Company. 54 February 13, 2001 Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Gentlemen: Attached is the EDGAR submission of Form 10-K for KIT Manufacturing Company for the fiscal year ended October 31, 2000, as required by the Securities and Exchange Act of 1934. Sincerely, /s/Bruce K. Skinner Bruce K. Skinner Vice President & Treasurer -----END PRIVACY-ENHANCED MESSAGE-----