10-Q 1 r10q-043001.txt FORM 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended April 30, 2001 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, P.O. Box 848, Long Beach,California 90801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (562)595-7451 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 . APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Common Stock (no par value), 1,027,334 shares outstanding as of April 30, 2001. 1 of 16 Pages PART I FINANCIAL INFORMATION 2 KIT MANUFACTURING COMPANY STATEMENTS OF OPERATIONS (Dollars in Thousands Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended April 30, April 30, 2001 2000 2001 2000 Sales $12,154 $14,908 $18,907 $25,874 Costs and expenses: Cost of sales 11,583 13,684 18,642 23,302 Selling, general and administrative expenses 1,680 1,166 2,829 2,176 Equity in loss of retail sales partnership - 26 - 129 Operating (loss) income (1,109) 32 (2,564) 267 Other income (expense) Interest income 109 47 179 102 Interest expense (79) (58) (148) (75) Gain on sale of property, plant and equipment - 1,455 - 1,455 (Loss) income before income taxes (1,079) 1,476 (2,533) 1,749 (Benefit) provision for income taxes (Note A) (436) 611 (1,024) 707 Net (loss) income (643) $ 865 $(1,509) $ 1,042 Net (loss) income per share- basic and diluted $(0.63) $0.80 ($1.47) $ 0.96 (Note B) Weighted-average shares 1,027,33 1,082,80 1,027,334 1,090,491 outstanding- 4 6 basic and diluted (Note B) Dividends per share $ - $ - $ - $ - The accompanying notes are an integral part of these financial statements.
KIT MANUFACTURING COMPANY BALANCE SHEETS (Dollars in Thousands) (Unaudited)
April 30, Oct. 31, 2001 2000 ASSETS Cash and cash investments $ 5,710 $ 4,489 Accounts receivable, net 3,177 2,787 Inventories: Raw materials 2,491 1,664 Work in process 686 597 Finished goods 2,549 537 Total inventories 5,726 2,798 Prepaids and other assets 328 324 Deferred income taxes 1,025 1,025 Total current assets 15,966 11,423 Property, plant and equipment, net 5,717 5,637 Other assets 1,774 286 Total assets $ 23,457 $ 17,346 LIABILITIES AND SHAREHOLDERS' EQUITY Line of credit $ 3,238 - Accounts payable 2,610 $ 818 Retail flooring liability 2,129 - Accrued payroll and related items 954 903 Accrued marketing programs 613 471 Accrued expenses 2,063 1,699 Total current liabilities 11,607 3,891 Deferred income taxes 1,487 1,487 Losses in excess of investments in and advances to retail sales partnership - 96 Total liabilities 13,094 5,474 Commitments and contingencies Shareholders'equity Common stock issued and outstanding 694 694 1,027,334 (April 30, 2001) and 1,027,334 (October 31, 2000) shares. Additional paid-in capital 775 775 Retained earnings 8,894 10,403 Total shareholders' equity 10,363 11,872 Total liabilities and shareholders' $ 23,457 $ 17,346 equity The accompanying notes are an integral part of these financial statements.
KIT MANUFACTURING COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
For the six months ended April 30, 2001 2000 Cash flow from operating activities: Cash received from customers $ 17,933 $ 24,948 Interest received 179 102 Cash paid to suppliers and employees (28,135) (19,758) Interest paid (74) (148) Income taxes paid (128) (3) Net cash used in operating activities (3,287) (1,797) Cash flow from investing activities: Purchase of property, plant and equipment (298) (3) Proceeds from disposals of property, plant and equipment 8 1,667 Cash from consolidation of retail sales partnership 94 - Net cash provide by investing activities 99 1,369 Cash flow from financing activities: Proceeds from lines-of-credit borrowings 9,340 9,123 Principal payments on lines-of-credit (6,390) borrowings (6,421) Purchase of treasury stock - (176) Net cash provided by financing activities 2,919 2,557 Net increase in cash 1,221 639 Cash at beginning of period 4,489 4,731 Cash at end of period $ 5,710 $ 5,370 Reconciliation of net (loss) income to net cash used in operating activities: Net (loss) income $ $ 1,042 (1,509) Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 304 186 Gain on sale of property, plant and equipment (1,455) Equity in loss of retail sales partnership 129 Changes in operating assets and liabilities: Accounts receivable 530 (496) Inventories (1,742) (664) Prepaids and other assets (857) (456) Accounts payable and accruals 2,051 (1,699) Accrued income taxes 579 (1,027) Net cash used in operating activities $ $(3,287) (1,797) The accompanying notes are an integral part of these financial statements.
6 KIT MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Note A The provision or benefit for income taxes is calculated using the Company's estimated annual effective tax rate. Note B Per share amounts are based on the weighted average number of common shares outstanding. Options have not been included in the computations because their effect would not be dilutive. Note C In the opinion of management, all material adjustments which are necessary for a fair statement of financial position, results of operations and cash flows have been included in these financial statements. Note D The results of the period are not necessarily indicative of annual results due to seasonality of the business. Note E Financial information contained herein is unaudited. Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. Note F The Company is contingently liable to various financial institutions on repurchase agreements in connection with wholesale inventory financing. In general, inventory is repurchased by the Company upon default by a dealer with a financing institution and then resold through normal distribution channels. In addition, the Company is contingently liable to financial institutions for letters of credit which were established to satisfy the self- insured workers' compensation regulations of the states in which the Company conducted manufacturing operations. Management does not expect that losses, if any, from the contingencies described above will be of material importance to the financial condition or earnings of the Company. Note G At October 31, 2000 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, was reflected as a noncurrent liability totaling $96,000. Additionally, the retail sales partnership has reflected all advances from the Company as a component of current liabilities equal to $625,000 at October 31, 2000. In fiscal 2001, the Company assumed significantly all responsibility in connection with the daily operations of the retail sales partnership. Although the original partnership agreement governing the relationship between the Company and the minority interest holder provided participating rights to the minority holder and thus precluded the Company from consolidating the retail sales partnership, the partnership's recurring losses 8 KIT MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) and need for continued funding demanded the Company's attention. The retail sales partnership commenced operations in fiscal 1998 and has continued to perform substantially below expectations with losses trending significantly higher in each successive year. While lender's tightened credit policies and industry-wide excess inventory levels are partially responsible for the partnership's poor performance, the Company's management believes such factors are secondary compared to the minority interest holder's management of the partnership's operations in accordance with the original agreement. The partnership agreement specifically delegates day-to-day operating responsibility and decision making authority to the minority interest holder and it is management's contention that such responsibilities have not been adequately fulfilled, as evidenced by the poor operating results previously mentioned. As a result, in fiscal 2001, the Company continued to fund 100% of the partnership's working capital needs and also became substantially involved in the decision making process and daily operations of the partnership. Due to such recent events, the Company is in the process of negotiating the purchase of the minority interest holder's 30% interest in the partnership and has elected to consolidate its investment effective the beginning of fiscal 2001. In prior years, the Company accounted for this investment under the equity method of accounting. However, because the cumulative losses of the partnership exceeded the minority interest holder's investment in fiscal 1999, the Company began recording 100% of the equity in losses from this point forward. The condensed unaudited financial information of the partnership is as follows: Three months ended Six months ended
April 30, April 30, (Dollars in Thousands) 2001 2000 2001 2000 Condensed Statement of Income Information: Sales $755 $1,815 $1,911 $2,890 Cost of sales (606) (1,595) (1,493) (2,539) Selling, general and administrative expenses (221) (205) (474) (433) Interest expense (67) (52) (135) (102) Net loss (139) (37) $(191) $(184) April 30, October 31, 2001 2000 Condensed Balance Sheet Information: Current assets $2,504 $2,602 Noncurrent assets 360 389 $2,864 $2,991 Current liabilities $3,776 $3,681 Noncurrent liabilities - 31 Members' deficit (912) (721) $2,864 $2,991
9 KIT MANUFACTURING COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) Note H The Company evaluates the performance of its operating segments based on operating income or losses. Each segment records direct expenses related and allocable to its employees. The Company does not allocate income taxes, interest income, interest expense or any gains or losses on the sale of property, plant and equipment 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 receivables for any period presented. Three Months Ended Six Months Ended (Dollars in Thousands) April 30, April 30,
2001 2000 2001 2000 Sales Manufactured homes $ 6,141 $6,224 $ 9,167 $12,295 Recreational vehicles 6,013 8,684 9,740 13,579 Total sales $ 12,154 $14,908 $ 18,907 $25,874 Income/(loss) before income taxes Operating (loss) income Manufactured homes $ (295) $ 129 $ (939) $ 461 Recreational vehicles (814) (97) (1,625) (194) Total operating (loss) income (1,109) 32 (2,564) 267 Interest income 109 47 179 102 Interest expense (79) (58) (148) (75) Gain on sale of property, plant and equipment - 1,455 - 1,455 (Loss) income before income taxes $(1,079) 1,476 $(2,533) $1,749 ===== ===== ===== =====
Note I 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, 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. 10 KIT MANUFACTURING COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2001, the Company assumed significantly all responsibility in connection with the daily operations of the retail sales partnership. Although the original partnership agreement governing the relationship between the Company and the minority interest holder provided participating rights to the minority holder and thus precluded the Company from consolidating the retail sales partnership, the partnership's recurring losses and need for continued funding demanded the Company's attention. The retail sales partnership commenced operations in fiscal 1998 and has continued to perform substantially below expectations with losses trending significantly higher in each successive year. While lender's tightened credit policies and industry-wide excess inventory levels are partially responsible for the partnership's poor performance, the Company's management believes such factors are secondary compared to the minority interest holder's management of the partnership's operations in accordance with the original agreement. The partnership agreement specifically delegates day-to-day operating responsibility and decision making authority to the minority interest holder and it is management's contention that such responsibilities have not been adequately fulfilled, as evidenced by the poor operating results previously mentioned. As a result, in fiscal 2001, the Company continued to fund 100% of the partnership's working capital needs and also became substantially involved in the decision making process and daily operations of the partnership. Due to such recent events, the Company is in the process of negotiating the purchase of the minority interest holder's 30% interest in the partnership and has elected to consolidate its investment effective the beginning of fiscal 2001. In prior years, the Company accounted for this investment under the equity method of accounting. However, because the cumulative losses of the partnership exceeded the minority interest holder's investment in fiscal 1999, the Company began recording 100% of the equity in losses from this point forward. The condensed statement of operations for the retail sales partnership for the three months and six months ended April 30, 2000, and 2001 is shown in note G. The condensed balance sheet for the retail sales partnership as of April 30, 2001 and October 31, 2000 is also shown in note G. FINANCIAL CONDITION APRIL 30, 2001 COMPARED TO OCTOBER 31, 2000 Since October 31, 2000, the Company has borrowed on its line of credit to maintain its inventory levels to provide for anticipated sales and to pay down certain current liabilities. Although the Company's cash and cash investments ($1,221,000), accounts receivable ($390,000) and inventory ($2,928,000) have increased since October 31, 2000, working capital has decreased $3,132,000. This decrease in working capital is primarily due to the increase in the line of credit ($3,238,000), increase in accounts payable ($1,792,000), and the inclusion of the retail flooring liability ($2,129,000) as a result of the consolidation of the retail sales partnership, partially offset by the higher asset balances mentioned above. It should also be noted that such increases in the previously mentioned accounts, most notably inventory, and accounts payable, are also partially a result of the consolidation of the retail sales partnership in fiscal 2001. The current ratio decreased to 1.4:1 at April 30, 2001 compared to 2.9:1 at October 31, 2000. The current ratio is the result of dividing current assets by current liabilities. It is a financial measure that indicates the ability of a company to pay its current obligations with its current assets. The Company's liquidity position as reflected in the current ratio 11 KIT MANUFACTURING COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations described above, capital resources, working capital, and $1,109,000 unused line of credit, are considered to be adequate to provide for near term cash needs. RESULTS OF OPERATIONS QUARTER ENDED APRIL 30, 2001 COMPARED TO QUARTER ENDED APRIL 30, 2000 The nature of the Company's business is seasonal. Historically, sales in the second and third quarters have been higher than sales achieved in the other fiscal quarters of the year. Thus, expenses and, to a greater extent, operating income vary by quarter. Caution, therefore, is advised when appraising results for a period shorter than a full year, or when comparing any period other than to the same period of the previous year. Total sales for the quarter ended April 30, 2001 were $12,154,000, an 18% decrease from sales of $14,907,000 for the same quarter of the prior year. The decrease consisted of a 1% decrease in manufactured home sales and a 31% decrease in recreational vehicle (RV) sales. Sales decreases in the RV division have been significantly impacted by higher fuel costs, lower consumer confidence, and tightened credit policies. Sales of manufactured homes have been impacted unfavorably by lender's tightened credit standards as well as industry-wide excess finished goods inventory levels. These decreases were partially offset by $755,000 in sales during the three months ended April 30, 2001 as a result of the consolidation of the retail sales partnership during this period. Cost of sales for the quarter ended April 30, 2001 was $11,583,000, a 15% decrease from cost of sales of $13,684,000 for the same quarter of the prior year. This decrease is due principally to the reduction of sales attributed to the recreational vehicle division and to a lesser degree, the manufactured homes division. These decreases were partially offset by $606,000 in cost of sales recorded during the three months ended April 30, 2001 in connection with the consolidation of the retail sales partnership during this period. Cost of sales as a percent of sales increased 3% from 92% in the second quarter of fiscal 2000 to 95% in the second quarter of fiscal 2001. Although product margins for both divisions are marginally lower to those of the same period in 2000, the disproportional reduction in gross profit compared to sales is due principally to the under absorption of fixed overhead costs brought about by lower production and sales volumes. Selling, general and administrative expenses for the quarter ended April 30, 2001 increased to 14% of sales in comparison to 8% of sales for the same quarter of the prior year. The selling, general and administrative 12 KIT MANUFACTURING COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations dollars increased 44%, or $514,000, from $1,166,000 for the quarter ended April 30, 2000 to $1,680,000 for the quarter ended April 30, 2001. This increase is due to increased selling and marketing costs as the Company attempts to maintain its market share as well as the inclusion of $221,000 of expenses from the consolidation of the retail sales partnership during the three months ended April 30, 2001 Equity in loss of retail sales partnership decreased from $26,000 for the quarter ended April 30, 2000 to $0 for the quarter ended April 30, 2001. This decrease is due to the consolidation of the retail sales partnership in fiscal 2001, which had previously been accounted for under the equity method of accounting in the prior period. Interest income increased $62,000, or 132%, from $47,000 for the quarter ended April 30, 2000 to $109,000 for the quarter ended April 30, 2001. The increase was due primarily to an increase in average balances of invested funds compared to the same quarter of the prior year. Interest expense increased $21,000, or 36%, from $58,000 for the quarter ended April 30, 2000 to $79,000 for the quarter ended April 30, 2001. This increase was primarily the result of an increase in average short-term borrowings due principally to the inclusion of such borrowings from the consolidation of the retail sales partnership in 2001. 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. The net loss for the three months ended April 30, 2001 was $643,000, or $0.63 per share, compared to net income of $865,000, or $0.80 per share, for the same quarter of the prior year. RESULTS OF OPERATIONS SIX MONTHS ENDED APRIL 30, 2001 COMPARED TO SIX MONTHS ENDED APRIL 30, 2000 Total sales for the six months ended April 30, 2001 were $18,907,000, a 27% decrease from sales of $25,874,000 for the same period of the prior year. The decrease consisted of a 25% decrease in manufactured homes sales and a 28% decrease in recreational vehicle (RV) sales. Sales decreases in the RV division have been significantly impacted by 13 KIT MANUFACTURING COMPANY Management's Discussion and Analysis of Financial Condition and Results of Operations higher fuel costs, lower consumer confidence, and tightened credit policies. Sales of manufactured homes have been impacted unfavorably by lender's tightened credit standards as well as industry-wide excess finished goods inventory levels. These decreases were partially offset by $1,911,000 in sales during the six months ended April 30, 2001 as a result of the consolidation of the retail sales partnership during this period. Cost of sales for the six months ended April 30, 2001 was $18,642,000, a 20% decrease from cost of sales of $23,302,000 for the same six months of the prior year. This decrease is due primarily due to the decrease in sales, company-wide, in both the recreational vehicle division and the manufactured homes division. These decreases were partially offset by $1,493,000 in cost of sales recorded during the six months ended April 30, 2001 in connection with the consolidation of the retail sales partnership during this period. Cost of sales as a percent of sales increased 9% from 90% for the 6 months ended April 30, 2000 to 99% for the 6 months ended April 30, 2001. Although product margins for both divisions are marginally lower to those of the same period in 2000, the disproportional reduction in gross profit compared to sales is due principally to the under absorption of fixed overhead costs brought about by lower production and sales volumes. Selling, general and administrative expenses for the six months ended April 30, 2001 increased to 15% of sales in comparison to 8% of sales for the same six months of the prior year. The selling, general and administrative dollars increased 30%, or $653,000, from $2,176,000 for the six months ended April 30, 2000 to $2,829,000 for the six months ended April 30, 2001. This increase is due to increased selling and marketing costs as the Company attempts to maintain its market share as well as the inclusion of $474,000 of expenses from the consolidation of the retail sales partnership during the six months ended April 30, 2001. Equity in loss of retail sales partnership decreased from $129,000 for the six months ended April 30, 2000 to $0 for the six months ended April 30, 2001. This decrease is due to the consolidation of the retail sales partnership in fiscal 2001, which had previously been accounted for under the equity method of accounting in the prior period. Interest income increased $77,000, or 75%, from $102,000 for the six months ended April 30, 2000 to $179,000 for the six months ended April 30, 2001. The increase was due primarily to an increase in average balances of invested funds compared to the same six months of the prior year. Interest expense increased $73,000, or 97%, from $75,000 for the six months ended April 30, 2000 to $148,000 for the six months ended April 30, 2001. This increase was primarily the result of an increase in average short-term borrowings due principally to the inclusion of such borrowings from the consolidation of the retail sales partnership in 2001. 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. The net loss for the six months ended April 30, 2001 was $1,509,000, or $1.47 per share, compared to net income of $1,042,000, or $0.96 per share, for the same six months of the prior year. 14 PART II OTHER INFORMATION Item 6 (b). Form 8-K was not required to be filed during the quarter ended April 30, 2001. 15 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KIT MANUFACTURING COMPANY (Registrant) DATE 6/14/01 /s/ Dan Pocapalia Dan Pocapalia Chairman of the Board, Chief Executive Officer (Principal Executive Officer) DATE 6/14/01 /s/ Bruce K. Skinner Bruce K. Skinner Vice President and Treasurer (Principal Financial and Accounting Officer) 16