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 July 31, 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 July 31, 2001.
1 of 17 Pages
PART I
FINANCIAL INFORMATION
2
KIT MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
2001 2000 2001 2000
Sales $11,449 $13,559 $30,356 $39,433
Costs and expenses:
Cost of sales 10,870 12,585 29,512 35,887
Selling, general and
administrative expenses 1,568 1,391 4,397 3,567
Equity in loss of retail
sales partnership - 135 - 264
Operating loss (989) (552) (3,553) (285)
Other income (expense)
Interest income 62 75 241 177
Interest expense (62) (53) (210) (128)
Gain on sale of property, plant
and equipment - 621 - 2,076
(Loss) income before income taxes (989) 91 (3,522) 1,840
(Benefit) provision for income
taxes
(Note A) (375) 38 (1,399) 745
Net (loss) income $(614) $ 53 $(2,123) $ 1,095
Net (loss) income per share-
basic and diluted $(0.60) $0.05 $(2.07) $ 1.02
(Note B)
Weighted-average shares 1,027,334 1,047,261 1,027,334 1,070,710
outstanding-
basic and diluted
(Note B)
Dividends per share $ - $ - $ - $ -
<FN>
<F1>The accompanying notes are an integral part of these
consolidated financial statements. </FN>
KIT MANUFACTURING COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
July 31, Oct. 31,
2001 2000
ASSETS
Cash and cash investments $ 6,147 $ 4,489
Accounts receivable, net 3,386 2,787
Inventories:
Raw materials 2,572 1,664
Work in process 652 597
Finished goods 2,858 537
Total inventories 6,082 2,798
Prepaids and other assets 353 324
Deferred income taxes 1,025 1,025
Total current assets 16,993 11,423
Property, plant and equipment, net 5,574 5,637
Other assets 1,863 286
Total assets $ 24,430 $ 17,346
LIABILITIES AND SHAREHOLDERS' EQUITY
Lines of credit $ 4,999 $ -
Accounts payable 2,386 818
Retail flooring liability 1,768 -
Accrued payroll and related items 1,052 903
Accrued marketing programs 964 471
Accrued expenses 2,025 1,699
Total current liabilities 13,194 3,891
Deferred income taxes 1,487 1,487
Losses in excess of investments in and
advances to retail sales partnership - 96
Total liabilities 14,681 5,474
Commitments and contingencies
Shareholders'equity
Common stock issued and outstanding, 694 694
1,027,334 shares at July 31, 2001 and
October 31, 2000
Additional paid-in capital 775 775
Retained earnings 8,280 10,403
Total shareholders' equity 9,749 11,872
Total liabilities and shareholders' $ 24,430 $ 17,346
equity
<FN>
<F1>The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
KIT MANUFACTURING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended July 31,
2001 2000
Cash flow from operating activities:
Cash received from customers $ 31,733 $ 38,132
Interest received 241 177
Cash paid to suppliers and employees (40,607)
(34,870)
Interest paid (128)
(210)
Income taxes paid (127)
(39)
Net cash used in operating activities (2,553)
(3,145)
Cash flow from investing activities:
Purchase of property, plant and equipment (34) (389)
Proceeds from disposals of property, plant
and equipment 63 2,921
Advances to retail sales partnership - (25)
Cash from consolidation of retail sales
partnership 94 -
Net cash provided by investing activities 123 2,507
Cash flow from financing activities:
Proceeds from short-term borrowings 14,866 12,855
Principal payments on short-term borrowings 10,186) (10,263)
Purchase of treasury stock - (499)
Net cash provided by financing activities 4,680 2,093
Net increase in cash 1,658 2,047
Cash at beginning of period 4,489 4,731
Cash at end of period $ 6,147 $ 6,778
Reconciliation of net (loss) income to net cash
used in operating activities:
Net (loss) income $ (2,123) $ 1,095
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 423 311
Gain on sale of property, plant and equipment (2,076)
Equity in loss of retail sales partnership 264
Changes in operating assets and liabilities:
Accounts receivable (705) 824
Inventories (1,020) (1,015)
Prepaids and other assets (570) (422)
Accounts payable and accruals 1,877 (2,152)
Accrued income taxes (1,027) 618
Net cash used in operating activities $ (3,145) $(2,553)
<FN>
<F1>The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
6
KIT MANUFACTURING COMPANY
NOTES TO CONSOLIDATED 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
7
KIT MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 lenders'
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, in June
2001, purchased the minority interest holder's 30% interest in the
partnership for $20,000 in cash and the assumption of $40,000 in
debt and has consolidated 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 that point
forward.
The condensed unaudited financial information of the partnership
is as follows:
Three months ended Nine months
ended
July 31, July 31,
(Dollars in Thousands) 2001 2000 2001 2000
Condensed Statements
of Operations Information:
Sales $1,067 $466 $2,978 $3,356
Cost of sales (783) (445) (2,341) (2,984)
Selling, general and
administrative expenses (334) (152) (743) (585)
Interest expense (65) (62) (200) (164)
Net loss $(115) $(193) $(306) $(377)
KIT MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
July 31, October 31,
2001 2000
Condensed Balance Sheet Information:
Current assets $2,311 $2,602
Noncurrent assets 356 389
$2,667 $2,991
Current liabilities $3,694 $3,681
Noncurrent liabilities - 31
Members' deficit (1,027) (721)
$2,667 $2,991
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 Nine Months Ended
(Dollars in Thousands) July 31, July 31,
2001 2000 2001 2000
Sales
Manufactured homes $ 5,650 $5,385 $14,817 $17,679
Recreational vehicles 5,799 8,174 15,539 21,754
Total sales $ 11,449 $13,559 $30,356 $39,433
Income/(loss) before income taxes
Operating (loss) income
Manufactured homes $ (469) $(268) $(1,407) $ 194
Recreational vehicles (520) (284) (2,146) (479)
Total operating loss (989) (552) (3,553) (285)
Interest income 62 75 241 177
Interest expense (62) (53) (210) (128)
Gain on sale of property, plant
and equipment - 621 - 2,076
(Loss) income before income taxes $(989) $ 91 $(3,522) $1,840
===== ===== ===== =====
9
KIT MANUFACTURING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Note J In June 2001, the Company amended its line of credit with
a commercial bank which allowed the Company to borrow up to
$6,000,000 at the prime rate of interest (6.75 percent at July 31,
2001) and is secured by the Company's accounts receivable,
inventory and cash. This line of credit expires on June 30, 2002.
The agreement requires that the Company pay unused commitment fees
equal to one quarter of one percent (0.25%) per annum on the
average daily unused amount of the line of credit and also
contains certain financial covenants requiring a minimum tangible
net worth and current ratio.
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 lenders' 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, in June 2001, purchased the minority interest
holder's 30% interest in the partnership for $20,000 in cash and
the assumption of $40,000 in debt and has consolidated 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 that point forward.
The condensed statements of operations information for the retail
sales partnership for the three months and nine months ended July
31, 2001, and 2000 is disclosed in note G. The condensed balance
sheet information for the retail sales partnership as of July 31,
2001 and October 31, 2000 is also disclosed in note G.
FINANCIAL CONDITION JULY 31, 2001 COMPARED TO OCTOBER 31, 2000
Since October 31, 2000, the Company has borrowed on its line of
credit
11
KIT MANUFACTURING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
to maintain its inventory levels to provide for anticipated sales
and to
pay down certain current liabilities. Although there have been
increases in the Company's cash and cash investments ($1,658,000),
accounts receivable ($599,000) and inventory ($3,284,000) since
October 31, 2000, working capital has decreased by $3,733,000.
This decrease in working capital is primarily due to offsetting
increases in the lines of credit ($4,999,000), accounts payable
($1,568,000), various accrued expenses ($968,000) and the
inclusion of the retail flooring liability ($1,768,000) as a
result of the consolidation of the retail sales partnership (Note
G). 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
1.3:1 at July 31, 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
described above, working capital, $1,001,000 available under the
lines of credit, and $139,000 available under the retail flooring
liability are considered to be adequate to provide for near term
cash needs. In June 2001, the Company amended its line of credit
with a commercial bank which allowed the Company to borrow up to
$6,000,000 at the prime rate of interest (6.75 percent at July 31,
2001) and is secured by the Company's accounts receivable,
inventory and cash. This line of credit expires on June 30, 2002.
The agreement requires that the Company pay unused commitment fees
equal to one quarter of one percent (0.25%) per annum on the
average daily unused amount of the line of credit and also
contains certain financial covenants requiring a minimum tangible
net worth and current ratio.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JULY 31, 2001 COMPARED
TO QUARTER ENDED JULY 31, 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.
12
KIT MANUFACTURING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Total sales for the quarter ended July 31, 2001 were $11,449,000,
a 16% decrease from sales of $13,559,000 for the same quarter of
the prior year. The decrease consisted of a 5% increase in
manufactured home sales and a 29% 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. Although sales of
manufactured homes have increased slightly during the current
quarter, they have been somewhat impacted unfavorably by lenders'
tightened credit standards as well as industry-wide excess
finished goods inventory levels. These results were partially
offset by $1,067,000 in sales during the three months ended July
31, 2001 as a result of the consolidation of the retail sales
partnership during this period.
Cost of sales for the quarter ended July 31, 2001 was $10,870,000,
a 14% decrease from cost of sales of $12,585,000 for the same
quarter of the prior year. This decrease is due principally to
the reduction of sales attributed to the recreational vehicle
division. This decrease was partially offset by $783,000 in cost
of sales recorded during the three months ended July 31, 2001 in
connection with the consolidation of the retail sales partnership
during this period. Cost of sales as a percent of sales increased
2% from 93% in the third quarter of fiscal 2000 to 95% in the
third 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
July 31, 2001 increased to 14% of sales in comparison to 10% of
sales for the same quarter of the prior year. The selling, general
and administrative dollars increased 13%, or $177,000, from
$1,391,000 for the quarter ended July 31, 2000 to $1,568,000 for
the quarter ended July 31, 2001.
This increase is due to the inclusion of $334,000 of expenses from
the consolidation of the retail sales partnership during the three
months ended July 31, 2001 offset by a reduction of officer's
salaries and administrative expenses during the quarter due to a
reduction of head count compared to the quarter ended July 31,
2000.
Equity in loss of retail sales partnership decreased from $135,000
for the quarter ended July 31, 2000 to $0 for the quarter ended
July 31, 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.
13
KIT MANUFACTURING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Interest income decreased $13,000, or 17%, from $75,000 for the
quarter ended July 31, 2000 to $62,000 for the quarter ended July
31, 2001.
The decrease was due primarily to a decrease in average balances
of invested funds compared to the same quarter of the prior year.
Interest expense increased $9,000, or 17%, from $53,000 for the
quarter ended July 31, 2000 to $62,000 for the quarter ended July
31, 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 fiscal 2001.
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 net loss for the three months ended July 31, 2001 was
$614,000, or $0.60 per share, compared to net income of $53,000,
or $0.05 per share, for the same quarter of the prior year.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 2001
COMPARED TO NINE MONTHS ENDED JULY 31, 2000
Total sales for the nine months ended July 31, 2001 were
$30,356,000, a 23% decrease from sales of $39,433,000 for the same
period of the prior
year. The decrease consisted of a 16% decrease in manufactured
homes sales and a 29% 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 lenders' tightened credit standards as
well as industry-wide excess finished goods inventory levels.
These decreases were partially offset by $2,978,000 in sales
during the nine months ended July 31, 2001 as a result of the
consolidation of the retail sales partnership during this period.
Cost of sales for the nine months ended July 31, 2001 was
$29,512,000, a 18% decrease from cost of sales of $35,887,000 for
the same nine months of the prior year. This decrease is due
primarily to the decrease in sales, company-wide, in both the
recreational vehicle division and the manufactured homes division.
These decreases were partially offset by $2,341,000 in cost of
sales recorded during the nine months ended July 31, 2001 in
connection with the consolidation of the retail sales partnership
during this period. Cost of sales as a percent of sales
14
KIT MANUFACTURING COMPANY
Management's Discussion and Analysis of Financial Condition
and Results of Operations
increased 6% from 91% for the 9 months ended July 31, 2000 to 97%
for
the 9 months ended July 31, 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 nine months
ended July 31, 2001 increased to 15% of sales in comparison to 9%
of sales for the same nine months of the prior year. The selling,
general and administrative dollars increased 23%, or $830,000,
from $3,567,000 for the nine months ended July 31, 2000 to
$4,397,000 for the nine months ended July 31, 2001. This increase
is due primarily to the inclusion of $743,000 of expenses from the
consolidation of the retail sales partnership during the nine
months ended July 31, 2001.
Equity in loss of retail sales partnership decreased from $264,000
for the nine months ended July 31, 2000 to $0 for the nine months
ended July 31, 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 $64,000, or 36%, from $177,000 for the
nine months ended July 31, 2000 to $241,000 for the nine months
ended July 31, 2001. The increase was due primarily to an increase
in average balances of invested funds compared to the same nine
months of the prior year. Interest expense increased $82,000, or
64%, from $128,000 for the nine months ended July 31, 2000 to
$210,000 for the nine months ended July 31, 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. 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. Therefore, the total
gain resulting from these two sales is $2,076,000.
The net loss for the nine months ended July 31, 2001 was
$2,123,000, or $2.07 per share, compared to net income of
$1,095,000, or $1.02 per share, for the same nine months of the
prior year.
15
PART II
OTHER INFORMATION
Item 6 (b).
Form 8-K was not required to be filed during the quarter ended
July 31, 2001.
16
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 9/14/01 /s/ Dan Pocapalia
Dan Pocapalia
Chairman of the Board,
Chief Executive Officer,
(Principal Executive Officer)
DATE 9/14/01 /s/ Bruce K. Skinner
Bruce K. Skinner
Vice President and Treasurer
(Principal Financial and Accounting
Officer)
17