1
Securities and Exchange Commission
Washington, D.C. 20549
Form 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended Commission File Number
November 30, 1996 1-9542
TECHKNITS, INC.
(Exact Name of registrant specified in its charter)
New York 11-2343548
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
10 Grand Avenue
Brooklyn, New York 11205
(Address of Principal Executive Office including zip code)
(718) 875-3299
(Registrant's telephone number including area code)
Indicate by check mark whether the Company (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
requirement for the past 90 days.
Yes x. No .
--- ---
Common Stock, Par Value $.003, outstanding at November 30, 1996
1,720,772 Shares
Preferred Stock, Par Value, $.003, outstanding at November 30, 1996
NONE
2
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
November 30, February 29,
1996 1996
---- ----
Current Assets
Cash $ 861,113 $ 133,644
Certificate of deposit (Note 4) 2,660,008 2,570,648
Accounts receivable, (net of allowance for
doubtful accounts of $39,388 and $29,388 at
November 30, 1996 and February 29, 1996,
respectively) (Notes 1 & 4) 1,786,820 1,174,175
Inventories (Notes 1, 2 & 4) 5,445,465 4,833,332
Prepaid expenses and other current assets 345,404 228,045
Loans receivable - officer (Note 8) - 0 - 95,863
------------ ------------
Total Current Assets $ 11,098,810 $ 9,035,707
Property and Equipment - Net (Notes 3 & 4) 3,604,189 3,946,975
Other Assets 231,460 215,001
------------ ------------
TOTAL ASSETS $ 14,934,459 $ 13,197,683
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable bank (Note 4) $ 4,000,000 $ 2,235,000
Accounts payable and accrued expenses 1,939,042 1,533,031
Current maturities of long-term debt and
capital leases (Note 5) 116,858 116,153
Income taxes payable 259,564 311,341
------------ ------------
Total Current Liabilities $ 6,315,464 $ 4,195,525
Long-term debt and capital leases (Note 5) 457,137 539,037
Deferred income taxes 860,441 860,441
------------ ------------
TOTAL LIABILITIES $ 7,633,042 $ 5,595,003
------------ ------------
Commitments and Contingencies (Notes 6 and 7)
Shareholders' Equity (Note 9)
Preferred stock, $.003 par value 2,500,000
shares authorized, none issued
Common stock, $.003 par value 10,000,000
shares authorized, 1,900,000 shares issued
and outstanding $ 5,700 $ 5,700
Additional paid-in capital 4,648,729 4,648,729
Retained earnings 2,955,954 3,257,217
Less: Treasury stock, 179,562 shares of common
stock - at November 30, 1996 and February 29, 1996,
at cost (308,966) (308,966)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,301,417 7,602,680
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 14,934,459 $ 13,197,683
============ ============
The accompanying notes are an integral part of this financial statement.
3
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS & RETAINED EARNINGS
FOR THE NINE MONTHS ENDED
November 30,
1996 1995
---- ----
Sales $ 9,402,551 $ 11,838,355
Cost of goods sold 7,781,102 10,051,960
----------- ------------
Gross Profit 1,621,449 1,786,395
----------- ------------
Operating Expenses
Selling, general & administrative expenses 1,389,990 1,378,552
----------- ------------
Income from operations 231,459 407,843
----------- ------------
Other Income (Expenses)
Interest income 90,841 106,320
Interest expense (391,483) (413,776)
----------- ------------
Total (300,642) (307,456)
----------- ------------
Income (loss) before provision for income taxes & flood loss (69,183) 100,387
Provision for income taxes - 0 - 34,000
Flood loss (Note 2) (232,080) - 0 -
----------- ------------
Net Income (Loss) (301,263) $ 66,387
RETAINED EARNINGS - BEGINNING OF PERIOD 3,257,217 3,227,317
Less: Cash dividend (Note 10) - 0 - 54,307
----------- ------------
RETAINED EARNINGS - END OF PERIOD $ 2,955,954 $ 3,239,397
=========== ============
Net Income (Loss) Per Share $ (.18) $ .04
=========== ============
Average number of shares of common
stock outstanding used in computing
earnings (loss) per share 1,720,772 1,741,504
=========== ============
The accompanying notes are an integral part of this financial statement.
4
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS & RETAINED EARNINGS
FOR THE THREE MONTHS ENDED
November 30,
1996 1995
---- ----
Sales $ 3,192,351 $ 5,346,738
Cost of goods sold 2,723,953 4,679,162
----------- -----------
Gross Profit 468,398 667,576
----------- -----------
Operating Expenses
Selling, general & administrative expenses 467,872 503,850
----------- -----------
Income from operations 526 163,726
----------- -----------
Other Income (Expenses)
Interest income 19,540 29,876
Interest expense (120,337) (160,935)
----------- -----------
Total (100,797) (131,059)
----------- -----------
Income (loss) before provision for income taxes (100,271) 32,667
Provision for income taxes - 0 - 11,000
----------- -----------
Net Income (Loss) (100,271) $ 21,667
RETAINED EARNINGS - BEGINNING OF PERIOD 3,056,225 3,272,037
Less: Cash dividend (Note 10) - 0 - (54,307)
----------- -----------
RETAINED EARNINGS - END OF PERIOD $ 2,955,954 $ 3,239,397
=========== ===========
Net Income (Loss) Per Share $ (.06) $ .01
=========== ===========
Average number of shares of common
stock outstanding used in computing
earnings (loss) per share 1,720,772 1,720,772
=========== ===========
The accompanying notes are an integral part of this financial statement.
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TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
November 30,
1996 1995
---- ----
Cash Flows From Operating Activities
Net Income (loss) $ (301,263) $ 66,387
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 415,500 444,300
Decrease (Increase) In Assets:
Accounts receivable (612,645) (2,725,268)
Inventories (612,133) 216,047
Prepaid expenses and other current assets (117,359) 63,774
Increase (Decrease) In Liabilities:
Accounts payable & accrued expenses 354,233 907,280
----------- -----------
Net Cash Used in Operating Activities (873,667) (1,027,480)
----------- -----------
Cash Flows From Investing Activities
Acquisition of fixed assets (70,713) (209,905)
Other assets (18,459) 24,188
----------- -----------
Net Cash Used in Investing Activities (89,172) (185,717)
----------- -----------
Cash Flows From Financing Activities
Notes Payable Bank 1,765,000 1,450,000
Payments of long-term debt (81,195) (100,574)
Loans receivable officer 95,863 135,281
Purchase of treasury stock - 0 - (84,726)
Dividend distribution - 0 - (54,307)
----------- -----------
Net Cash Provided By Financing Activities 1,779,668 1,345,674
----------- -----------
NET INCREASE IN CASH
AND CERTIFICATE OF DEPOSIT 816,829 132,477
CASH AND CERTIFICATE OF DEPOSIT,
BEGINNING OF PERIOD 2,704,292 2,552,480
----------- -----------
CASH AND CERTIFICATE OF DEPOSIT,
END OF PERIOD $ 3,521,121 $ 2,684,957
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Operating activities:
Cash paid during the year for:
Interest $ 407,339 $ 343,201
=========== ===========
Income taxes $ 85,172 $ 76,372
=========== ===========
The accompanying notes are an integral part of this financial statement.
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TECHKNITS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
The Company is a vertically integrated manufacturer of knitted sweaters,
which it markets throughout the U.S.A. on a pre-order basis to multi-unit
stores and to wholesalers that sell under their own private labels.
Concentration of Credit Risk - The Company maintains credit insurance on
most of its accounts. For those accounts which are not insured the Company
monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Inventories - Inventories consist of finished garments, work in progress,
yarns, fabrics and supplies. Inventories are stated at the lower of cost
or market, using a first-in first-out (FIFO) basis.
Property and Equipment - Property and equipment is stated at cost.
Depreciation and amortization are computed on the straight-line method
over estimated useful lives:
Leasehold Improvements - Life of the related lease, which is not in
excess of the estimated useful life.
Furniture, Fixtures and Office Equipment - 6 to 10 years.
Manufacturing Equipment - 12 years.
Revenue Recognition - The Company recognizes revenue at the time goods are
shipped and title to goods sold passes to the customer.
Principles of Consolidation - The consolidated financial statements
include the results of operations of the Company and its subsidiary. All
intercompany transactions and balances have been eliminated in
consolidation.
Earnings Per Share - Earnings (loss) per share is calculated by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding during the year.
Income Taxes - Income taxes are provided for all transactions, regardless
of the year the transactions are reported for income tax purposes. The
differences in the timing of recognition of income and expenses for income
tax purposes are reflected as deferred income taxes.
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TECHKNITS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Estimates - The preparation of financial statements in conformity 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 the revenues and
expenses during the reported period. Actual results could differ from those
estimates.
NOTE 2 - FLOOD LOSS
On March 11, 1996, the Company sustained inventory losses of $877,000 due to
a flood. Net insurance reimbursement amounted to $644,920.
NOTE 3. - PROPERTY AND EQUIPMENT
Balances of major classes of assets and allowances for depreciation and
amortization are as follows:
November 30, February 29,
1996 1996
---- ----
Factory machinery and equipment $7,174,723 $7,153,109
Leasehold improvements 1,182,705 1,138,100
Furniture and fixtures 158,529 158,529
Computers 130,579 126,085
--------- ---------
Property and equipment - at cost 8,646,536 8,575,823
Less accumulated depreciation 5,042,347 4,628,848
--------- ---------
Property and equipment - net $3,604,189 $3,946,975
========= =========
Depreciation expense for the nine months ended November 30, 1996 and 1995
were $413,500 and $442,500, respectively. Depreciation expense for the three
months ended November 30, 1996 and 1995 were $138,000 and $197,500,
respectively.
NOTE 4. - LOAN PAYABLE BANK
The Company has a $6,000,000 line-of-credit agreement (the "Agreement") with
a bank which provides for funds to be advanced based on a specific formula.
At November 30, 1996, the Company had outstanding borrowings under this
agreement of $4,000,000. Such loan bears interest at the rate of 3/4 percent
above the bank's prime rate (prime rate being 8 1/4 percent at November 30,
1996) and is collateralized by a certificate of deposit and related interest,
accounts receivables, work in process and finished goods, inventory and
certain machinery as well as assignment of Keyman's life insurance, and
credit insurance covering accounts receivable. The loan is also guaranteed by
the President of the Company.
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TECHKNITS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5. - LONG TERM DEBT
Long term debt for the purchase and financing of knitting machinery consists
of the following:
Monthly Principal
Annual Installments Amounts Payable At
Financial Interest (Including November February
Institution Rate Interest) 30,1996 29, 1996
----------- ---- --------- ------- --------
New York Business
Development Corp. (1) 7.5% $ 4,857 $374,197 $395,846
Various 12.25% - 15.5% 8,464 199,798 259,344
------ ------- -------
Totals $13,321 $573,995 $655,190
====== ======= =======
(1) In 1990, the Company obtained from New York Business Development
Corp. a term loan to purchase machinery, repayable at the rate of
$4,857 per month, including interest at the rate of 7.5 percent per
annum. The loan is secured by a first mortgage on real property, at
10 Grand Avenue, owned by the Company's President and a first
security interest in certain machinery. The loan is also guaranteed
by the Company's President and by 10 Grand Realty Corporation. The
loan agreement has various stipulations, which include minimum net
current assets, minimum net worth, and maximum officers'
compensation.
Annual maturities of long term debt are as follows:
Year Ending
February 28,
------------
1997 (Three Months) $ 34,958
1998 112,392
1999 112,531
2000 56,443
Thereafter 257,671
Total 573,995
Less current portion 116,858
Long term debt $457,137
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TECHKNITS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6. - COMMITMENTS AND CONTINGENCIES
The Company leases an entire building (totalling 65,000 sq. ft.) at 10 Grand
Avenue, Brooklyn, New York, with 10 Grand Realty Corp., a company owned by
the President of the Company, for manufacturing, administrative and executive
offices. This lease, which expires July 31, 1999, provides for an annual base
rent of $165,000 plus real estate taxes, assessments, insurance, utilities
and repairs.
The Company also leases space in various buildings from the President of the
Company as follows:
Annual Rent
Square Excluding Real Estate Taxes
Location Feet and Other Expenses
-------- ---- ------------------
17-21 Grand Ave. 7,500 $48,000
23-27 Grand Ave. 15,000 84,000
6 Grand Ave. 16,000 72,000
All leases expire July 31, 1999.
During the current period, the Company terminated its showroom lease in New
York City.
Future minimum lease payments for rental of manufacturing, warehousing and
administrative offices are as follows:
Minimum
Year Ending Rental
February 28 Commitment
----------- ----------
1997 (three months) $ 92,250
1998 369,000
1999 369,000
2000 153,750
Rent charged to operations, excluding related expenses, for the nine months
ended November 30, 1996, and 1995 were $283,320 and $306,173, respectively.
Rent charged to operations, excluding related expenses, for the three months
ended November 30, 1996 and 1995 were $101,934 and $90,250, respectively.
NOTE 7. - LEGAL PROCEEDINGS
In March 1993, the Company and its President were added as defendants to an
action brought by Chubb & Son, Inc., in the United States District Court for
the Eastern District of New York, for conspiracy. The basis of the claim
against the Company, in the amount of $1,200,000 plus punitive damages, is
that Chubb paid the Company an excessive sum for fire, water and smoke damage
based on inflated figures in an amount to be determined at trial. The Company
and its President have denied the allegations of the complaint and intend to
defend against the claims.
10
TECHKNITS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
As per company counsel, the claims have no merit and are vigorously being
contested.
NOTE 8. - RELATED PARTY TRANSACTIONS
At February 29, 1996, the Company was owed by its President loans of $95,863
bearing interest at a rate of 7% annually.
NOTE 9. - SHAREHOLDERS' EQUITY
In December 1990, the Company's shareholders approved a resolution of the
Board of Directors authorizing a one for three reverse stock split (of three
old shares of common stock par value $.001 per share for one new share of
common stock par value $.003 per share). Accordingly, the number of shares of
common stock outstanding was reduced to 1,900,000 shares $.003 par value per
share. At the same time, the Company amended its Certificate of Incorporation
to change the number of authorized shares from 20,000,000 shares $.001 par
value per share to 12,500,000 shares $.003 par value per share.
In connection with its public offering in July of 1987, the Company issued to
the Underwriters 100,000 five-year Underwriters' Warrants, each warrant
entitling the Underwriters to purchase a Unit for $7.50. Each Unit consists
of 2 shares of Common Stock, $.001 par value, one Class A Warrant and one
Class B Warrant each exercisable at $3.75 and $4.50 per share, respectively,
into one share of Common Stock $.001 par value. In April of 1992, the Company
extended the expiration date of such warrants to July 1, 1995. As of July 1,
1995, none of these warrants were exercised and they expired.
NOTE 10. - CASH DIVIDEND
On September 15, 1995, the Board of Directors declared a cash dividend of
$.07 per common share to shareholders of record on that date, which was paid
on October 30, 1995.
This special dividend was the result of a constructive dividend given to an
officer of the corporation as determined by an Internal Revenue Service
audit. (see consolidated statement of shareholders' equity for the year ended
February 28, 1995)
11
TECHKNITS, INC. & SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the nine months ended November 30, 1996, were $9,402,551
representing a 20% decrease over net sales of $11,838,355 for the nine
months ended November 30, 1995. The decrease is the result of discontinued
non-profitable sales. Gross profit for the nine months ended November 30,
1996 increased by 2%, and operating expenses increased by 3%.
Net sales for the three months ended November 30, 1996 were $3,192,351
representing a 40% decrease over net sales of $5,346,738 for the three
months ended November 30, 1995. Gross profit for the three months ended
November 30, 1996 increased by 2.0% and operating expenses increased by
5.0%.
Cash flow generated by the Company's operations is deemed adequate to meet
the Company's financial obligations.
12
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORT ON FORM 10-Q
1. (a) Exhibits: None
(b) No report on Form 10-Q was filed by the Company during the
months of September, October and November 1996.
ALL OTHER ITEMS ARE NOT APPLICABLE OR NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNKITS, INC.
10 Grand Avenue
Brooklyn, New York 11205
(Registrant)
By: /s/ Simon Taub
-------------------------------------
Simon Taub
Chairman of the Board and
President
By: /s/ Moshe Taub
-------------------------------------
Moshe Taub
Treasurer and
Chief Financial Officer
Date: January 14, 1997
Brooklyn, New York