Securities and Exchange Commission
Washington, D.C. 2059
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
May 31, 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 May 31, 1996
1,720,772 Shares
Preferred Stock, Par Value, $.003, outstanding at May 31, 1996
NONE
<PAGE>
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31, 1996 February 29, 1996
Current Assets
Cash $ 120,294 $ 133,644
Certificate of deposit (Note 4) 2,598,896 2,570,648
Accounts receivable, (net of allowance for
doubtful accounts of $29,388 at May 31, 1996
and February 29, 1996) (Notes 1 & 4) 549,347 1,174,175
Inventories (Notes 1, 2 & 4) 5,878,773 4,833,332
Insurance Reimbursement Receivable (Note 2) 251,342
Prepaid expenses and other current assets 377,728 228,045
Loan receivable - officer (Note 8) 66,863 95,863
Total Current Assets $ 9,843,243 $ 9,035,707
Property and Equipment - Net (Notes 3 & 4) 3,818,266 3,946,975
Other Assets 219,541 215,001
TOTAL ASSETS $13,881,050 $ 13,197,683
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable bank (Note 4) $ 3,385,000 $ 2,235,000
Accounts payable and accrued expenses 1,657,085 1,533,031
Current maturities of long-term debt and
capital leases (Note 5) 105,660 116,153
Income taxes payable 220,065 311,341
Total Current Liabilities $ 5,367,810 $ 4,195,525
Long-term debt and capital leases (Note 5) 522,490 539,037
Deferred income taxes 860,441 860,441
TOTAL LIABILITIES $ 6,750,741 $ 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 2,784,846 3,257,217
Less: Treasury stock, 179,562 shares of common
stock - at May 31, 1996 and February 29, 1996,
at cost ( 308,966) ( 308,966)
TOTAL SHAREHOLDERS' EQUITY 7,130,309 7,602,680
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $13,881,050 $ 13,197,683
The accompanying notes are an integral part of this financial statement.
<PAGE>
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED
May 31,
1996 1995
Sales $ 1,088,247 $ 1,728,476
Cost of goods sold (Note 2) 1,193,132 1,434,741
Gross Profit (Loss) ( 104,885 ) 293,735
Operating Expenses
Selling, general & administrative Expenses 318,164 331,616
Loss from operations ( 423,049 ) ( 37,881 )
Other Income (Expenses)
Interest income 29,842 38,579
Interest expense ( 156,164 ) ( 108,979 )
Total ( 126,322 ) ( 70,400 )
Loss before extraordinary credit of net
operating loss carryback ( 549,371 ) ( 108,281 )
Extraordinary credit of net operating loss
carryback 77,000 - 0 -
Net Loss ( 472,371 ) ( 108,281 )
Retained Earnings - Beginning of Period 3,257,217 3,227,317
Retained Earning - End of Period $ 2,784,846 $ 3,119,036
Loss Per Share Before Extraordinary Credit $(.32 ) $ - 0 -
Extraordinary Credit $ .05 $ - 0 -
Net Loss Per Share $(.27 ) $( .06 )
Weighted average number of shares of common
stock outstanding used in computing
earnings per share 1,720,772 1,766,976
The accompanying notes are an integral part of this financial statement.
<PAGE>
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED
May 31,
1996 1995
Cash Flows From Operating Activities
Net Loss $( 472,371 ) $( 108,281 )
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 150,864 120,600
Decrease (Increase) In Assets:
Accounts receivable 624,828 ( 724,740 )
Inventory (1,045,441 ) (1,273,909 )
Prepaid expenses and other current assets ( 149,683 ) 19,755
Insurance reimbursement receivable ( 251,342 ) - 0 -
Increase (Decrease) In Liabilities:
Accounts payable & accrued expenses 124,054 511,972
Income taxes payable ( 91,276 ) ( 17,907 )
Net Cash Used in Operating Activities (1,110,367 ) (1,472,510)
Cash Flows From Investing Activities
Acquisition of fixed assets ( 21,483 ) ( 101,494 )
Other assets ( 5,212 ) 32,770
Net Cash Used in/Provided by Investing Activities ( 26,695 ) 68,724
Cash Flows From Financing Activities
Proceeds of bank loan 1,150,000 1,550,000
Payments of long-term debt ( 27,040 ) ( 42,065 )
Loans receivable officer 29,000 5,609
Purchase of treasury stock - 0 - ( 38,559 )
Net Cash Provided By Financing Activities 1,151,960 1,474,985
NET INCREASE (DECREASE) IN CASH
AND CERTIFICATE OF DEPOSIT 14,898 ( 66,249 )
CASH AND CERTIFICATE OF DEPOSIT,
BEGINNING OF PERIOD 2,704,292 2,552,480
CASH AND CERTIFICATE OF DEPOSIT,
END OF PERIOD $ 2,719,190 $ 2,486,231
Supplemental Disclosures of Cash Flow Information:
Cash paid for:
Interest $ 136,861 $ 78,914
Income taxes $ 36,887 $ 17,241
The accompanying notes are an integral parto of this financial statement.
<PAGE>
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.
<PAGE>
NOTE 2 - INVENTORY LOSS
On March 11, 1996, the Company sustained inventory losses of $877,000
due to a flood. Estimated net insurance reimbursement is expected to
be $478,842 of which $227,500 has been received by May 31, 1996.
The estimated loss of $398,158 is reflected in the cost of sales.
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.
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 3. - PROPERTY AND EQUIPMENT
Balances of major classes of assets and allowances for depreciation
and amortization are as follows:
May 31 February 29
1996 1996
Factory machinery and equipment $7,145,223 $7,153,109
Leasehold improvements 1,164,104 1,138,100
Furniture and fixtures 158,529 158,529
Computers 129,450 126,085
Property and equipment - at cost 8,597,306 8,575,823
Less accumulated depreciation 4,779,040 4,628,848
Property and equipment - net $3,818,266 $3,946,975
Depreciation expense for the three months ended May 31, 1996, and 1995
were $150,193 and $121,101, respectively.
Note 4. - LOAN PAYABLE TO BANK
The Company has a $6,000,000 line-of-credit agreement (the "Agreement")
with a bank expiring September 1, 1996 which provides for funds to be
advanced based on a specific formula. At May 31, 1996, the Company had
outstanding borrowings under this agreement of $3,385,000. Such loan
bears interest at the rate of 3/4 percent above the bank prime rate
(prime rate being 8 1/4 percent at May 31, 1996) and is collateralized
by a certificate of deposit and related interest, accounts receivables,
work in process 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.
<PAGE>
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 May February
Institution Rate Interest) 31,1996 29, 1996
New York Business
Development Corp. (1) 7.5% $ 4,857 $388,655 $395,846
Various 12.25% - 15.5% 8,464 239,495 259,344
Totals $13,321 $628,150 $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 (Nine Months) $ 89,113
1998 112,392
1999 112,531
2000 56,443
Thereafter 257,671
Total 628,150
Less current portion 105,660
Long term debt $522,490
<PAGE>
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.
The Company leases a showroom in New York City at an annual base rent
of $31,200. The lease expires January 31, 1998.
Future minimum lease payments for rental of manufacturing, warehousing
and administrative offices are as follows:
Minimum
Year Ending Rental
February 28, Commitment
1997 (nine months) $300,150
1998 397,600
1999 369,000
2000 153,750
Rent charged to operations, excluding related expenses, for the three
months ended May 31, 1996, and 1995 were $98,821 and $102,055, 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. As per company counsel, the claims have no
merit and are vigorously being contested.
<PAGE>
NOTE 8 - RELATED PARTY TRANSACTIONS
At May 31, 1996 and February 29, 1996, the Company was owed by its
President loans of $66,863 and $95,863, respectively. These loans
bear 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 shares $.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.
Net sales for the three months ended May 31, 1996 were $1,088,247
representing a 37% decrease over net sales of $1,728,476 for the
three months ended May 31, 1995. The decrease is the result of
discontinued non-profitable sales.
Gross profit excluding the inventory loss for the three months ended
May 31, 1996 increased by 10%. On March 11, 1996, the Company
sustanined an estimated uninsured inventory loss of $398,158 resulting
in an overall reduction of gross profit by 27%. Operating expenses
increased by 10%.
Cash flow generated by the Company's operations is deemed adequate to
meet the Company's financial obligations.
</TEXT/>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> [BLANK] [BLANK]
<PERIOD-END> MAY-31-1996 MAY-31-1995
<CASH> 2,719,190 2,436,231
<SECURITIES> [BLANK] [BLANK]
<RECEIVABLES> 578,735 1,050,967
<ALLOWANCES> 29,388 22,548
<INVENTORY> 5,878,773 6,078,747
<CURRENT-ASSETS> 9,843,243 9,973,471
<PP&E> 8,597,306 8,406,998
<DEPRECIATION> 4,779,040 4,148,077
<TOTAL-ASSETS> 13,881,050 14,442,071
<CURRENT-LIABILITIES> 5,367,810 5,401,571
<BONDS> [BLANK] [BLANK]
[BLANK] [BLANK]
[BLANK] [BLANK]
<COMMON> 5,700 5,700
<OTHER-SE> 7,124,619 7,504,966
<TOTAL-LIABILITY-AND-EQUITY> 13,881,050 14,442,031
<SALES> 1,088,247 1,728,476
<TOTAL-REVENUES> 1,088,247 1,728,476
<CGS> 1,193,132 1,434,741
<TOTAL-COSTS> 1,193,132 1,434,741
<OTHER-EXPENSES> 318,164 331,616
<LOSS-PROVISION> [BLANK] [BLANK]
<INTEREST-EXPENSE> 126,322 70,400
<INCOME-PRETAX> (548,371) (108,281)
<INCOME-TAX> [BLANK] [BLANK]
<INCOME-CONTINUING> [BLANK] [BLANK]
<DISCONTINUED> [BLANK] [BLANK]
<EXTRAORDINARY> 77,000 [BLANK]
<CHANGES> [BLANK] [BLANK]
<NET-INCOME> (472,371) (108,281)
<EPS-PRIMARY> (.27) (.06)
<EPS-DILUTED> (.27) (06)
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