<PAGE> 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
August 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 August 31, 1996
1,720,772 Shares
Preferred Stock, Par Value, $.003, outstanding at August 31, 1996
NONE
<PAGE> 2
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31, February 29,
1996 1996
------------ ------------
<S> <C> <C>
Current Assets
Cash $ 1,897,972 $ 133,644
Certificate of deposit (Note 4) 2,629,433 2,570,648
Accounts receivable, (net of allowance for
doubtful accounts of $47,488 and $29,388 at
August 31, 1996 and February 29, 1996,
respectively) (Notes 1 & 4) 2,263,655 1,174,175
Inventories (Notes 1, 2 & 4) 5,528,080 4,833,332
Insurance Reimbursement Receivable (Note 2) 150,519
Prepaid expenses and other current assets 282,336 228,045
Loan receivable - officer (Note 8) 39,149 95,863
------------ ------------
Total Current Assets $ 12,791,144 $ 9,035,707
Property and Equipment - Net (Notes 3 & 4) 3,737,601 3,946,975
Other Assets 224,996 215,001
------------ ------------
TOTAL ASSETS $ 16,753,741 $ 13,197,683
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable bank (Note 4) $ 5,710,000 $ 2,235,000
Accounts payable and accrued expenses 1,883,023 1,533,031
Current maturities of long-term debt and
capital leases (Note 5) 107,071 116,153
Income taxes payable 297,452 311,341
------------ ------------
Total Current Liabilities $ 7,997,546 $ 4,195,525
Long-term debt and capital leases (Note 5) 494,066 539,037
Deferred income taxes 860,441 860,441
------------ ------------
TOTAL LIABILITIES $ 9,352,053 $ 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 3,056,225 3,257,217
Less: Treasury stock, 179,562 shares of common
stock - at August 31, 1996 and February 29, 1996,
at cost (308,966) (308,966)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 7,401,688 7,602,680
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 16,753,741 $ 13,197,683
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 3
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED
<TABLE>
<CAPTION>
August 31,
1996 1995
----------- -----------
<S> <C> <C>
Sales $ 6,210,200 $ 6,491,617
Cost of goods sold 5,057,149 5,372,798
----------- -----------
Gross Profit 1,153,051 1,118,819
----------- -----------
Operating Expenses
Selling, general & administrative expenses 922,118 874,702
----------- -----------
Income (loss) from operations 230,933 244,117
----------- -----------
Other Income (Expenses)
Interest income 71,301 76,444
Interest expense (271,146) (252,841)
----------- -----------
Total (199,845) (176,397)
----------- -----------
Income before provision for income
taxes and flood loss 31,088 67,720
Provision for income taxes - 0 - 23,000
Flood loss (Note 2) 232,080 - 0 -
----------- -----------
Net Income (Loss) (200,992) 44,720
RETAINED EARNINGS - BEGINNING OF PERIOD 3,257,217 3,227,317
----------- -----------
RETAINED EARNINGS - END OF PERIOD $ 3,056,225 $ 3,272,037
=========== ===========
Net Income (Loss) Per Share $ (.12) $ .03
=========== ===========
Average number of shares of common
stock outstanding used in computing
earnings per share 1,720,772 1,751,756
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 4
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED
<TABLE>
<CAPTION>
August 31,
1996 1995
---- ----
<S> <C> <C>
Sales $ 5,121,953 $ 4,763,141
Cost of goods sold 3,864,017 3,938,057
----------- -----------
Gross Profit 1,257,936 825,084
----------- -----------
Operating Expenses
Selling, general & administrative expenses 603,954 543,086
----------- -----------
Income from operations 653,982 281,998
----------- -----------
Other Income (Expenses)
Interest income 41,459 37,865
Interest expense (114,982) (143,862)
----------- -----------
Total (73,523) (105,997)
----------- -----------
Income before provision for income
taxes and flood loss 580,459 176,001
Provision for income taxes 77,000 23,000
Flood loss (Note 2) 232,080 - 0 -
----------- -----------
Net Income 271,379 153,001
RETAINED EARNINGS - BEGINNING OF PERIOD 2,784,846 3,119,036
----------- -----------
RETAINED EARNINGS - END OF PERIOD $ 3,056,225 $ 3,272,037
=========== ===========
Net Income Per Share $ .16 $ .09
=========== ===========
Average number of shares of common
stock outstanding used in computing
earnings per share 1,720,772 1,736,537
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 5
TECHKNITS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (200,992) $ 44,720
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 276,840 246,200
Decrease (Increase) In Assets:
Accounts receivable (1,089,480) (3,276,599)
Inventory (694,748) (1,194,374)
Prepaid expenses and other assets (204,810) 24,430
Increase (Decrease) In Liabilities:
Accounts payable & accrued expenses 336,103 1,162,259
----------- -----------
Net Cash Used in Operating Activities (1,577,087) (2,993,364)
----------- -----------
Cash Flows From Investing Activities
Acquisition of fixed assets (66,125) (193,491)
Other assets (11,336) 29,170
----------- -----------
Net Cash Used in Investing Activities (77,461) (164,321)
----------- -----------
Cash Flows From Financing Activities
Proceeds of bank loan 3,475,000 3,350,000
Payments of long-term debt (54,053) (73,964)
Loans receivable officer 56,714 75,000
Purchase of treasury stock - 0 - (84,726)
----------- -----------
Net Cash Provided By Financing Activities 3,477,661 3,266,310
----------- -----------
NET INCREASE IN CASH
AND CERTIFICATE OF DEPOSIT 1,823,113 108,625
CASH AND CERTIFICATE OF DEPOSIT,
BEGINNING OF PERIOD 2,704,292 2,552,480
----------- -----------
CASH AND CERTIFICATE OF DEPOSIT,
END OF PERIOD $ 4,527,405 $ 2,661,105
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Operating activities - Cash paid for during the year:
Interest $ 266,009 $ 217,012
=========== ===========
Income taxes $ 36,182 $ 14,369
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
<PAGE> 6
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.
<PAGE> 7
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 of which
$494,402 has been received by August 31, 1996.
NOTE 3. - PROPERTY AND EQUIPMENT
Balances of major classes of assets and allowances for depreciation and
amortization are as follows:
<TABLE>
<CAPTION>
August 31, 1996 February 29,
1996 1996
---- ----
<S> <C> <C>
Factory machinery and equipment $7,173,973 $7,153,109
Leasehold improvements 1,179,996 1,138,100
Furniture and fixtures 158,529 158,529
Computers 129,450 126,085
---------- ----------
Property and equipment - at cost 8,641,948 8,575,823
Less accumulated depreciation 4,904,347 4,628,848
---------- ----------
Property and equipment - net $3,737,601 $3,946,975
========== ==========
</TABLE>
Depreciation expense for the six months ended August 31, 1996 and 1995
were $275,500 and $245,000, respectively. Depreciation expense for the
three months ended August 31, 1996 and 1995 were $125,307 and $123,899,
respectively.
NOTE 4. - LOAN PAYABLE 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 August 31, 1996, the Company had
outstanding borrowings under this agreement of $5,710,000. 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 August 31, 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.
<PAGE> 8
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:
<TABLE>
<CAPTION>
Principal
Monthly Amounts Payable At
Annual Installments ------------------
Financial Interest (Including August February
Institution Rate Interest) 31,1996 29, 1996
----------- ---- --------- ------- --------
<S> <C> <C> <C> <C>
New York Business
Development Corp. (1) 7.5% $ 4,857 $381,491 $395,846
Various 12.25% - 15.5% 8,464 219,646 259,344
------- -------- --------
Totals $13,321 $601,137 $655,190
======= ======== ========
</TABLE>
(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:
<TABLE>
<CAPTION>
Year Ending
February 28,
------------
<S> <C>
1997 (Six Months) $ 62,100
1998 112,392
1999 112,531
2000 56,443
Thereafter 257,671
--------
Total 601,137
Less current portion 107,071
--------
Long term debt $494,066
========
</TABLE>
<PAGE> 9
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:
<TABLE>
<CAPTION>
Annual Rent
Square Excluding Real Estate Taxes
Location Feet and Other Expenses
-------- ---- ------------------
<S> <C> <C>
17-21 Grand Ave. 7,500 $48,000
23-27 Grand Ave. 15,000 84,000
6 Grand Ave. 16,000 72,000
</TABLE>
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:
<TABLE>
<CAPTION>
Minimum
Year Ending Rental
February 28, Commitment
- ------------ ----------
<S> <C>
1997 (six months) $200,100
1998 397,600
1999 369,000
2000 153,750
</TABLE>
Rent charged to operations, excluding related expenses, for the six
months ended August 31, 1996, and 1995 were $193,070 and $204,239,
respectively. Rent charged to operations, excluding related expenses, for
the three months ended August 31, 1996 and 1995 were $94,249 and
$102,184, 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
<PAGE> 10
TECHKNITS, INC. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
defend against the claims. As per company counsel, the claims have no
merit and are vigorously being contested.
NOTE 8. - RELATED PARTY TRANSACTIONS
At August 31, 1996 and February 29, 1996, the Company was owed by its
President loans of $39,149 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 20,000,000 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.
<PAGE> 11
TECHKNITS, INC. & SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net sales for the six months ended August 31, 1996, were $6,210,200
representing a 4.5% decrease over net sales of $6,491,617 for the six
months ended August 31, 1995. The decrease is the result of discontinued
non-profitable sales.
Gross profit for the six months ended August 31, 1996 increased by 1%,
and operating expenses increased by 1%.
Net sales for the three months ended August 31, 1996 were $5,121,953
representing a 7.5% increase over net sales of $4,763,141 for the three
months ended August 31, 1996. Gross profit for the three months ended
August 31, 1996 increased by 7.0% and operating expenses remained the
same.
Cash flow generated by the Company's operations is deemed adequate to
meet the Company's financial obligations.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 5-MOS 5-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> MAR-01-1996 MAR-01-1995
<PERIOD-END> AUG-31-1996 AUG-31-1995
<CASH> 4,527,405 2,661,105
<SECURITIES> 0 0
<RECEIVABLES> 2,311,143 3,654,826
<ALLOWANCES> 47,488 74,548
<INVENTORY> 5,528,080 5,999,212
<CURRENT-ASSETS> 12,791,144 12,552,703
<PP&E> 8,641,948 8,498,996
<DEPRECIATION> 4,904,347 4,273,077
<TOTAL-ASSETS> 16,753,741 16,985,199
<CURRENT-LIABILITIES> 7,997,546 7,873,764
<BONDS> 0 0
0 0
0 0
<COMMON> 5,700 5,700
<OTHER-SE> 7,395,988 7,611,800
<TOTAL-LIABILITY-AND-EQUITY> 16,753,741 16,985,199
<SALES> 6,210,200 6,491,617
<TOTAL-REVENUES> 6,210,200 6,491,617
<CGS> 5,289,229 5,372,798
<TOTAL-COSTS> 5,289,229 5,372,798
<OTHER-EXPENSES> 850,817 798,258
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 271,146 252,841
<INCOME-PRETAX> (200,992) 67,720
<INCOME-TAX> 0 23,000
<INCOME-CONTINUING> (200,992) 44,720
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (200,992) 44,720
<EPS-PRIMARY> (.12) .03
<EPS-DILUTED> 0 0
</TABLE>
