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U.S. Securities and Exchange Commission
Washington, D.C. 20549
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Form 10-KSB
(Mark One)
[ x ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1943 [No Fee Required]
For the transition period from to
Commission file number 0-23898
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MITY-LITE, INC.
(Name of small business issuer in its charter)
Utah 87-0448892
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1301 West 400 North
Orem, Utah 84057
(Address of principal executive offices, zip code)
Issuer's telephone number: (801) 224-0589
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
TITLE OF CLASS
Common Stock, par value $.01
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [ ]
The Company's net sales for the fiscal year just ended were $18,680,000.
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $15,077,000 (computed using
the closing price of $12.875 per share of Common Stock on May 23, 1997 as
reported by Nasdaq). Shares of Common Stock held by each officer and director
(and their affiliates) and each person who owns 5 percent or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
affiliates for purposes of this calculation. The determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 3,164,026 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on May 23, 1997.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check one:) Yes No x
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Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held on August 21, 1997, which Proxy
Statement will be filed no later than 120 days after the close of the regis-
trant's fiscal year ended March 31, 1997, are incorporated by reference in
Part III of this Annual Report on Form 10-KSB. Portions of the registrant's
1997 Annual Report to Shareholders, attached hereto as Exhibit 13, are
incorporated by reference in Part II, Items 6 and 7 of this Annual Report on
Form 10-KSB.
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PART I
Item 1. BUSINESS
BACKGROUND
Mity-Lite, Inc. ("Mity-Lite" or the "Company") designs, manufactures and
markets lightweight, durable, folding leg tables, stacking chairs and related
products used in multi-purpose rooms of educational, recreational, hotel and
hospitality, government, office, health care, religious and other public
assembly facilities. The Company typically sells its products directly to end
users using a proprietary, computerized sales management system and an
in-house staff of trained sales and customer service personnel. The Company
markets its products throughout the United States and in certain foreign
countries.
The Company has developed and currently manufactures and markets 46
different plastic table sizes which come in three standard and a variety of
custom colors. These tables are made with a variety of different folding leg
and custom color options. The Company has successfully applied engineering
grade plastics and sophisticated manufacturing and assembly methods to the
production of tables that weigh less and are more durable than competing
particle board or plywood table products of similar size. The Company's
plastic tables are manufactured using abrasion, stain and water resistant
materials. The Company's cornered tables are constructed using the Company's
proprietary high-impact corners which can withstand a two foot drop without
sustaining debilitating damage. All of the Company's plastic tables include
reinforced edging. Cornered tables are equipped with non-skid pads which
facilitate stacking and storage. Management believes the Company's plastic
table products appeal to its customers because they are durable, lightweight,
easy to handle and attractive.
The Company also manufacturers and sells Elite(TM) and Aluminum tables.
The Elite(TM) table is a distinctive, lightweight, wood conference style
table. The table is constructed of real wood veneers or high pressure
laminates, solid wood edges and a polymer honeycomb core. The Elite(TM) line
provides easily removable elegant tables for offices, conference and training
rooms. The Aluminum table is made for outdoor use and provides resistance to
extreme exposure to ultraviolet light, rain, snow and other corrosive
environments. The Aluminum tables can hold up to 1600 pounds, yet are 30 to
50 percent lighter than conventional tables. All of the Company's table
products are sold with a five-year warranty covering materials and
workmanship.
In addition to its table products, the Company currently offers four
lines of stacking chairs, the MityTuff(TM), the MityFlex(TM), the
MityDeluxe(TM) and the MityHost(TM). The MityTuff(TM) chairs are distributed
by the Company under original equipment manufacturer (OEM) arrangements with
the chair manufacturers. Portions of the MityFlex(TM) and the MityDeluxe(TM)
chairs are manufactured by the Company. In addition, the Company performs
final assembly on these two chair lines. The MityHost(TM) stacking chair was
introduced in January 1997 and is manufactured in-house at the Company's
facility in Orem, Utah.
The MityTuff(TM) is sold with a seven-year warranty covering materials
and workmanship. The MityFlex(TM) and the MityDeluxe(TM) are sold with a
ten-year warranty covering materials and workmanship. The MityHost(TM) is
sold with a ten-year warranty covering the structural integrity of the metal
frame and a one-year warranty covering the upholstery.
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In addition to lightweight, durable tables and stacking chairs, the
Company manufactures and markets accessory products including table and chair
carts, tablecloths, skirting and skirt clips.
GROWTH STRATEGY
The Company's strategy is to be a leading supplier of furniture for
multi-purpose rooms. Key elements of the Company's business strategy include:
INCREASE SHARE OF TABLE MARKET. The Company intends to continue its
efforts to expand its share of the market for lightweight, durable, folding
leg tables. During the fiscal years ended March 31, 1995, 1996, and 1997, the
Company's table sales increased by 28 percent, 15 percent and 19 percent,
respectively. The Company attributes this growth in sales to increasing
market acceptance of its products, an expanded sales force, an increasing rate
of existing customer re-orders and the Company's ability to generate new
customer leads and close sales. The Company intends to continue to expand its
share of the hospitality market by, among other things, continuing to pursue
purchasing contracts with national hotel and motel chains. With respect to
the hospitality market, the Company's tables have been approved for use by
three major hotel operators. The Company's table products have been approved
for purchase by the General Services Administration of the United States
government. The states of Utah, Virginia, New Jersey and Louisiana have also
approved the Company's table products for purchase by agencies of those
states. The Company's approval as a qualified vendor by the General Services
Administration, and the states of Utah, Virginia, New Jersey and Louisiana
means that agencies of these authorities can, if they so choose, purchase
products from the Company at a specifically negotiated price. The Company's
designation as a qualified government vendor for these authorities does not
extend to any new products introduced by the Company. The Company intends to
continue its efforts to become a qualified government vendor. The Company
also intends to pursue penetration of international markets primarily through
direct marketing and an international sales team. The Company has also
expanded its table product line to include higher priced designer tables and
aluminum tables, giving the Company a broader table product line to offer its
customers. The Company further intends to continue emphasizing product
quality and convenience, factors which have enabled the Company to increase
sales of its table products despite the fact that the Company's table products
are generally more expensive than competing table products of similar sizes.
CONTINUE TO INTRODUCE NEW PRODUCT LINES TO EXISTING CUSTOMERS. The
Company currently intends to develop in-house or acquire complementary product
lines of multi-purpose room furniture that can be sold to its customers using
the Company's current marketing strategy. Data collected from existing
customers leads management to believe that a market exists for complementary
multi-purpose room furniture products. Complementary product lines identified
by the Company include stacking and folding chairs, staging, flooring, risers,
bench seating, partitions and podiums. The Company began to implement this
strategy during the year ended March 31, 1995 by introducing four lines of
stacking chairs, the MityTuff(TM), the MityStack(TM), the MityFlex(TM), and
the MityDeluxe(TM). The MityStack(TM) has been subsequently discontinued. In
addition, the Company introduced the MityHost(TM) in January 1997. Each line
has been developed for and focuses on varying needs of different customers.
The Company intends to continue to develop or acquire through purchase or
license or through creation of a distributor relationship chair lines which
could be sold to the Company's table customers, are complementary to the
Company's tables and are consistent with specific market needs. In March
1997, the Company acquired a 49.9 percent equity interest in DO Group, Inc. a
closely-held manufacturer of office seating and office panel systems. The
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Company will continue to consider acquiring other companies with businesses or
product lines compatible with or complementary to the Company's business or
products. The Company believes that the development or acquisition of new
lines of multi-purpose room furniture products is important to its long-term
success.
MARKET PRODUCTS DIRECTLY TO END USERS. Unlike its competitors who
usually sell through dealers and distributors, the Company primarily sells its
table and chair products directly to end users. The Company believes that its
strategy of selling directly to end users through its in-house staff of sales
and customer service personnel gives the Company a competitive advantage by
allowing the Company to reduce and control its selling costs and maintain
direct contact with its customers. The Company's sales and customer service
representatives use a computerized sales management and tracking system
developed by the Company to qualify and track sales leads. While the
Company's sales and service representatives will from time to time visit
customers in their respective sales territories, the Company has been able to
reduce its selling costs through a system of following up on leads and closing
sales using the telephone, videos, fax machine, overnight courier services and
the mail as its primary sales tools. The Company intends to continue this
strategy for marketing its existing table products and any future product
lines and has begun to introduce similar techniques at its affiliate, DO
Group, Inc. In addition, the Company intends to continue expanding its
domestic and international in-house sales and customer service staff and
believes the expansion will allow it to focus more aggressively on its current
markets.
CONTINUE ENHANCEMENT OF MANUFACTURING PROCESS. The Company believes its
manufacturing system provides it with a competitive advantage by allowing it
to better control production costs, maintain product quality, increase
productivity and maintain relatively short lead times (the period from
customer order to delivery). The Company strives to achieve low delivery
costs to its customers and has located its manufacturing operations in an area
with high quality and relatively low cost labor and has equipped its
manufacturing facility with advanced technology and cost effective machinery.
In an effort to control costs and increase productivity, the Company's
management carefully evaluates the Company's production process and often
makes technical modifications and adjustments to reduce costs and improve
productivity. The Company intends to continue efforts to enhance its
manufacturing process.
The statements made above in this Growth Strategy section and all
statements in this filing that include the terms "may", "will", "management
believes", "estimate", "project", "anticipate", "expect" and similar words are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. The forward-looking statements made in this filing
involve risks and uncertainties and are based on certain assumptions that may
or may not be realized. Actual results and outcomes may differ materially
from those discussed or anticipated. Factors that might cause such
differences include, but are not limited to, risks and uncertainties related
to the Company's ability to expand its market share of the table market,
compete effectively in its markets, manage growth, acquire new product lines,
expand through acquisitions and successfully integrate such acquisitions into
its existing operations, enter new markets, and protect and profitably
implement its proprietary technology. For a more detailed discussion of these
and other risks please refer to the section entitled "Certain Considerations,"
herein, and the documents filed by the Company with the Securities and
Exchange Commission.
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RECENT ACQUISITION
On March 31, 1997, the Company completed the acquisition of a 49.9
percent equity interest in DO Group, Inc. ("DO Group"), a privately-held
manufacturer of office seating and office panel systems headquartered in
Elkhart, Indiana. DO Group markets its products under the Domore and DO3
trade names and has manufacturing facilities in Elkhart, Indiana and Marked
Tree, Arkansas. DO Group's seating and system sales totaled approximately
$12.4 million for the twelve months ended December 31, 1996.
DO Group's operations have not been profitable during the last two
years. During this period, DO Group incurred pretax losses approximating $7.2
million. Losses were mainly generated from the operations of its wood case
goods division located in High Point, North Carolina. On December 31, 1996,
DO Group sold this division and began to focus on its seating and systems
operations. The combined seating and systems division generated a profit
during the last two years.
Mity-Lite purchased its 49.9 percent equity interest in DO Group from
an outside investor group for $750,000 in cash and the payment of certain
closing and due diligence costs totaling $112,000 as of March 31, 1997.
Mity-Lite holds an option to put back its investment to the DO Group officers
at any time during the next three years. At the conclusion of the three year
period and if the put option has not been exercised, the majority owners of DO
Group will have the right to convert their 50.1 percent interest in DO Group
into 115,000 shares of Mity-Lite common stock, at which time DO Group will
become a wholly-owned subsidiary of Mity-Lite. In addition, Mity-Lite set
aside options to purchase 175,000 shares of Mity-Lite Common Stock for DO
Group employees under the 1997 Stock Incentive Plan. These options will vest
in three years and only if Mity-Lite does not exercise its put option.
As part of the acquisition, Mity-Lite loaned $1,000,000 in a senior
subordinated note to a wholly-owned subsidiary of DO Group. The note matures
on March 24, 2000 and bears interest at 10 percent payable quarterly. The
Company believes the interest rate approximates the market rate of interest
for similar debt instruments negotiated at arms length.
MARKET OVERVIEW
Based upon management's analysis of companies known to sell
multi-purpose room furniture and based upon management's experience and
contacts in this business, management estimates that the domestic market for
multi-purpose room furniture exceeds $1 billion annually. It is estimated
that folding tables alone make up over $200 million of this domestic market.
Chairs and other related seating products are estimated to account for
approximately $750 million of the estimated domestic multi-purpose room
furniture market. Other products such as staging, risers, partitions,
podiums, and flooring account for the balance of the estimated domestic
market.
SALES AND MARKETING
The Company primarily markets its products directly to end users in the
educational, recreational, hotel and hospitality, governmental, office
products, health care, public assembly and church markets. This strategy
enables the Company to manage selling costs more effectively and maintain
direct contact with its customers. The Company currently employs 39 full-time
in-house sales and customer service employees. The Company's sales and
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customer service personnel are compensated on a commission basis and may
qualify for other incentive bonuses based on individual, sales team, and
Company performance. Each sales and customer service employee receives
training in product attributes, customer service, use of the Company's
computerized sales management system and in all aspects of the sales cycle.
The Company typically markets its products by first identifying
customers through internal market research, referrals, trade shows, customer
networking and test marketing. Once a market has been identified, the
Company's sales and marketing staff will attempt to generate leads for
prospective purchasers in such markets by attending trade shows, through mass
mailings, and other lead oriented advertising. The Company uses a cost
efficient, proprietary, computer based sales management system to qualify,
track and manage sales leads for prospective and existing customers and
compile customer feedback. While each sales and customer service employee
maintains some in-person contact with such employee's assigned customers, most
of the Company's sales efforts are pursued using the telephone, fax machine,
videotapes and overnight mail services. The Company also uses a reference
list of customers in each geographical sales territory in order to promote
sales of its products. The Company has a sampling program and provides
prospective purchasers with product samples for 30-day trial periods. The
Company does not extensively advertise its products in trade publications.
INTERNATIONAL OPERATIONS
Since its inception in 1987, the Company has focused its marketing
efforts primarily on domestic markets. The Company has, however, sold its
table products in Canada, South America, Europe, Asia, Middle East and
Australia. For the fiscal years ended March 31, 1995, 1996, and 1997, the
Company's international sales accounted for 7.5 percent, 5.8 percent and 7.4
percent of the Company's total net sales, respectively. In March 1992, the
Company expanded its international operations by establishing a European sales
branch in Swindon (near London), England. Since the European sales branch was
not profitable, the Company sold the branch on March 31, 1995, realizing a
pre-tax loss of approximately $44,000. The Company has continued to sell to
the European market through an unrelated distributor, Mobilite International
Limited. In addition, the Company created a new position of international
sales manager in June 1995. The primary focus of this position is on
expanding the international sales and distribution of the Company's products.
The Company has been successful in establishing distributor relationships in
Canada, Mexico, Peru, Argentina, Colombia, Dominican Republic, England,
France, Spain, Germany, Israel, Jordan, United Arab Emirates, Hong Kong,
China, South Korea, Taiwan, Singapore, and Malaysia.
MANUFACTURING AND MATERIALS
The Company's manufacturing process for its table products consists
principally of bonding a thermoformed ABS plastic shell to a wood core frame.
Metal legs, which are manufactured and painted in-house, and edge trim are
then attached to the table to complete the process. Since its inception, the
Company has implemented a number of changes to its manufacturing process and
product design which have resulted in increased production volumes, improved
production quality, reduced costs and increased on-time shipping performance.
The Company has designed and manufactured certain proprietary equipment used
in its manufacturing process. The Company believes that its manufacturing
innovations give it a competitive advantage, allowing the Company to reduce
production costs and increase productivity. The Company's typical order to
delivery lead time is between three and five weeks.
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The Company's manufacturing process for its chair products consists
principally of the manufacturing and painting of legs and frames, attachment
of upholstery and final assembly of components.
Raw materials used in the Company's products such as plastic, wood and
metal are generally available from a number of suppliers. The plastic used in
the Company's products and tubing used in the metal legs are manufactured
according to the Company's specifications. The Company's other raw materials
such as wood and certain welding compounds are commodity items. The Company
has no raw material supply contracts. The Company operates without a
substantial raw materials inventory by depending on certain key suppliers to
provide raw materials on a "just-in-time" basis. The Company believes that
its raw materials are available from alternative suppliers. However, any
significant interruption in delivery of such items could have a material
adverse effect on the Company's operations.
COMPETITION
The markets in which the Company participates are highly competitive.
The table, institutional chair and multi-purpose room furniture industry
consists of a fragmented group of approximately 60 major manufacturers and a
host of smaller manufacturers.
Management believes that customers purchase the Company's tables
primarily because of product performance, reputation, on-time delivery,
warranty service and perceived value. The Company markets its table products
based primarily on product performance (lightweight and durability) and
reputation, not price. The Company's average table price is generally higher
than the average price of competing particle board, plywood or metal table
products of its competitors. The Company believes that it has a respected
reputation for product quality, convenience and customer service and that for
these reasons, end users often choose its table products over competitors'
lower cost table products. Because only certain elements of the Company's
table design are patented, the Company's tables may be reverse engineered and
duplicated by competitors who are able to develop the manufacturing equipment
and processes to do so. Introduction of similar products by low cost
producers would put price and profit margin pressure on the Company which
would have a material adverse effect on the Company's results of operations.
Among the Company's primary competitors in the table market are Palmer-Snyder,
Inc., McCourt Manufacturing, Inc., Virco Manufacturing Corporation, Inc. and
Howe Furniture Corporation which market a thermoformed plastic table; Southern
Aluminum, Inc., which produces an aluminum table; Krueger International, Inc.,
U.S. Industries (Samsonite), Bevis Custom Furniture, Inc., Globe Business
Furniture and Virco Manufacturing Corporation, Inc. which produce particle
board tables; and Howe Furniture Corporation, Midwest Folding Products,
Palmer-Snyder, Inc., and Shelby Williams Industries, Inc. which produce
plywood tables.
Management believes that customers will purchase the Company's chair
products primarily because of product performance, reputation, warranty
service and convenience. The market for institutional chairs is highly
competitive and very fragmented. Although the Company has not yet developed
chairs which offer the same technological and performance advances as the
Company's table products, the Company believes its current chair line has
distinct selling features. The MityTuff(TM) chair offers a strong, durable
leg, rivetless construction, and seat back reinforcements for added strength
and comfort. The lightweight MityFlex(TM) chair has a patented "living hinge"
that flexes and conforms to each individual's back, adding extra comfort. The
Company is party to a distribution agreement with the patent holder related to
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the MityFlex(TM) chair. The MityDeluxe(TM) chair is a stylish, lightweight
upholstered chair that is constructed with thick, high grade foam in the seat
and back and has contoured molding. The MityHost(TM) stacking chair is
lighter weight than comparable models and has wider contoured seats without
adding any width to the chair itself. Among the Company's primary competitors
in the institutional chair market are Steelcase, Falcon Products, Inc., Virco
Manufacturing Corporation, Artco-Bell Corporation, Fixtures Manufacturing
Company, Globe Business Furniture, Shelby Williams Industries, Inc., Krueger
International, Inc. and U.S. Industries (Samsonite).
INTELLECTUAL PROPERTY
The Company has been granted two utility patents relating to the
construction of its table tops. The Company has chosen not to apply for
international patent protection for these two concepts. The Company does not
believe this will have a material adverse effect on the Company. The Company
believes that aspects of its manufacturing processes are trade secrets of the
Company. The Company relies on trade secret law and nondisclosure agreements
to protect its trade secrets. The Company believes that its patents and trade
secrets provide competitive advantages. The Company licenses the trade name
"Mity-Lite" on a non-exclusive basis from an unaffiliated third-party for a
five-year term, renewable indefinitely at the option of the Company. The
Company claims common law trademark rights in the trademarks MityTuff(TM),
MityFlex(TM), MityDeluxe(TM) and MityHost(TM). The Company does not own
patent rights on any of these chairs.
REGULATION AND ENVIRONMENTAL COMPLIANCE
The Company is subject to various local, state and federal laws and
regulations including, without limitation, regulations promulgated by federal
and state environmental and health agencies, the Federal Occupational Safety
and Health Administration, and laws pertaining to the hiring, treatment,
safety and discharge of employees. The Company's manufacturing operations
must also meet federal, state and local regulatory standards in the areas of
labor, safety and health. Historically, regulatory compliance has not had a
material adverse effect on the Company's sales or operations. The Company
believes it is in compliance with applicable laws including laws related to
the handling and use of environmentally hazardous materials.
EMPLOYEES
As of March 31, 1997, the Company had 130 full-time employees. Except
for certain executive officers, all of the Company's employees are employed at
will. None of the Company's employees is represented by a labor union. The
Company believes that its relationship with its employees is good.
CERTAIN CONSIDERATIONS
COMPETITION. The markets in which the Company participates are highly
competitive. In the future, the Company expects increased competition from
the Company's existing competitors as well as from other companies which may
enter the markets served by the Company. Only certain elements of the
Company's table products are patented so the unpatented elements could be
reverse engineered and duplicated by competitors who are able to develop the
manufacturing equipment and processes to do so. Many of the Company's
competitors have greater name recognition and greater financial, personnel,
manufacturing and marketing resources than the Company. The Company believes
that competition for multi-purpose room furniture products is generally based
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on product quality and characteristics, service and price. The Company's
table products are more expensive than table products sold by the Company's
competitors in the same markets. However, the Company believes that it has
been able to compete in such markets and increase its market share by
emphasizing the quality and performance of its table products as compared to
its competitors' table products. Introduction of similar products by low cost
producers would put price and margin pressure on the Company. The Company's
continued success will depend upon, among other things, its ability to
continue to manufacture and market high quality, high performance tables and
other multi-purpose room furniture products at prices competitive in the
markets served by the Company.
PRODUCT LINE EXPANSION STRATEGIES; ENTRY INTO NEW MARKETS. One of the
Company's primary growth strategies is to pursue revenue and earnings growth
through the introduction of new lines of complementary multi-purpose room
furniture such as chairs, staging, partitions, podiums, flooring, risers,
bench seating and related furniture products which the Company intends to
acquire or develop in-house. The Company's expansion of its current product
lines is contingent, among other things, upon the Company's ability to develop
and/or acquire additional lines of complementary multi-purpose room furniture
which can be purchased or manufactured in a cost efficient manner and sold at
competitive prices in the Company's markets. Except for DO Group, Inc., the
Company currently has no commitments, agreements or understandings with
respect to any acquisitions of product lines or of companies with
complementary products or businesses. The Company to date has and will
continue to acquire or develop in-house several lines of chairs. The Company
is not in a position to project whether it will be able to develop or acquire
chair lines which can be sold profitably and can meet the Company's quality
standards. Although the Company has successfully penetrated the lightweight,
folding leg table market, and while the Company believes that a number of
complementary product lines can be sold into the Company's existing markets,
no assurances are or can be made that the Company's experience in the folding
leg table market will be repeated in markets for new product lines.
Furthermore, the Company anticipates the development or acquisition of new
product lines and the penetration of new markets will require a substantial
commitment of management's time and the Company's resources.
The Company's ability to manufacture other product lines depends on,
among other things, the timely expansion of its current facility or
construction of additional manufacturing facilities on the property currently
leased by the Company. The Company's ability to increase penetration of the
domestic table market depends in part on the Company's ability to expand its
in-house sales and customer service staff and locate and hire qualified
personnel. No assurances can be or are made that the Company's expansion
strategies will be successful.
DEPENDENCE ON MANAGEMENT. The Company is dependent on the efforts and
abilities of certain of its senior management, including Gregory L. Wilson,
the Company's Chairman, President, and Chief Executive Officer. Mr. Wilson
is employed under a five-year employment contract expiring in May 1998. The
Company maintains a $2,000,000 "key-man" life insurance policy on Mr. Wilson.
The loss of any of the Company's key executives could have a material adverse
effect on the Company and its operations and prospects, although the loss of
Mr. Wilson might have a more significant adverse effect on the Company.
PROPRIETARY RIGHTS. The Company has been granted two utility patents
relating to the construction of its table tops. The Company has chosen not to
apply for international patent protection for these two concepts. The
Company's success and future revenue growth will depend, in part, upon its
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ability to protect its trade secrets. The Company relies on trade secret law
and non-disclosure agreements to protect its unpatented and proprietary
know-how. There can be no assurance that such measures will provide
meaningful protection for the Company's trade secrets or other proprietary
information. Moreover, in the absence of further patent protection, the
Company's business may be adversely affected by competitors who independently
develop substantially equivalent products and manufacturing processes. The
Company will endeavor to keep its products and processes and the results of
its research and development program proprietary, but it may not be able to
prevent others from using some or all of such information or technology
without compensation to the Company. The Company licenses the trade name
"Mity-Lite" from a third-party under a five-year license agreement that is
renewable indefinitely at the option of the Company. The termination of this
tradename license and the loss of the use of the "Mity-Lite" name could have a
material adverse impact on the Company and its business. Because the
Company's license for the tradename "Mity-Lite" is non-exclusive, it is
possible that others could obtain a license to use the tradename "Mity-Lite."
Use of the tradename "Mity-Lite" by others in connection with the
manufacturing and sale of tables or other multi-purpose room furniture in the
same markets in which the Company participates could potentially cause
confusion among customers. If the name were used by others in connection with
inferior products or services, it is possible that the Company could suffer
the loss of goodwill associated with its tradename "Mity-Lite." The Company
claims common law trademark rights in the trademarks MityTuff(TM),
MityFlex(TM), MityDeluxe(TM) and MityHost(TM). The Company does not own
patents rights on any of these chairs.
RAW MATERIAL PRICES AND SOURCES. Both the plastic used in the Company's
products and the tubing used in the Company's table and chair legs are
manufactured according to Company specifications. The Company intends to
operate without substantial inventory levels of raw materials by depending on
certain key suppliers to provide raw materials on a "just-in-time" basis. The
Company has no raw material supply contracts. The Company believes that
necessary materials are generally available from alternate suppliers.
However, any shortages or significant interruptions in the delivery of raw
materials could have a material adverse effect on the Company's production
schedule and operations. Price increases for raw materials used in the
Company's products would put pressure on the Company's profit margins if the
Company were unable to pass such price increases through to customers.
WARRANTY SERVICE COSTS. The Company's tables come with a five year
warranty covering materials and workmanship. The Company's warranty service
costs for fiscal years ended March 31, 1995, 1996, and 1997 totaled 0.5
percent of net sales or $60,000, 0.9 percent of net sales or $145,000, and 1.4
percent of net sales or $267,000, respectively. The Company intends to
continue to offer warranties covering materials and workmanship on its table
and chair products and anticipates providing a warranty covering materials and
workmanship for all complementary product lines developed or acquired by the
Company. While the Company has implemented improved quality control measures
that it expects will reduce warranty claims, it is possible that warranty
servicing costs will increase in future periods. Furthermore, the Company is
not in a position to anticipate the additional warranty service costs that may
be incurred as a result of the Company's expansion into complementary product
lines.
NEW MANUFACTURING PROCESS. The Company has recently implemented what it
believes will be improvements to its bonding process. The new system, which
utilizes hot melt reactive adhesives, is more environmentally friendly than
the previous system, which used keytone-based adhesives. In addition, the new
<PAGE> 11
system will facilitate faster throughput in the bonding process but will also
require greater process control to ensure a proper bond. The Company has
conducted extensive testing over the past four years on products produced
using the new process and are reasonably assured of the long term product
performance characteristics and reliability of the new system.
FUTURE VARIATIONS IN OPERATING RESULTS. The Company's short-term
profitability could be adversely affected by its decision to develop or
acquire complementary product lines, hire additional sales staff, implement
changes to the Company's sales compensation program and implement a new
management information system. Various factors, including timing of new
product introductions and the cost of penetrating new markets and changes in
product mix, may have an adverse effect on the Company's results of
operations. While the Company believes that the addition of new product lines
will increase the Company's long term profitability, there can be no assurance
that the Company will continue to experience profitability at historical
rates. No assurances can be or are made that the Company will not experience
temporary fluctuations in operations. While the Company has not experienced
substantial negative variations in quarterly operating results during the
fiscal years ended March 31, 1996 and 1997, no assurances can be or are made
that the Company will not experience such quarterly variations in the future.
REGULATION AND ENVIRONMENTAL CONSIDERATIONS. The Company is subject to
various local, state and federal laws and regulations including, without
limitation, regulations promulgated by federal and state environmental, health
and labor agencies. Historically, regulatory compliance has not had a
material adverse effect on the Company's sales or operations. However,
changes in the laws and regulations governing the Company's business may
impose an increased financial burden upon the Company which could adversely
affect the Company's business or operations. Actions by federal, state and
local governments concerning environmental or other matters could result in
regulations that could increase the cost of producing the products
manufactured and sold by the Company. Certain of the Company's operations are
subject to federal, state and local laws and environmental regulations that
impose limitations on the discharge of pollutants into the air. The Company
believes that it is in compliance with applicable air quality laws and
regulations. While the Company has not had to make significant capital
expenditures for environmental compliance, the Company cannot predict with any
certainty its future capital expenditure requirements relating to
environmental compliance because of continually changing compliance standards
and technology. The Company does not have insurance coverage for
environmental liabilities and does not anticipate obtaining such coverage in
the future.
FORWARD-LOOKING STATEMENTS. The statements made above in this Certain
Considerations section and all statements in this filing that include the
terms "may", "will", "management believes"," estimate", "project",
"anticipate", "expect" and similar words are forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995 (the "1995
Act"), and are deemed by the Company to be covered by and to qualify for the
safe harbor protection provided by the 1995 Act. Investors and prospective
investors in the Company should understand that several factors govern whether
any forward-looking statements contained herein will be or can be achieved.
Any one of those factors could cause actual results to differ materially from
those project herein. These forward-looking statements include plans and
objectives of management for future operations, including plans and objectives
for products, marketing, customers, product line expansions, enhancements to
its manufacturing process, and potential acquisitions. The forward-looking
statements included herein are based on current expectations that involve a
<PAGE> 12
number of risks and uncertainties. These forward-looking statements are based
on assumptions, among others, that the Company a) will be able to successfully
increase its share of the table market, introduce new product lines to
existing customers, market products directly to end users, enter new markets,
and continue enhancing its manufacturing process, b) will continue to
manufacture and market at current margins high quality, high performance
products at competitive prices, c) can continue to source acceptable raw
materials at current prices, d) will continue to experience current levels of
warranty service costs, and e) will realize a return on investment from the
DO Group, Inc. acquisition. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic, competitive
and market conditions and future business decisions, all of which are
difficult or impossible to predict accurately and many of which are beyond the
control of the Company. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of those assumptions could prove inaccurate and, therefore, there is and can
be no assurance that the results contemplated in any such forward-looking
statement will be realized. Budgeting and other management decisions are
subjective in many respects and thus susceptible to interpretations and
periodic revision. The impact of actual experience and business developments
may cause the Company to alter its marketing, capital expenditure plans or
other budgets, which may in turn affect the Company's result of operations.
In light of the significant uncertainties inherent in the forward-looking
statement included herein, the inclusion of any such statement should not be
regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. For further discussion
of these and other risks, please refer to the last paragraph of the section
entitled "Growth Strategy," herein, and the documents filed by the Company
with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company's corporate headquarters and manufacturing facility is
located in Orem, Utah (approximately 40 miles south of Salt Lake City). This
facility consists of approximately 68,000 square feet of leased manufacturing,
office, research and development and storage space located on approximately
three acres of leased land. The facility and related real estate is leased
from a trust, of which Gregory L. Wilson's uncle is one of the trustees, under
a lease agreement for a five year term expiring in the year 2000. The base
monthly lease payment is $17,100. The Company pays all maintenance costs,
taxes and insurance. The Company believes that by adding additional equipment
and production shifts, its current facility will serve its table manufacturing
needs for the term of the lease. The Company anticipates either leasing or
constructing additional facilities for future expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation and is not aware
of any threatened litigation against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1997.
<PAGE> 13
PART II
ITEM 5. MARKET VALUE OF THE REGISTRANT'S COMMON STOCK
The Company's Common stock is traded on the Nasdaq National Market
System under the symbol MITY. The Company's Common Stock first began trading
on April 29, 1994.
High Low
-------- --------
Fiscal Year Ended March 31, 1996:
First Quarter $9.750 $7.750
Second Quarter 9.875 8.625
Third Quarter 9.125 7.375
Fourth Quarter 8.500 5.875
Fiscal Year Ended March 31, 1997:
First Quarter $8.375 $7.500
Second Quarter 9.500 7.000
Third Quarter 14.125 9.125
Fourth Quarter 15.750 10.750
There were approximately 125 security holders of record as of May 23,
1997. In addition, management estimates that there were approximately 1,200
beneficial shareholders. Since the closing of its public offering, the
Company has not declared dividends and intends to retain earnings for use in
the business for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to
the Company's 1997 Annual Report to Shareholders, extracts of which are
attached as Exhibit 13.
ITEM 7. FINANCIAL STATEMENTS
The information required by this Item is incorporated by reference to
the Company's 1997 Annual Report to Shareholders, extracts of which are
attached as Exhibit 13.
<PAGE> 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 4, 1997, the Audit Committee of Mity-Lite, Inc. recommended and
approved the dismissal of its prior auditing firm, Price Waterhouse LLP
("Price Waterhouse") and the appointment of Deloitte & Touche LLP ("Deloitte &
Touche") as the Company's new auditing firm.
Price Waterhouse's reports on the financial statements for either of the
past two fiscal years have not contained an adverse opinion or a disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope,
or accounting principles. In connection with the audits for the two most
recent fiscal years and through March 4, 1997, there were no disagreements
with Price Waterhouse on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which
disagreements, if not resolved to the satisfaction of Price Waterhouse, would
have caused Price Waterhouse to make reference to the subject matter of the
disagreements in its reports on the financial statements for such years. A
copy of the Form 8-K disclosure, which was dated March 4, 1997, was provided
to Price Waterhouse.
During the two most recent fiscal years and subsequent interim periods,
the Company's new auditor, Deloitte & Touche, was not consulted regarding the
type of audit opinion that might be rendered on the Company's financial
statements, nor was there any written or oral advice provided to the Company
that Deloitte & Touche concluded would be an important factor considered by
the Company in reaching a decision as to accounting, auditing or financial
reporting issues. The Company did have limited oral discussions with Deloitte
& Touche regarding the application of pooling accounting principles in a
contemplated acquisition. The specific inquiries discussed and related
viewpoints of Deloitte & Touche are summarized as follows:
Inquiry Deloitte & Touche Viewpoint
------------------------------ ------------------------------
Impact of cash dividends on the ability If the current cash dividends have
of the registrant to account for a been calculated and disbursed
contemplated transaction as a pooling. consistently with amounts
distributed historically, pooling
accounting treatment would not be
affected.
Impact of a real estate distribution In this situation, the impact of
on the ability of the registrant to such transaction would prevent
account for a contemplated transaction pooling accounting treatment.
as a pooling.
Price Waterhouse was not consulted by the Company regarding the aforementioned
issues. The Form 8-K was reviewed by Deloitte & Touche prior to filing with
the Commission.
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this Item is incorporated by reference to
the sections of the Company's Proxy Statement filed in connection with its
1997 Annual Meeting of Stockholders entitled "Nominees" and "Directors and
Executive Officers."
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section of the Company's Proxy Statement filed in connection with its 1997
Annual Meeting of Stockholders entitled "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the section of the Company's Proxy Statement filed in connection with its 1997
Annual Meeting of Stockholders entitled "Security Ownership of Management and
Others."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the sections of the Company's Proxy Statement filed in connection with its
1997 Annual Meeting of Stockholders entitled "Executive Compensation" and
"Certain Transactions."
<PAGE> 16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
INDEX TO EXHIBITS
Exhibit No. Description Location
2.1 Contribution Agreement dated as of March 24, 1997
by and among Estate of Chester E. Dekko, David
Kebrdle, Dennis and Mary M. Kebrdle, Domenic and
Martha S. Federico, ChiCol Group, Inc., DO Group,
Inc., Sican Corp., Sican II Corp., DO Group Holding,
Inc. and Mity-Lite, Inc. ##
2.2 Stock Purchase Agreement dated as of March 13, 1997
between Mity-Lite, Inc. and Xaio, Inc. ##
2.3 Stock Purchase Agreement dated as of March 13, 1997
between Mity-Lite, Inc. and Ellman Equities, Inc. ##
2.4 Stock Purchase Agreement dated as of March 13, 1997
between Mity-Lite, Inc. and Key Equity Capital
Corporation. ##
2.5 Stock Purchase Agreement dated as of March 13, 1997
between Mity-Lite, Inc. and National City Capital
Corporation. ##
2.6 Stock Purchase Agreement dated as of March 13, 1997
between Mity-Lite, Inc. and Cardinal Development
Capital Fund I. ##
2.7 Term Loan Agreement dated as of March 24, 1997
between Mity-Lite, Inc. and Sican Corp. ##
2.8 Put Agreement dated as of March 24, 1997 by and
among Mity-Lite, Inc. and Dennis Kebrdle, David
Kebrdle, Domenic Federico, ChiCol Group, Inc.,
Sican II Corp., and DO Group, Inc. ##
3.1 Amended and Restated Articles of Incorporation
of the Registrant **
3.2 Amended and Restated Bylaws of the Registrant **
3.3 First Amendment to the Amended and Restated Bylaws
of Registrant **
4.1 Form of Stock Certificate **
10.1 Revolving Note dated March 16, 1992 and Revolving
Loan Agreement dated March 16, 1992 between the
Registrant and First Security Bank of Utah, N.A. **
10.2 Modification Agreement dated March 16, 1993 between
the Registrant and First Security Bank of Utah, N.A. **
10.3 Lease Agreement dated November 1, 1993 between the
Registrant and the Walter M. and Orpha M. Lewis
Family Trust **
10.4 Trademark License dated November 23, 1993 between
the Registrant and R.D. Werner Co., Inc. **
10.5 Solicitation, Offer and Award Contract between the
Registrant and the General Services Administration
Federal Supply Service dated January 27, 1992 (issued
March 6, 1990) and Amendments thereto dated January 27,
1992 (effective July 16, 1990), January 27, 1992
(effective December 1, 1990), January 27, 1992
(effective December 28, 1991) and the Revision of
August 24, 1992 **
<PAGE> 17
Exhibit No. Description Location
10.6 Notice of Contract Award dated June 23, 1993 between
the Registrant and the Commonwealth of Virginia,
Department of General Services Division of Purchases
and Supply **
10.7 Agreement dated July 26, 1990 between the Registrant
and the State of Utah, Department of Administrative
Services and Revisions thereto dated March 8, 1991,
June 5, 1991, and May 19, 1992 and March 10, 1993 **
10.8 Agreement dated December 17, 1991 between the
Registrant and the Air Force Nonappropriated Fund
Purchasing Office **
10.9 Purchasing Contract effective October 1, 1993 between
the Registrant and The Corporation of the Presiding
Bishop of The Church of Jesus Christ of Latter-Day
Saints **
10.10 Employment Agreement with attached Proprietary
Information Agreement dated effective as of May 21,
1993 between Registrant and Gregory L. Wilson **
10.11 Employment Agreement with attached Proprietary
Information Agreement dated effective as of May 21,
1993 between Registrant and Stanley L. Pool **
10.12 Employment Agreement with attached Proprietary
Information Agreement dated effective as of May 21,
1993 between Registrant and Kenneth A. Law **
10.13 Employment Agreement with attached Proprietary
Information Agreement dated effective as of February
16, 1994 between Registrant and Brent B. Bonham **
10.14 Employment Agreement with attached Proprietary
Information Agreement dated effective as of February
16, 1994 between Registrant and Bradley T Nielson **
10.15 1990 Stock Option Plan, as amended and Form of Stock
Option Agreements **
10.16 Form of Indemnification Agreements between Registrant
and officers and directors of Registrant **
10.17 Form of Lock-up Agreements with Shareholders **
10.18 Form of Confidentiality Agreement entered into which
employees of the Registrant **
10.19 Key-Man Insurance Policy between the Company and Chubb
Sovereign Life Insurance Company **
10.20 Distributor Agreement between the Company and Sebel
Furniture Limited dated February 14, 1994 ***
10.21 Lease Agreement dated March 31, 1995 between the
Company and the Walter M. and Orpha M. Lewis Family
Trust ****
10.22 Exclusive Distributor Agreement between the Company
and Mobilite International Limited (aka Mity-Lite
(Europe) Limited) ****
10.23 Purchasing Contract effective October 1, 1995 between
the Registrant and The Corporation of the Presiding
Bishop of The Church of Jesus Christ of Latter-Day
Saints #
10.24 Promissory Note dated December 6, 1995 between the
Registrant and Zions First National Bank #
10.25 Promissory Note dated October 27, 1995 between the
Registrant and First Security Bank ###
10.26 Summary Plan Description and Basic Plan Document
for the 1995 Mity-Lite, Inc. Employee Retirement Plan ###
<PAGE> 18
Exhibit No. Description Location
10.27 Promissory Note dated January 23, 1997 between the
Registrant and Zions First National Bank
10.28 Modification Agreement (dated October 27, 1996)
to Promissory Note dated October 27, 1995 between
the Registrant and First Security Bank
10.29 Lease Agreement Amendment dated October 31, 1996
between the Company and the Walter M. and Orpha M.
Lewis Family Trust
11.1 Statement Regarding Computation of Per Share Earnings
13 1997 Annual Report to Shareholders (only contains
items incorporated by reference in this Annual
Report in Form 10-KSB)
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Price Waterhouse LLP
25.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
- -------------------------------------------------
* Incorporated by reference to the referenced exhibit number to the
Company's Form 8-K filed on June 12, 1995.
** Incorporated by reference to the referenced exhibit number to the
Company's Registration Statement on Form SB-2, Reg. No. 33-76758-D.
*** Incorporated by reference to the referenced exhibit number to the
Company's Form 10-KSB for the year ended March 31, 1994.
****Incorporated by reference to the referenced exhibit number to the
Company's Form 10-KSB for the year ended March 31, 1995.
# Incorporated by reference to the referenced exhibit number to the
Company's Form 10-QSB for the quarter ended December 31, 1995.
## Incorporated by reference to the referenced exhibit number to the
Company's Form 8-K dated March 31, 1997.
### Incorporated by reference to the referenced exhibit number to the
Company's Form 10-KSB for the year ended March 31, 1996.
(b) Reports on Form 8-K
The Company has filed two reports on Form 8-K during the last
quarter of the year ended March 31, 1997. A Form 8-K dated March 4,
1997 included an Item 4 disclosure, "Changes in Registrant's Certifying
Accountant" and an Item 5 disclosure, "Other Events," to announce the
pending acquisition of a 49.9 percent equity interest in DO Group, Inc.
A Form 8-K dated March 31, 1997 included an Item 2 disclosure,
"Acquisition or Disposition of Assets" detailing Mity-Lite's purchase
of a 49.9 percent equity interest in DO Group, Inc.
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Orem, State of Utah, on June 11,
1997.
MITY-LITE, INC.
By: /s/ Gregory L. Wilson
----------------------------
Gregory L. Wilson, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that undersigned officers or
directors of the Registrant, by virtue of their signatures to this Form 10-KSB
appearing below, hereby constitute and appoint Gregory L. Wilson as attorney-
in-fact in their names, place and stead to execute any and all amendments to
this Registration Statement in the capacities set forth opposite their names
and hereby ratify all that said attorney-in-fact may do by virtue hereof.
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
/s/ Gregory L. Wilson Chairman of the Board, President, June 11, 1997
- ------------------------- and Director
Gregory L. Wilson (Principal Executive Officer)
/s/ Bradley T Nielson Chief Financial Officer June 11, 1997
- ------------------------- (Principal Financial and Accounting
Bradley T Nielson Officer)
/s/ Ralph E. Crump Director June 11, 1997
- -------------------------
Ralph E. Crump
/s/ Peter Najar Director June 11, 1997
- -------------------------
Peter Najar
/s/ C. Lewis Wilson Director June 11, 1997
- -------------------------
C. Lewis Wilson
<PAGE> 1
Promissory Note
Borrower: MITY-LITE, INC. Lender: ZIONS FIRST NATIONAL BANK
1301 WEST 400 NORTH CENTRAL UTAH COMMERCIAL BANKING
OREM, UT 84057 CENTER
#1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
Principal Amount: $2,000,000 Initial Rate: 8.250% Date of Note: 1/23/97
PROMISE TO PAY. MITY-LITE, INC. ("Borrower") promises to pay ZIONS FIRST
NATIONAL BANK ("Lender"), or order, in lawful money of the United States of
America, the principal amount of Two Million & 00/100 Dollars ($2,000,000.00)
or so much as may be outstanding, together with interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated
from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding
principal plus all accrued unpaid interest on December 5, 1997. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest
beginning March 1, 1997, and all subsequent interest payments are due on the
same day of each month after that. Interest on this Note is computed on a
365/360 simple interest basis; that is, by applying the ratio of the annual
interest rate over a year of 360 days, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed
or required by applicable law, payments will be applied first to any unpaid
collection costs and any late charges, then to any unpaid interest, and any
remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the ZIONS FIRST
NATIONAL BANK PRIMATE RATE (the "Index"). "PRIME RATE" MEANS AN INDEX WHICH
IS DETERMINED DAILY BY THE PUBLISHED COMMERCIAL LOAN VARIABLE RATE INDEX HELD
BY ANY TWO OF THE FOLLOWING BANKS: CHASE MANHATTAN BANK, WELLS FARGO BANK
N.A., AND BANK OF AMERICA N.T. & S.A. IN THE EVENT NO TWO OF THE ABOVE BANKS
HAVE THE SAME PUBLISHED RATE, THE BANK HAVING THE MEDIAN RATE WILL ESTABLISH
LENDER'S PRIME RATE. IF, FOR ANY REASON BEYOND THE CONTROL OF LENDER, ANY OF
THE AFOREMENTIONED BANKS BECOMES UNACCEPTABLE AS A REFERENCE FOR THE PURPOSE
OF DETERMINING THE PRIME RATE USED HEREIN, LENDER MAY, FIVE DAYS AFTER POSTING
NOTICE IN LENDERS OFFICES, SUBSTITUTE ANOTHER COMPARABLE BANK FOR THE ONE
DETERMINED UNACCEPTABLE. AS USED IN THIS PARAGRAPH, "COMPARABLE BANK" SHALL
MEAN ONE OF THE TEN LARGEST COMMERCIAL BANKS HEADQUARTERED IN THE UNITED
STATES OF AMERICA. THIS DEFINITION OF PRIME RATE IS TO BE STRICTLY
INTERPRETED AND IS NOT INTENDED TO SERVE ANY PURPOSE OTHER THAN PROVIDING AN
INDEX TO DETERMINE THE VARIABLE INTEREST RATE USED HEREIN. IT IS NOT THE
LOWEST RATE AT WHICH LENDER MAY MAKE LOANS TO ANY OF ITS CUSTOMERS, EITHER NOW
OR IN THE FUTURE. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each DAY. The Index currently is 8.250% per annum. The interest rate to be
applied to the unpaid principal balance of this Note will be at a rate equal
to the Index, resulting in an initial rate of 8.250% per annum. Notice:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
<PAGE> 2
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
DEFAULT. Borrower will be in default if any of the following happens (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement or loan Borrower has with Lender. (c) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (d) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment
for the benefit of creditors, or any proceeding is commenced either by
Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any
creditor tries to take any of Borrower's property on or in which Lender has a
lien or security interest. This includes a garnishment of any of Borrower's
accounts with Lender. (f) Any guarantor dies or any of the other events
described in this default section occurs with respect to any guarantor of this
Note. (g) A material adverse change occurs in Borrower's financial condition,
or Lender believes the prospect of payment or performance of the Indebtedness
is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower
has not been given a Notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written Notice from
Lender demanding cure of such default: (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this
Note to 3.000 percentage points over the index. The interest rate will not
exceed the maximum rate permitted by applicable law. Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's reasonable attorney's fees and Lender's legal
expenses whether or not there is a lawsuit, including reasonable attorney's
fees and legal expenses for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited by
applicable law, Borrower also will pay any court costs, in addition to all
other sums provided by law. This Note has been delivered to Lender and
accepted by Lender in the State of Utah. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts of
SALT LAKE County, the State of Utah. Subject to the provisions on
arbitration, the Note shall be governed by and construed in accordance with
the laws of the State of Utah.
<PAGE> 3
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all
accounts Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or by an authorized
person. Lender may, but need not, require that all oral requests be confirmed
in writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the line
of credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: GREGORY L. WILSON,
PRESIDENT; STANLEY L. POOL, VICE PRESIDENT/SECRETARY; V. DOUGLAS JOHNSON,
TREASURER; AND BRADLEY T. NIELSON, CHIEF FINANCIAL OFFICER. Borrower agrees
to be liable for all sums either: (a) advanced in accordance with the
instructions of an authorized person or (b) credited to any of Borrower's
accounts with Lender. The unpaid principal balance owing on this Note at any
time may be evidenced by endorsements on this Note or by Lender's internal
records, including daily computer print-outs. Lender will have no obligation
to advance funds under this Note if: (a) Borrower or any guarantor is in
default under the terms of this Note; (b) Borrower or any guarantor ceases
doing business or is insolvent; (c) any guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such guarantor's guarantee of this Note or
any other loan with Lender; (d) Borrower has applied funds provided pursuant
to this Note for purposes other than those authorized by Lender; or (e) Lender
in good faith deems itself insecure under this Note or any other agreement
between Lender and Borrower.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS THE
LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND SUBJECT TO
ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT, INCLUDING
THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT FROM
COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
<PAGE> 4
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including but
not limited to those arising out of or relating to the Agreement or any
agreements or instruments relating hereto or delivered in connection
herewith, and including but not limited to a claim based on or arising
from an alleged tort, shall at the request of any party be determined by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted in Salt Lake City, Utah. The arbitrator(s) shall have the
qualifications set forth in subparagraph (c) hereto. All statues of
limitations which would otherwise be applicable in a judicial action
brought by a party shall apply to any arbitration or reference
proceedings hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, if the controversy or claim is
not submitted to arbitration as provided and limited in subparagraph (a)
hereto, all decisions of fact and law shall be determined by a reference
in accordance with Rule 53 of the Federal Rules of Civil Procedure or
Rule 53 of the Utah Rules of Civil Procedure or other comparable,
applicable reference procedure. The parties shall designate to the court
the referee(s) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored arbitration proceedings. The referee(s) shall have
the qualifications set forth in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with
the rules of the American Arbitration Association from panels maintained
by the Association. A single arbitrator or referee shall be
knowledgeable in the subject matter of the dispute. Where three
arbitrators or referees conduct an arbitration or reference proceeding,
the claim shall be decided by a majority vote of the three arbitrators or
referees, at least one of whom must be knowledgeable in the subject
matter of the dispute and at least one of whom must be a practicing
attorney. The arbitrator(s) or referee(s) shall award recovery of all
costs and fees (including reasonable attorneys' fees, administrative
fees, arbitrator's fees, and court costs). The arbitrator(s) or
referee(s) also may grant provisional or ancillary remedies such as, for
example, injunctive relief, attachment, or the appointment of a receiver,
either during the pendency of the arbitration or reference proceeding or
as part of the arbitration or reference award.
<PAGE> 5
(d) Judgment upon an arbitration or reference award may be entered in
any court having jurisdiction, subject to the following limitation: the
arbitration or reference award is binding upon the parties only if the
amount does not exceed Four Million Dollars ($4,000,000.00); if the award
exceeds that limit, either party may commence legal action for a court
trial de novo. Such legal action must be filed within thirty (30) days
following the date of the arbitration or reference award; if such legal
action is not filed within that time period, the amount of the
arbitration or reference award shall be binding. The computation of the
total amount of an arbitration or reference award shall include amounts
awarded for arbitration fees, attorneys' fees, interest, and all other
related costs.
(e) At the Lender's option, foreclosure under a deed of trust or
mortgage may be accomplished either by exercise of a power of sale under
the deed of trust or by judicial foreclosure. The institution and
maintenance of an action for judicial relief or pursuit of a provisional
or ancillary remedy shall not constitute waiver of the right of any
party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.
(f) Notwithstanding the applicability of other law to any other
provision of this Agreement, the Federal Arbitration Act, 9 U.S.C. 1 et
seq., shall apply to the construction and interpretation of this
arbitration paragraph.
LOAN AGREEMENT. THIS PROMISSORY NOTE IS MADE IN ACCORDANCE WITH A BUSINESS
LOAN AGREEMENT DATED DECEMBER 6, 1995.
PRIOR NOTE. THE PROMISSORY NOTE FROM MITY-LITE, INC. TO LENDER DATED DECEMBER
6, 1995.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan, or release any party or guarantor or collateral; or
impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the
consent of or notice to anyone. All such parties also agree that Lender may
modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES
TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE
NOTE.
BORROWER:
MITY-LITE, INC.
By: /s/ Gregory L. Wilson By: /s/ Stanley L. Pool
---------------------------- ------------------------
GREGORY L. WILSON, PRESIDENT STANLEY L. POOL, VICE
PRESIDENT/SECRETARY
<PAGE> 1
FIRST SECURITY BANK Modification Agreement
Loan No.: 0004287-9001
First Security Bank, N.A. ("First Security") has extended credit (the
"Loan") to the undersigned (individually and collectively "Borrower") pursuant
to a promissory note dated October 27, 1995 (the "Note") in the stated
principal amount of $2,000,000.00. The Loan is unsecured.
The Note and any loan agreements, guaranties, subordinations, Collateral
Documents, and other instruments and documents executed in connection
therewith, together with any previous modifications to any of these
instruments or documents, shall be referred to as the "Loan Documents."
Borrower has requested certain modifications to the Loan Documents and
First Security is willing to grant such modifications on the following terms
and conditions:
1. Provided that all conditions stated herein are satisfied, the terms
of the Loan Documents are hereby modified as follows:
MODIFICATIONS TO THE TERMS OF THE NOTE:
The maturity date of the Note is extended to October 25, 1997
OTHER MODIFICATIONS TO THE LOAN DOCUMENTS:
The Loan Documents shall be amended as follows: A late charge and
default rate as set forth in the Attachment hereto are added to the terms of
this Note.
2. As preconditions to the terms of this Agreement, Borrower shall
complete or provide the following:
2.1 N/A
2.2 N/A
3. As an additional precondition to the terms of this Agreement,
Borrower shall pay or shall have paid all reasonable fees, costs, and
expenses, of whatever kind or nature, incurred by First Security in connection
with this Agreement, including but not limited to attorney's fees, lien search
fees, title reports and policies, and recording and filing fees.
4. It is the intention and agreement of Borrower and First Security
that: (i) all collateral security in which First Security has acquired a
security interest or other lien pursuant to the Loan Documents shall continue
to serve as collateral security for payment and performance of all the
obligations of the Borrower under the Loan Documents, and (ii) all agreements,
representations, warranties, and covenants contained in the Loan Documents are
hereby reaffirmed in full by Borrower except as specifically modified by this
Agreement.
5. Borrower hereby acknowledges that: (i) the Loan Documents are in
full force and effect, as modified by this Agreement, and (ii) by entering
into this Agreement, First Security does not waive any existing default or any
<PAGE> 2
default hereafter occurring or become obligated to waive any condition or
obligation under the Loan Documents.
6. Borrower hereby acknowledges that Borrower has no claim, demand,
lawsuit cause of action, claim for relief, remedy, or defense against
enforcement of the Loan Documents that could be asserted against First
Security, its affiliates, directors, officers, employees, or agents, whether
known or unknown, for acts, failures to act (whether such act or failure to
act is intentional or negligent), representations, commitments, statements or
warranties, including without limitation any such conduct arising out of or in
any way connected with the Loan Documents. Notwithstanding the foregoing,
Borrower hereby waives, releases, and relinquishes any and all claims,
demands, lawsuits, causes of action, claims for relief, remedies, or defenses
against enforcement of the Loan Documents that could be asserted against First
Security, its affiliates, directors, officers, employees, or agents, whether
known or unknown.
7. In addition to this Agreement, the Loan Documents, and any
additional documents that this Agreement requires, this finance transaction
may include other written closing documentation such as resolutions, waivers,
certificates, financing statements, filings, statements, closing or escrow
instructions, loan purpose statements, and other documents that First Security
may customarily use in such transactions. Such documents are incorporated
herein by this reference. All the documents to which this paragraph makes
reference express, embody, and supersede any previous understandings,
agreements, or promises (whether oral or written) with respect to this finance
transaction, and represent the final expression of the agreement between First
Security and Borrower, the terms and conditions of which cannot hereafter be
contradicted by any oral understanding (if any) not reduced to writing and
identified above.
Effective as of October 25, 1996
FIRST SECURITY:
First Security Bank, N.A.
/s/ Arthur E. Newell
- ------------------------------------------
Arthur E. Newell, Assistant Vice President
BORROWER:
Mity-Lite, Inc.
/s/ Gregory L. Wilson
- ------------------------------------------
Gregory L. Wilson, President
<PAGE> 3
ATTACHMENT TO MODIFICATION AGREEMENT
DATED October 25, 1996
The Loan Documents shall be amended as follows:
In addition to the terms and conditions of the Loan, Borrower agrees to the
following:
If First Security has not received the full amount of any payment by the
end of fifteen (15) calendar days after the date due, including the balance
due at maturity, Borrower will pay a late charge to First Security in the
amount of five percent (5%) of the overdue payment of principal and interest
or $1,000.00, whichever is less. Borrower hereby agrees to pay the late
charge promptly, but only once on each late payment.
In addition to any late charges that may be assessed as herein provided,
the outstanding balance of this Note after a default in payment of principal
and/or interest or any part thereof, including but not limited to a default in
making the final payment due at maturity, or a default as defined in any loan
agreement, any document securing this Note, or any other document executed in
connection with this Note, shall accrue interest from the date of the default
at the rate equal to four (4) percentage points per annum in excess of the
interest rate charged if this Note were not in default. If First Security
shall waive in writing or permit a cure of such default, the interest rate
shall revert to the non-default rate from and after such waiver of completion
of such cure.
All other terms and conditions shall remain unchanged.
<PAGE> 1
LEASE AGREEMENT AMENDMENT
MITY-LITE, INC.
THIS LEASE AGREEMENT AMENDMENT (the "Lease Amendment") is made and
entered into as of this 31st day of October, 1996 and represents amendments to
the LEASE AGREEMENT dated the 31st day of March, 1995, by and between the
Walter M. and Orpha M. Lewis Family Trust (the "Landlord") and Mity-Lite,
Inc., a Utah corporation (the "Tenant").
The following amendments, as listed by section to the original lease
agreement, are being executed:
1. PREMISES
1.1 Description of the Premises. The approximate square feet of the
leased premises has been increased from 46,200 to 67,700.
2. BASIC RENTAL PAYMENTS; DEPOSIT
2.1 Basic Annual Rent. The Basic Monthly Rental amount is increased
from $11,640 to $17,100.
MITY-LITE, INC. WALTER M. and ORPHA M. LEWIS FAMILY TRUST
/s/ Bradley T Nielson /s/ Walter M. Lewis, Trustee
- -------------------------- -----------------------------------
Bradley T Nielson Walter M. Lewis, Trustee
Chief Financial Officer
<PAGE> 1
STATEMENT OF COMPUTATION OF PRIMARY
AND FULLY DILUTED NET INCOME PER SHARE
Three months ended Twelve months ended
March 31, March 31,
------------------ ---------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
Net income as reported $640,000 $539,000 $2,485,000 $1,928,000
======== ======== ========== ==========
PRIMARY:
Common and common equivalent shares outstanding:
Weighted average number of
common shares outstanding 3,161,359 3,096,472 3,120,433 3,085,801
Common stock equivalents
from options computed on
the treasury-stock method
using the estimated fair
market value of common
stock during the period 162,175 128,438 158,902 149,260
--------- --------- ---------- ----------
Shares used in the
computation 3,323,534 3,224,910 3,279,335 3,235,061
========= ========= ========== ==========
Primary net income per share $0.19 $0.17 $0.76 $0.60
========= ========= ========== ==========
<PAGE> 2
Three months ended Twelve months ended
March 31, March 31,
------------------ ---------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
Net income as reported $640,000 $539,000 $2,485,000 $1,928,000
======== ======== ========== ==========
FULLY DILUTED:
Common and common equivalent shares outstanding:
Weighted average number of
common shares outstanding 3,161,359 3,096,472 3,120,433 3,085,801
Common stock equivalents
from options computed on
the treasury-stock method
using the estimated fair
market value of common
stock at the end or during
the period (whichever was
higher) 177,289 149,618 169,991 157,227
--------- --------- ---------- ----------
Shares used in the
computation 3,338,648 3,246,090 3,290,424 3,243,028
========= ========= ========== ==========
Fully diluted net income
per share $0.19 $0.17 $0.76 $0.59
========= ========= ========== ==========
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
(Including only those items incorporated by reference)
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and the Notes thereto included in this Annual Report to
Shareholders. The statement of income data set forth below with respect to
the fiscal years ended March 31, 1996 and 1997 and the balance sheet data at
March 31, 1996 and 1997 are derived from, and should be read in conjunction
with the audited Financial Statements included elsewhere herein. The
statement of income data set forth below with respect to the fiscal year ended
March 31, 1995 and the balance sheet at March 31, 1995 are derived from
audited financial statements not included in this Annual Report to
Shareholders.
STATEMENTS OF INCOME DATA
Fiscal Year Ended March 31,
- ---------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $13,029 $15,383 $18,680
Cost of products sold 7,669 9,125 10,921
- ---------------------------------------------------------------------------
Gross profit 5,360 6,258 7,759
Expenses:
Selling 1,982 2,194 2,969
General and administrative 601 707 865
Research and development 392 511 375
Expenses related to potential acquisitions -- 128 --
- ---------------------------------------------------------------------------
Income from operations 2,385 2,718 3,550
Interest and other, net 116 219 339
- ---------------------------------------------------------------------------
Income before provision for income taxes 2,501 2,937 3,889
Provision and pro forma provision for
income taxes, including $766,000 of
actual tax expense and a reduction of
$144,000 for the cumulative effect of
change in tax status for the year ended
March 31, 1995(1) 773 1,009 1,404
- ---------------------------------------------------------------------------
Net income and pro forma net income $1,728 $1,928 $2,485
===========================================================================
Net income and pro forma net income
per share $0.55 $0.60 $0.76
===========================================================================
Weighted average common and common
equivalent shares 3,143,308 3,235,061 3,279,335
===========================================================================
<PAGE> 2
BALANCE SHEET DATA
March 31,
- ---------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------
(in thousands)
Total assets $9,090 $11,321 $14,251
Working capital 6,863 8,918 9,441
Current portion of long-term debt -- -- --
Long-term debt less current portion -- -- --
Stockholders' equity 8,167 10,231 12,933
- --------------------------
(1) From April 1, 1988 through April 30, 1994, the Company elected to be
treated as an S Corporation under the provisions of the Internal
Revenue Code and was not subject to federal or state income taxes. The
amount for 1995 reflects a pro forma tax provision. To allow
comparisons with C Corporations, the Company has used a pro forma tax
rate of 36.7 percent, excluding the cumulative effect of change in tax
status described below, to compute its pro forma provision for income
taxes. Concurrent with the termination of its S Corporation status, the
Company was required to establish deferred taxes according to the
provisions of SFAS No. 109 "Accounting for Income Taxes." Under the
liability method prescribed by SFAS 109, deferred income taxes reflect
the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and
amounts used for income tax purposes. The Company recognized this
cumulative effect of change in tax status by recording a net deferred
tax asset for existing temporary differences in the amount of $144,000.
The resulting adjustment was recorded as an income tax benefit for the
year ended March 31, 1995.
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company designs, manufactures and markets lightweight, durable,
folding leg tables, stacking chairs, and other related products used in
multi-purpose rooms of educational, recreational, hotel and hospitality,
government, office, health care, religious and other public assembly
facilities. Historically, the Company's growth has come from an expanding
base of new customers and from increasing sales to existing customers. The
Company's current and future growth is largely dependent upon its ability to
continue increasing table sales to new and existing customers and its ability
to successfully introduce and market new product lines of multi-purpose room
furniture such as folding and stacking chairs, staging, flooring, partitions,
podiums, risers and bench seating. The Company anticipates that over the next
12 months, its primary business strategy and emphasis will be on expanding
domestic and international table sales while seeking appropriate product line
expansion through acquisitions.
In addition to its table products, the Company currently offers five
lines of stacking chairs, the MityTuff(TM), the MityStack(TM), the
MityFlex(TM), the MityDeluxe(TM) and the MityHost(TM). The MityTuff(TM) and
MityStack(TM) chairs are distributed by the Company under OEM arrangements
with the chair manufacturers. Portions of the MityFlex(TM) and the
MityDeluxe(TM) chairs are manufactured by the Company. In addition, the
Company performs final assembly on these two chair lines. The MityHost(TM) is
manufactured in-house at the Company's facility in Orem, Utah.
From April 1, 1988 through April 30, 1994, the Company elected to be
treated as an S Corporation under the provisions of the Internal Revenue Code
and was not subject to federal or state income taxes. The net income for 1995
reflects a pro forma tax provision. To allow comparisons with C Corporations,
the Company used a pro forma tax rate of 36.7 percent, excluding the
cumulative effect of change in tax status described below, to compute its pro
forma provision for income taxes. Concurrent with the termination of its S
Corporation status, the Company was required to establish deferred taxes
according to the provisions of SFAS No. 109 "Accounting for Income Taxes."
Under the liability method prescribed by SFAS 109, deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes. The Company recognized this cumulative effect
of change in tax status by recording a net deferred tax asset for existing
temporary differences in the amount of $144,000. The resulting adjustment was
recorded as an income tax benefit for the fiscal year ended March 31, 1995.
Net sales of the Company's table products have increased during the
fiscal years ended March 31, 1995, 1996 and 1997. Management expects, but
cannot assure, that this trend will continue. It is not anticipated that
gross profit on table products as a percent of table sales will increase
significantly above current levels. Gross margins and expenses associated
with chairs and other new product lines are difficult to predict during start
up periods but the Company believes that by applying its management techniques
to these product lines, profitability rates slightly less than those achieved
on table products can ultimately be reached. However, no assurance can be
given that these results will be realized.
<PAGE> 4
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of net sales represented by items included in or derived from the Company's
Statements of Income:
Fiscal Year Ended March 31,
- ---------------------------------------------------------------------------
1995 1996 1997
- ---------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of products sold 58.9 59.3 58.5
- ---------------------------------------------------------------------------
Gross profit 41.1 40.7 41.5
Operating expenses:
Selling 15.2 14.3 15.9
General and administrative 4.6 4.6 4.6
Research and development 3.0 3.3 2.0
Expenses related to potential acquisitions -- 0.8 --
- ---------------------------------------------------------------------------
Income from operations 18.3 17.7 19.0
Interest and other, net 0.9 1.4 1.8
- ---------------------------------------------------------------------------
Income before tax 19.2 19.1 20.8
Provision and pro forma
provision for income taxes(1) 5.9 6.6 7.5
- ---------------------------------------------------------------------------
Net income and pro forma net income 13.3% 12.5% 13.3%
===========================================================================
(1) From April 1, 1988 through April 30, 1994, the Company elected to be
treated as an S Corporation under the provisions of the Internal Revenue Code
and was not subject to federal or state income taxes. The amount for 1995
reflects a pro forma tax provision. To allow for comparisons to C
corporations, the Company has used its pro forma tax rate of 36.7 percent,
excluding the cumulative effect of change in tax status described below, to
compute its pro forma provision for income taxes. Concurrent with the
termination of its S Corporation status, the Company was required to establish
deferred taxes according to the provisions of SFAS No. 109 "Accounting for
Income Taxes." Under the liability method prescribed by SFAS 109, deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes. The Company recognized this
cumulative effect of change in tax status by recording a net deferred tax
asset for existing temporary differences in the amount of $144,000. The
resulting adjustment was recorded as an income tax benefit for the year ended
March 31, 1995.
<PAGE> 5
COMPARISON OF FISCAL YEARS 1996 AND 1997
Net Sales
The Company's fiscal 1997 net sales of $18,680,000 increased 21.4 percent
over net sales in the prior fiscal year. The increase reflected sales growth
of 18.7 percent in the table product lines and 57.2 in the chair product
lines. Chair sales represented 6.9 percent and 5.3 percent of net sales for
the fiscal years ended March 31, 1997 and 1996, respectively, while
international sales represented 7.4 percent and 5.7 percent of net sales for
the same respective time periods. The sales increase has resulted mainly from
increased sales in the hospitality, recreation and office products market
segments and an overall higher average unit sales price realized on table
sales.
Gross Profit
Gross profit as a percentage of net sales increased over the prior year
by 0.8 percentage points, to 41.5 percent for the fiscal year ended March 31,
1997. The increase was primarily due to increases in the average unit sales
price realized on table products, partially offset by lower gross profit
margins realized on increasing sales of the Company's chair products.
Operating Expenses
Selling expenses were 15.9 percent of net sales in fiscal 1997 as
compared to 14.3 percent for the prior fiscal year. Actual spending increased
by 35.3 percent, or $775,000, resulting from higher personnel, international
selling, and tradeshow costs.
General and administrative expenses were 4.6 percent of net sales in
fiscal 1997 and 1996. Actual spending increased by 22.3 percent, or $158,000.
The increases in spending resulted primarily from increases in personnel
related expenses incurred to support the growing business needs and the
implementation of a new management information system.
Research and development expenses were 2.0 percent of net sales in fiscal
1997 as compared to 3.3 percent for the prior fiscal year. Actual spending
decreased by 26.6 percent, or $136,000. The decrease in research and
development expenditures primarily resulted from one-time expenses incurred in
the June 1995 quarter associated with the development of the Company's
Tesla(TM) folding chair and the Mity-Lite Elite(TM) and Mity-Lite Aluminum(TM)
tables and lower legal expenses incurred for patents. These new product lines
were introduced at the Neocon Trade Show in Chicago and significant
development resources were expended during that quarter to prepare for the
trade show. The Company postponed developing further the Tesla(TM), but began
selling the Mity-Lite Elite(TM) and Mity-Lite Aluminum(TM) tables during the
previous fiscal year.
Also included in operating expenses for the fiscal year ended March 31,
1996 were certain expenses the Company incurred related to the proposed
acquisitions of Fixtures Manufacturing Company and The Lineal Group (Samsonite
Furniture Company). When the Fixtures Manufacturing Company acquisition
discussions were terminated in August 1995, the Company recorded a $95,000
pre-tax charge. In addition, the Company attempted to purchase The Lineal
Group, Inc. which was under bankruptcy protection. The Lineal Group was
eventually purchased by another bidder. The Company incurred approximately
$33,000 in pre-tax expenses related to this potential acquisition. These one-
time charges represented 0.8 percent of net sales for fiscal year ended March
31, 1996.
<PAGE> 6
Other Income/Expense
Other income and expense netted to $339,000 in fiscal 1997. Interest
income was $360,000, an increase of $112,000 from the prior fiscal year due to
a greater average balance of cash and cash equivalents. During fiscal 1997, a
$19,000 loss was incurred from the disposition of certain manufacturing and
research and development assets.
Net Income
For reasons stated above, the Company's 1997 fiscal year net income of
$2,485,000 increased 28.9 percent over net income in the prior fiscal year.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly financial data for
the most recent eight quarters. This quarterly financial data reflects, in
the opinion of Management, all adjustments necessary to present fairly the
results of operations for such periods. The operating results for any quarter
are not necessarily indicative of results for any future period. The Company
anticipates that operating results may fluctuate on a quarterly basis
depending upon a number of factors.
Unaudited Quarterly Financial Information:
YEAR ENDED MARCH 31, 1997
- ---------------------------------------------------------------------------
Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $4,647 $4,939 $4,517 $4,577
Gross profit 2,006 2,046 1,865 1,842
Income before provision for income tax 922 1,057 929 981
Net income 585 672 588 640
Net income per share 0.18 0.21 0.18 0.19
YEAR ENDED MARCH 31, 1996
- ---------------------------------------------------------------------------
Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------
(in thousands, except per share amounts)
Net sales $3,835 $3,978 $3,666 $3,904
Gross profit 1,586 1,625 1,522 1,525
Income before provision for income tax 764 724 735 714
Net income 478 445 466 539
Net income per share 0.15 0.14 0.14 0.17
The Company's quarterly operating results can fluctuate significantly
depending on factors such as timing of new product introductions, market
acceptance of new products, increased competitive pressures, growth in the
institutional furniture market, acquisitions, expansion of international
operations, timing and expansion into complementary products such as chairs,
changes in raw material sources and costs, and adverse changes in general
economic conditions in any of the countries in which the Company does
business. The Company's ability to develop and market tables and
complementary products that successfully adapt to current market needs may
also have an impact on future quarterly results of operations. No assurances
<PAGE> 7
can be or are made that the Company will not experience such quarterly
variations in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, which consist primarily of high-quality
municipal bonds and tax-advantaged money market instruments, totaled $7.65
million at March 31, 1997 as compared to $7.35 million at March 31, 1996. The
increase in cash and cash equivalents was due primarily to cash generated from
operations ($2.70 million) and proceeds related to the exercise of stock
options ($0.19 million). This increase was mostly offset by cash used to 1)
purchase a 49.9 percent equity interest in DO Group, Inc. ($0.86 million), 2)
loan capital to a wholly owned subsidiary of DO Group ($1.00 million), 3)
purchase manufacturing and computer equipment, furniture, and 4) make certain
leasehold improvements ($.73 million).
The Company has historically financed its growth through cash from
operations and borrowings under a revolving credit facility. The Company has
revolving credit facilities with Zions First National Bank and First Security
Bank of Utah, N.A. The agreements, which expire on December 5, 1997 and
October 27, 1997, respectively, allow the Company to draw up to a combined
$4,000,000 under the credit facilities. As of March 31, 1997, the Company had
no amounts drawn under these facilities. The credit facilities require the
maintenance of certain financial ratios and levels of working capital, all of
which were met as of March 31, 1997.
The Company believes that cash flow from its current operations together
with existing cash reserves will be sufficient to support its working capital
requirements for its existing operations for at least the next 12 months.
However, the Company's working capital requirements may significantly increase
if other acquisitions are consummated. No assurances can be given as to the
sufficiency of the Company's working capital to support the Company's
operations following any such acquisitions. If the existing cash reserves,
cash flow from operations and debt financing are insufficient or if working
capital requirements are greater than estimated, the Company could be required
to raise additional capital. There can be no assurance the Company will be
capable of raising additional capital or that the terms upon which such
capital will be available to the Company will be acceptable. Additional
sources of equity capital are available to the Company through the exercise by
holders of outstanding options. At March 31, 1997, the proceeds which would
have been received by the Company upon exercise of outstanding options which
were exercisable on that date were approximately $700,000. There is no
assurance that such options will be exercised. The Company is also evaluating
strategic business and product line acquisitions.
The Company's material cash commitments at March 31, 1997 consisted
primarily of current liabilities to be repaid from funds generated from
operations. At March 31, 1997, the Company had total current liabilities of
$1,318,000. The Company has also entered into a lease agreement from a
related party for its production and office facility under which it is
obligated to pay $17,100 per month through March 2000.
IMPACT OF INFLATION AND ENVIRONMENTAL REGULATIONS
The Company believes that inflation has not had a material effect on its
operating results. However, significant increases in the price of raw
materials could have a material adverse impact on the Company's results of
<PAGE> 8
operations. In addition, compliance with environmental laws or regulations
has not had a material effect on the Company's operations.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS
All forward-looking statements contained herein are deemed by the Company
to be covered by and to qualify for the safe harbor protection provided by the
Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Investors
and prospective investors in the Company should understand that several
factors govern whether any forward-looking statement contained herein will be
or can be achieved. Any one of those factors could cause actual results to
differ materially from those projected herein. These forward-looking
statements include plans and objectives of management for future operations,
including plans and objectives for products, marketing, customers, product
line expansions, enhancements to its manufacturing process, and potential
acquisitions. The forward-looking statements included herein are based on
current expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on assumptions, among others, that the
Company a) will be able to successfully increase its share of the table
market, introduce new product lines to existing customers, market products
directly to end users, enter new markets, and continue enhancing its
manufacturing process, b) will continue to manufacture and market at current
margins high quality, high performance products at competitive prices, c) can
continue to source acceptable raw materials at current prices, d) will
continue to experience current levels of warranty service costs, and e) will
successfully implement its new sales incentive program and management
information system. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of
the Company. Although the Company believes that the assumptions underlying
the forward-looking statements contained herein are reasonable, any of those
assumptions could prove inaccurate and, therefore, there is and can be no
assurance that the results contemplated in any such forward-looking statement
will be realized. Budgeting and other management decisions are subjective in
many respects and thus susceptible to interpretations and periodic revision.
The impact of actual experience and business developments may cause the
Company to alter its marketing, capital expenditure plans or other budgets,
which may in turn affect the Company's result of operations. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
Due to factors noted above and elsewhere in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Company's
future earnings and stock price may be subject to significant volatility,
particularly on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods. Any
shortfall in net sales or earnings from the levels anticipated by securities
analysts could have an immediate and significant effect on the trading price
of the Company's common stock in any given period. Additionally, the Company
may not learn of such shortfalls until late in a fiscal quarter, which could
result in an even more immediate and adverse effect on the trading price of
the Company's common stock.
<PAGE> 9
Independent Auditors' Report
To the Board of Directors and
Shareholders of Mity-Lite, Inc.:
We have audited the accompanying balance sheet of Mity-Lite, Inc. as of March
31, 1997, and the related statements of income, stockholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of Mity-Lite's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Mity-Lite, Inc. at March 31, 1997, and the
results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
May 2, 1997
<PAGE> 10
Report of Independent Accountants
May 13, 1996
To the Board of Directors and
Stockholders of Mity-Lite, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Mity-Lite, Inc. at March 31, 1996, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Salt Lake City, Utah
<PAGE> 11
BALANCE SHEETS
March 31, 1997 1996
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,646,000 $ 7,346,000
Accounts receivable, less allowances of
$161,000 at March 31, 1997 and $132,000
at March 31, 1996 2,196,000 1,608,000
Inventories 700,000 509,000
Deferred income taxes 129,000 91,000
Prepaid expenses and other current assets 88,000 101,000
Related party receivable -- 353,000
------------------------------
Total current assets 10,759,000 10,008,000
Property and equipment, net 1,629,000 1,313,000
Note receivable from affiliate 1,000,000 --
Investment in affiliate 862,000 --
Intangibles 1,000 --
------------------------------
$14,251,000 $11,321,000
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 833,000 $ 747,000
Accrued expenses 485,000 343,000
------------------------------
Total current liabilities 1,318,000 1,090,000
Commitments and Contingencies -- --
Stockholders' equity:
Preferred stock, par value $.10 per share;
authorized 3,000,000 shares; no shares
issued and outstanding -- --
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued and
outstanding 3,161,359 shares at March 31,
1997 and 3,096,472 shares at March 31, 1996 32,000 31,000
Additional paid-in capital 6,952,000 6,744,000
Retained earnings 5,949,000 3,456,000
------------------------------
Total stockholders' equity 12,933,000 10,231,000
------------------------------
$14,251,000 $11,321,000
==============================
See accompanying notes to financial statements.
<PAGE> 12
STATEMENTS OF INCOME
Year Ended March 31, 1997 1996
- ------------------------------------------------------------------------------
Net sales $18,680,000 $15,383,000
Cost of products sold 10,921,000 9,125,000
------------------------------
Gross profit 7,759,000 6,258,000
Selling 2,969,000 2,194,000
General and administrative 865,000 707,000
Research and development 375,000 511,000
Expenses related to potential acquisitions -- 128,000
------------------------------
Total operating expenses 4,209,000 3,540,000
------------------------------
Income from operations 3,550,000 2,718,000
Other income (expense):
Interest expense (2,000) (3,000)
Interest income 360,000 248,000
Other (19,000) (26,000)
------------------------------
Total other income (expense) 339,000 219,000
------------------------------
Income before provision for income taxes 3,889,000 2,937,000
Provision for income taxes 1,404,000 1,009,000
------------------------------
Net income $2,485,000 $1,928,000
==============================
Net income per share $0.76 $0.60
==============================
Weighted average number of common and
common equivalent shares 3,279,335 3,235,061
==============================
See accompanying notes to financial statements.
<PAGE> 13
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Additional Total
Stock Par Paid-In Retained Stockholders'
Value Capital Earnings Equity
- ------------------------------------------------------------------------------
Balance at April 1, 1995 $31,000 $6,616,000 $1,520,000 $8,167,000
Net income 1,928,000 1,928,000
Issuance of 25,331 shares
of common stock from the
exercise of options 85,000 85,000
Deferred compensation 8,000 8,000
Tax benefit of employee
stock options 43,000 43,000
-------------------------------------------------
Balance at March 31, 1996 31,000 6,744,000 3,456,000 10,231,000
-------------------------------------------------
Net income 2,485,000 2,485,000
Issuance of 62,317 shares
of common stock from the
exercise of options 1,000 170,000 171,000
Issuance of 2,750 shares of
common stock to the
Company's 401(k) plan 20,000 20,000
Deferred compensation 8,000 8,000
Tax benefit of employee
stock options 18,000 18,000
-------------------------------------------------
Balance at March 31, 1997 $32,000 $6,952,000 $5,949,000 $12,933,000
=================================================
See accompanying notes to financial statements.
<PAGE> 14
STATEMENTS OF CASH FLOWS
Year Ended March 31, 1997 1996
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $2,485,000 $1,928,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 394,000 354,000
Deferred compensation 8,000 8,000
Deferred tax expense (38,000) (8,000)
Loss on disposal of property and equipment 19,000 26,000
Tax benefit from exercise of stock options 18,000 43,000
Changes in assets and liabilities:
Accounts receivable (588,000) (75,000)
Inventories (191,000) (86,000)
Prepaid expenses and other current assets 13,000 38,000
Related party receivable 353,000 (153,000)
Intangibles (1,000) --
Federal tax deposit -- 313,000
Accounts payable 86,000 103,000
Accrued expenses and other 142,000 64,000
------------------------------
Net cash provided by operating activities 2,700,000 2,555,000
------------------------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 6,000 1,000
Purchases of property and equipment (735,000) (390,000)
Note receivable from affiliate (1,000,000) --
Investment in affiliate (862,000) --
Receivable from sale of European sales branch -- 272,000
------------------------------
Net cash used in investing activities (2,591,000) (117,000)
------------------------------
Cash flows from financing activities:
Net proceeds from exercise of stock options 191,000 85,000
------------------------------
Net cash provided by financing activities 191,000 85,000
------------------------------
Net increase in cash and cash equivalents 300,000 2,523,000
Cash and cash equivalents at beginning of period 7,346,000 4,823,000
------------------------------
Cash and cash equivalents at end of period $7,646,000 $7,346,000
==============================
Supplemental schedule of non-cash investing and
financing activities:
Cash paid during the year for income taxes $1,426,000 $944,000
See accompanying notes to financial statements.
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mity-Lite, Inc. (the "Company") designs, manufactures and markets
lightweight, durable, folding leg tables, stacking chairs and related products
used in multi-purpose rooms of educational, recreational, hotel and
hospitality, government, office, health care, religious and other public
assembly facilities. The Company typically sells its products directly to end
users using a proprietary, computerized sales management system and an
in-house staff of trained sales and customer service personnel. The Company
markets its products throughout the United States and in certain foreign
countries.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments which have a
term maturity not greater than three months.
INVENTORIES
Inventories are stated at the lower of cost, on a first in, first out
basis, or market.
ADVERTISING
Advertising costs consist primarily of print advertising costs which are
charged to expense as incurred. Advertising costs expensed during the years
ended March 31, 1996 and 1997 were $124,000 and $103,000, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to operations as incurred, whereas major replacements and improvements
are capitalized and subsequently depreciated. Depreciation and amortization
on the company's equipment, furniture, and fixtures are provided on a
straight-line basis over the estimated useful lives of the related assets (3
to 7 years). Improvements to leased properties are amortized over their
estimated useful lives or the remaining term of the lease, whichever is
shorter (5 to 15 years).
REVENUE RECOGNITION
Revenue is recognized upon shipment of product.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables and cash
equivalents. In the normal course of business, the company provides credit
terms to its customers. Accordingly, the Company performs ongoing credit
evaluations of its customers and maintains allowances for possible losses
which, when realized, have been within the range of management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the note receivable from affiliate approximates its
book value at March 31, 1997.
INCOME TAXES (see Note 9)
Mity-Lite uses an asset and liability approach for financial accounting
and reporting for income taxes. Deferred income taxes are provided for
temporary differences in the bases of assets and liabilities as reported for
financial statement purposes and income tax purposes.
<PAGE> 16
STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-based Compensation," which became effective for Mity-Lite beginning
April 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the equity
instrument awarded. Since Mity-Lite has decided to continue to apply APB 25
(as permitted by SFAS No. 123), the appropriate required disclosure of the
effects of SFAS No. 123 are included in Note 7.
USE OF ESTIMATES
The preparation of these 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 revenues and expenses during the
reporting period. Actual results could differ from these estimates.
LONG-LIVED ASSETS
Impairment of long-lived assets is determined in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived
Assets to be Disposed Of," which was adopted on January 1, 1996. There were
no impairments as of March 31, 1997.
RECLASSIFICATIONS
Certain reclassifications have been made to 1996 balances to be
consistent with the 1997 presentation.
2. INVENTORIES
Inventories consisted of the following:
March 31, 1997 1996
- ------------------------------------------------------------------------------
Materials and supplies $611,000 $432,000
Work-in-progress 58,000 51,000
Finished goods 31,000 26,000
------------------------------
$700,000 $509,000
==============================
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
March 31, 1997 1996
- ------------------------------------------------------------------------------
Equipment $1,605,000 $1,335,000
Furniture and fixtures 770,000 591,000
Leasehold improvements 509,000 410,000
------------------------------
2,884,000 2,336,000
Less accumulated depreciation and amort. (1,255,000) (1,023,000)
------------------------------
$1,629,000 $1,313,000
==============================
<PAGE> 17
4. INVESTMENT IN AND NOTE RECEIVABLE FROM AFFILIATE
On March 31, 1997, the Company completed the acquisition of a 49.9
percent equity interest in DO Group, Inc., a privately-held manufacturer of
office seating and office panel systems headquartered in Elkhart, Indiana. DO
Group markets its products under the Domore and DO3 trade names and has
manufacturing facilities in Elkhart, Indiana and Marked Tree, Arkansas. DO
Group's seating and system sales totaled approximately $12 million for the
twelve months ended December 31, 1996. Total sales and net loss for the year
ended December 31, 1996, including the operations of its unprofitable wood
case goods division which was sold on December 31, 1996, were $14.2 million
and ($0.5) million respectively. Total assets and liabilities as of December
31, 1996 were $7.4 million and $8.3 million, respectively. Mity-Lite's share
of DO Group's net assets as of December 31, 1996 totaled ($426,000).
Mity-Lite purchased its 49.9 percent equity interest for $750,000 in cash
and the payment of certain closing and due diligence costs totaling $112,000
as of March 31, 1997. Mity-Lite holds a put option to put back its investment
to the DO Group officers at any time during the next three years. The value
of the put option equals the greater of Mity-Lite's cost of investment plus 10
percent per annum or the value of Mity-Lite's interest in DO Group using Mity-
Lite's then current price earnings ratio applied to the earnings of DO Group.
Mity-Lite's put option is collateralized by the remaining 50.1 percent
interest in DO Group. At the conclusion of the three year period, the
majority owners of DO Group will have the right to convert their 50.1 percent
interest in DO Group into 115,000 shares of Mity-Lite common stock, at which
time DO Group will become a wholly owned subsidiary of Mity-Lite. In
addition, Mity-Lite set aside options to purchase 175,000 shares of stock
under the 1997 Stock Incentive Plan (see Note 7). If Mity-Lite does not
exercise its put option, these options will vest in three years.
Mity-Lite will utilize the equity method of accounting for its
investment. Under the equity method, Mity-Lite will recognize its
proportionate share of the earnings or losses of DO Group as incurred.
Management estimates that the difference between Mity-Lite's investment cost
and its share of the underlying equity in DO Group's net assets is
approximately $145,000. This amount will be amortized over a 15-year period.
As part of the acquisition, Mity-Lite loaned $1,000,000 in a senior
subordinated note to a wholly owned subsidiary of DO Group. The note, which
is subordinated to a financial institution's interest, is secured by
inventories, receivables, machinery & equipment, furniture and fixtures, real
property, and all other assets of DO Group. The note is callable in the event
the put option is exercised. The note matures on March 24, 2000 and bears
interest at 10 percent payable quarterly. The Company believes the interest
rate approximates the market rate of interest for similar debt instruments
negotiated at arms length.
Because of the liquidation of the wood case goods division, the pay down
of borrowings from the related proceeds, and the expected positive net income
and cash flows of DO Group, Management believes the investment in DO Group
will be recoverable and the note receivable will be collectible.
5. DEBT
The Company has an unsecured $2,000,000 line of credit with Zions First
National Bank which expires in December 1997 with interest at the bank's base
rate (8.50 percent at March 31, 1997). In addition, the Company has an
<PAGE> 18
unsecured $2,000,000 line of credit with First Security Bank which expires in
October 1997 with interest at the bank's prime rate (8.50 percent at March 31,
1997). No balances were outstanding on either line as of March 31, 1996 and
1997. Among other restrictions, debt covenants related to the lines of credit
require the Company to maintain certain financial ratios and levels of working
capital, all of which were met at March 31, 1997 and 1996.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
March 31, 1997 1996
- ------------------------------------------------------------------------------
Accrued payroll and payroll taxes $336,000 $248,000
Accrued warranty 140,000 84,000
Other 9,000 11,000
------------------------------
$485,000 $343,000
==============================
7. COMMON STOCK OPTIONS
At March 31, 1997, the Company has two stock incentive plans, the 1990
Stock Incentive Plan (the "1990 Plan") and the 1997 Stock Incentive Plan (the
"1997 Plan"). Under the 1990 Plan, Mity-Lite authorized and reserved a total
of 500,000 shares of common stock for issuance under the plan. Under the 1997
Plan, which is still subject to shareholder approval, Mity-Lite plans to
authorize and reserve a total of 300,000 shares of common stock for issuance
under the plan. The purchase price for the shares under the Plans is equal to
the fair value of the Common Stock at the date the options are granted as
determined by the closing price listed on Nasdaq. A table of stock option
activity is shown below:
Number Option Price
Of Options Per Share
- ------------------------------------------------------------------------------
Outstanding at April 1, 1995 262,506 $0.82-$7.38
Granted 67,500 6.13-8.63
Exercised (25,331) 1.64-3.50
Forfeited (376) 2.73
------------------------------
Outstanding at March 31, 1996 304,299 0.82-8.63
Granted 187,150 9.13-14.50
Exercised (62,317) 0.82-3.50
Forfeited (4,542) 2.73-9.13
------------------------------
Outstanding at March 31, 1997 424,590 $1.64-$14.50
==============================
Options exercisable at March 31, 1997 and 1996 were 182,694 and 151,847,
respectively.
Mity-Lite applied APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost of Mity-Lite's
two stock-based compensation plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of
SFAS No. 123, Mity-Lite's net income and earnings per share would have changed
to the pro forma amounts indicated below:
<PAGE> 19
Year Ended March 31, 1997 1996
- ------------------------------------------------------------------------------
Net income:
As reported $2,485,000 $1,928,000
Pro forma 2,431,000 1,883,000
------------------------------
Earnings per share assuming no dilution
As reported $0.76 $0.60
Pro forma $0.74 $0.58
Fully diluted earnings per share assuming
full dilution
As reported $0.76 $0.59
Pro forma $0.74 $0.58
------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997 and 1996, respectively: expected
volatility of 31 percent and 31 percent, risk free interest rates of 6.02
percent and 5.39 percent, and expected lives of one to three years. Under
SFAS No. 123, the weighted average fair value per share of options issued
during the years ended March 31, 1997 and 1996 were $3.85 and $1.49,
respectively.
8. EMPLOYEE BENEFIT PLANS
In January 1995, The Company established a defined contribution plan
which qualifies under Section 401(k) of the Internal Revenue Code. The plan
provides retirement benefits for employees meeting minimum age and service
requirements. Participants may contribute up to 20 percent of their gross
wages, subject to certain limitations. The plan provides for discretionary
matching contributions by the company, as determined by the Board of
Directors. The discretionary amounts contributed to the plan for the years
ended March 31, 1996 and 1997 were $23,000 and $35,000, respectively.
In October 1996, the Board of Directors reserved up to 25,000 shares of
Mity-Lite common stock to be issued under the provisions of the 401(k) plan.
Shares are issued to the plan on a quarterly basis at a price reflecting a 15
percent discount from the market price of the stock at the beginning or the
end of the quarter, whichever is less. The number of shares issued to the
plan during the plan year was 2,750.
<PAGE> 20
9. INCOME TAXES
Income tax provision consisted of the following components:
Year Ended March 31, 1997 1996
- ------------------------------------------------------------------------------
Current:
Federal $1,242,000 $ 870,000
State 200,000 147,000
------------------------------
Total current 1,442,000 1,017,000
------------------------------
Deferred:
Federal (35,000) (11,000)
State (3,000) 3,000
------------------------------
Total deferred (38,000) (8,000)
------------------------------
$1,404,000 $1,009,000
==============================
The tax provisions were at effective rates as follows:
Year Ended March 31, 1997 1996
- ------------------------------------------------------------------------------
Federal statutory tax rates 34.0% 34.0%
State income taxes, net of federal benefit 3.3 3.3
Tax exempt interest (1.4) (2.5)
Research and development tax credit -- (0.8)
Other 0.2 0.4
------------------------------
36.1% 34.4%
==============================
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
Year Ended March 31, 1997 1996
- ------------------------------------------------------------------------------
Deferred tax:
Depreciation ($13,000) ($2,000)
Allowance for bad debts 28,000 25,000
Inventory 2,000 2,000
Vacation accrual 19,000 10,000
Warranty accrual 84,000 56,000
Other accruals 9,000 --
------------------------------
Total deferred tax $129,000 $91,000
==============================
The Company has not provided an allowance against the deferred taxes
recorded in the financial statements since management believes that it is more
likely than not that future earnings will be sufficient to recover deferred
tax.
<PAGE> 21
10. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its building facilities from a related party under an
operating lease which expires in March 2000 and is renewable at the then
current market rates for an additional ten years. The agreement requires
minimum lease payments of $205,000 per year until expiration. The Company has
no other noncancelable lease agreements. Total rent expense was $208,000 and
$157,000 for the years ended March 31, 1997 and 1996, respectively.
During the year ended March 31, 1996, the Company incurred certain capital
costs related to the construction of additional manufacturing and office space
at its current facility. A portion of these amounts, totaling $353,000 as of
March 31, 1996, has been recorded as a related party receivable. During the
year ended March 31, 1997, this amount was reimbursed to the Company by the
lessor once the additions were substantially completed.
11. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings per Share." This standard establishes standards for
computing and presenting earnings per share (EPS). SFAS No. 128 simplifies
the approach for computing earnings per share previously found in Accounting
Principles Board Opinion (APB) Opinion No. 15. It replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures.
Under the new structure, basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997. The computation of basic EPS under SFAS No.
128 would have resulted in net income per common share of $0.62 and $0.80 for
the fiscal years ended March 31, 1996 and 1997, respectively. Diluted EPS
computed under SFAS No. 128 would have resulted in net income per common share
of $0.60 and $0.76 for the fiscal years ended March 31, 1996 and 1997,
respectively.
We consent to the incorporation by reference in the Post-Effective Amendment
No. 1 to Registration Statement No. 333-11355 of Mity-Lite, Inc. on Form S-8
of our report dated May 2, 1997, appearing in this Annual Report on Form 10-KSB
of Mity-Lite, Inc. for the year ended March 31, 1997.
Deloitte & Touche LLP
Salt Lake City, Utah
June 9, 1997
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 No. 333-11355 and in Post-Effective Amendment No. 1 to
the Registration Statement on Form S-8 No. 333-11355 of Mity-Lite, Inc. of our
report dated May 13, 1996 which appears on page 22 of the 1997 Annual Report
(or page 10 of hereto attached Exhibit 13), which is incorporated by reference
on Form 10-KSB of Mity-Lite, Inc. for the year ended March 31, 1997.
Price Waterhouse LLP
Salt Lake City, Utah
June 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at March 31, 1997 and Statements of Income for the twelve months
ended March 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,646,000
<SECURITIES> 0
<RECEIVABLES> 2,357,000
<ALLOWANCES> (161,000)
<INVENTORY> 700,000
<CURRENT-ASSETS> 10,759,000
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<CURRENT-LIABILITIES> 1,318,000
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0
0
<COMMON> 6,984,000
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<EPS-PRIMARY> .76
<EPS-DILUTED> .76
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