UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended: June 30, 2003.
or
[ ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from ______________ to ______________.
Commission File Number: 000-25939
THE KELLER MANUFACTURING COMPANY, INC.
(Exact name of registrant as specified in its charter)
| Indiana | 35-0435090 | |
|
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| 701 N. Water Street, Corydon, Indiana | 47112 | |
| (Address of principal executive offices) | (Zip Code) | |
| (812) 738-2222 | ||
|
(Registrant's telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 14, 2003, the registrant had 5,177,180 Common shares, no par value, outstanding.
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TABLE OF CONTENTS
Page
| PART I. | |||
| Item 1. | Financial Statements | ||
| Consolidated Balance Sheets as of | |||
| June 30, 2003, June 30, 2002 and December 31, 2002 | 3 | ||
| Consolidated Statements of Income for the | |||
| Three Months Ended and the Six Months ended June 30, 2003 and 2002 | 4 | ||
| Consolidated Statements of Cash Flows for the | |||
| Six Months ended June 30, 2003 and 2002 | 5 | ||
| Notes to Consolidated Financial Statements | 6 | ||
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations | 7 | |
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 10 | |
| Item 4. | Controls and Procedures | 10 | |
| PART II. | |||
| Item 4. | Submission of Matters to a Vote of Security Holders | 11 | |
| Item 5. | Other Information | 11 | |
| Item 6. | Exhibits and Reports on Form 8-K | 12 | |
| Signatures | 13 | ||
| Index to Exhibits | 14 |
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THE KELLER MANUFACTURING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002 AND DECEMBER 31, 2002
| JUNE 30, | DECEMBER 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 |
2002 | |||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 1,295,506 | $ | 4,293,654 | $ | 3,172,234 | |||||
| Investments available for sale | 3,776,309 | 1,253,437 | |||||||||
| Accounts receivable, less allowance for doubtful accounts of | |||||||||||
| $495,000 (June 30, 2003), $805,000 (June 30, 2002) and | |||||||||||
| $420,000 (December 31, 2002) | 3,069,016 | 5,199,150 | 3,807,817 | ||||||||
| Inventories | 8,658,827 | 12,231,118 | 9,788,948 | ||||||||
| Current deferred tax asset | 724,646 | 728,284 | 897,451 | ||||||||
| Income taxes receivable | 275,460 | 635,982 | 2,301,639 | ||||||||
| Other current assets | 199,143 | 424,461 | 182,777 | ||||||||
| Total current assets | 17,998,907 | 23,512,649 | 21,404,303 | ||||||||
| PROPERTY, PLANT AND EQUIPMENT - net | 8,130,104 | 9,624,395 | 8,490,457 | ||||||||
| NET ASSETS AVAILABLE FOR SALE | 661,048 | 661,048 | |||||||||
| DEFERRED TAX ASSET | 86,696 | ||||||||||
| PREPAID PENSION COSTS | 1,479,652 | ||||||||||
| TOTAL | $ | 26,876,755 | $ | 34,616,696 | $ | 30,555,808 | |||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | 382,261 | $ | 624,894 | $ | 660,165 | |||||
| Commissions, salaries and withholdings | 383,108 | 584,551 | 436,889 | ||||||||
| Accrued vacation | 553,556 | 742,801 | 547,895 | ||||||||
| Accrued pension liability | 576,069 | 450,647 | |||||||||
| Allowances for sales returns | 303,742 | 245,000 | 347,981 | ||||||||
| Restructuring reserve | 242,299 | ||||||||||
| Other current liabilities | 1,149,483 | 1,131,677 | 1,424,337 | ||||||||
| Total current liabilities | 3,348,219 | 3,328,923 | 4,110,213 | ||||||||
| LONG-TERM LIABILITIES - | |||||||||||
| Accrued pension liability | 1,339,255 | 1,339,255 | |||||||||
| Deferred income taxes | 241,989 | ||||||||||
| Other long-term liabilities | 107,890 | 1,147,865 | 107,890 | ||||||||
| Total long-term liabilities | 1,447,145 | 1,147,865 | 1,689,134 | ||||||||
| COMMITMENTS AND CONTINGENCIES | |||||||||||
| STOCKHOLDERS' EQUITY: | |||||||||||
| Common stock - no par value, authorized, 40,000,000 shares, | |||||||||||
| issued and outstanding 5,177,180 (June 30, 2003), 5,376,611 | |||||||||||
| (June 30, 2002) and 5,301,611 (December 31, 2002) | 1,670,207 | 1,615,396 | 1,710,350 | ||||||||
| Accumulated other comprehensive loss | (1,874,914 | ) | (1,874,914 | ) | |||||||
| Retained earnings | 22,286,098 | 28,524,512 | 24,921,025 | ||||||||
| Total stockholders' equity | 22,081,391 | 30,139,908 | 24,756,461 | ||||||||
| TOTAL | $ | 26,876,755 | $ | 34,616,696 | $ | 30,555,808 | |||||
See notes to consolidated financial statements
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THE KELLER MANUFACTURING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED AND THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
| THREE MONTHS ENDED JUNE 30 |
SIX MONTHS ENDED JUNE 30 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||
| NET SALES | $ | 4,845,299 | $ | 9,859,784 | $ | 12,682,768 | $ | 19,542,251 | ||||||
| COST OF SALES | 5,311,466 | 8,839,820 | 12,330,208 | 17,768,125 | ||||||||||
| GROSS PROFIT (LOSS) | (466,167 | ) | 1,019,964 | 352,560 | 1,774,126 | |||||||||
| SELLING, GENERAL AND ADMINISTRATIVE | 1,206,284 | 1,991,280 | 2,538,944 | 3,863,973 | ||||||||||
| OPERATING LOSS | (1,672,451 | ) | (971,316 | ) | (2,186,384 | ) | (2,089,847 | ) | ||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||
| Interest income | 13,274 | 15,373 | 22,001 | 23,625 | ||||||||||
| Interest expense | (1,411 | ) | (5,350 | ) | (1,515 | ) | ||||||||
| Other | (198,603 | ) | 2,567 | (184,468 | ) | 66,954 | ||||||||
| Other income (expense), net | (185,329 | ) | 16,529 | (167,817 | ) | 89,064 | ||||||||
| LOSS BEFORE INCOME TAXES | (1,857,780 | ) | (954,787 | ) | (2,354,201 | ) | (2,000,783 | ) | ||||||
| INCOME TAX BENEFIT | (503,855 | ) | (155,880 | ) | (857,787 | ) | ||||||||
| NET LOSS | $ | (1,857,780 | ) | $ | (450,932 | ) | (2,198,321 | ) | $ | (1,142,996 | ) | |||
| NET LOSS PER SHARE OF COMMON STOCK, | ||||||||||||||
| basic and dilutive - | ||||||||||||||
| based on weighted average number of shares | ||||||||||||||
| outstanding of 5,272,952 and 5,407,300 for the six months | ||||||||||||||
| ended June 30, 2003 and 2002, respectively; and | ||||||||||||||
| 5,246,217 and 5,400,489 for the three months ended | ||||||||||||||
| June 30, 2003 and 2002, respectively | $ | (0.35 | ) | $ | (0.08 | ) | $ | (0.42 | ) | $ | (0.21 | ) | ||
See notes to the consolidated financial statements
– 4 –
THE KELLER MANUFACTURING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
| SIX MONTHS ENDED JUNE 30 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | |||||||
| (Unaudited) | ||||||||
| OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (2,198,321 | ) | $ | (1,142,996 | ) | ||
| Adjustments to reconcile net loss to net cash provided | ||||||||
| by operating activities: | ||||||||
| Depreciation | 574,568 | 664,200 | ||||||
| Deferred income taxes | (155,880 | ) | (320,214 | ) | ||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 738,801 | 278,664 | ||||||
| Inventories | 1,130,121 | 1,595,031 | ||||||
| Income taxes receivable / payable | 2,026,179 | 940,314 | ||||||
| Other current assets | (16,366 | ) | (266,445 | ) | ||||
| Prepaid pension costs/accrued pension liability | 125,422 | 295,857 | ||||||
| Accounts payable | (277,904 | ) | 99,975 | |||||
| Commissions, salaries, withholdings and accrued vacation | (48,120 | ) | 170,526 | |||||
| Allowance for sales returns | (44,239 | ) | ||||||
| Other current liabilities | (517,153 | ) | 137,238 | |||||
| Net cash provided by operating activities | 1,337,108 | 2,452,150 | ||||||
| INVESTING ACTIVITIES : | ||||||||
| Purchases of investments held for sale | (2,522,872 | ) | ||||||
| Purchases of property, plant and equipment | (214,215 | ) | (237,845 | ) | ||||
| Net cash used in investing activities | (2,737,087 | ) | (237,845 | ) | ||||
| FINANCING ACTIVITIES: | ||||||||
| Redemption of Common Stock | (291,752 | ) | (132,958 | ) | ||||
| Dividends paid | (184,997 | ) | (379,005 | ) | ||||
| Net cash used in financing activities | (476,749 | ) | (511,963 | ) | ||||
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,876,728 | ) | 1,702,342 | |||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 3,172,234 | 2,591,312 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,295,506 | $ | 4,293,654 | ||||
| CASH PAID (REFUNDED) DURING THE YEAR FOR: | ||||||||
| Interest | $ | $ | 1,400 | |||||
| Income taxes | $ | (2,028,909 | ) | $ | (781,000 | ) | ||
See notes to the consolidated financial statements
– 5 –
THE KELLER MANUFACTURING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002 AND DECEMBER 31, 2002
Note 1. Basis of Presentation
The interim financial statements are unaudited and reflect all adjustments (consisting solely of normal recurring adjustments) that, in the opinion of management, are necessary for a fair statement of results for the interim periods presented in conformity with accounting principles generally accepted in the United States of America. This report should be read in conjunction with the audited consolidated financial statements included in the Form 10-K filed by the Company with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2002. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year ending December 31, 2003 or any other interim period.
Note 2. Inventories
The following is a summary of the major classes of inventories:
| June 30, 2003 |
June 30, 2002 |
December 31, 2002 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Unaudited) | (Unaudited) | ||||||||||
| Raw materials | $ | 2,252,825 | $ | 3,726,648 | $ | 3,122,773 | |||||
| Work-in-process | 3,058,812 | 5,733,324 | 3,653,633 | ||||||||
| Finished goods | 3,347,190 | 2,771,146 | 3,012,542 | ||||||||
| Net inventories | $ | 8,658,827 | $ | 12,231,118 | $ | 9,788,948 | |||||
Note 3. Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The Company adopted this statement effective January 1, 2003. Management has concluded that the adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
Note 4. Disclosure of Certain Significant Risks and Uncertainties
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company’s periodic filings with the Securities and Exchange Commission include, where applicable, disclosures of estimates, assumptions, uncertainties and concentrations in products, sources of supply and markets that could affect the consolidated financial statements and future operations of the Company.
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Note 5. Income Taxes
The Company follows SFAS No. 109, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the consolidated financial statement or income tax return. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income in the future. Because of the continuous losses in the second quarter of 2003, the Company has provided a valuation allowance for operating loss carryforwards originating in the second quarter.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains statements that constitute forward looking statements within the meaning of the securities laws. Such statements may include statements regarding the intent, belief or current expectations of The Keller Manufacturing Company, Inc. (the “Company”) or its officers with respect to (i) the Company’s strategic plans, (ii) the policies of the Company regarding capital expenditures, financing or other matters, and (iii) industry trends affecting the Company’s financial condition or results of operations. Readers of this discussion are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward looking statements as a result of various factors. This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2003, June 30, 2002, and December 31, 2002 and the consolidated results of operations for the three month and six month periods ended June 30, 2003 and 2002. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations included the Company’s December 31, 2002 Annual Report to Shareholders.
Critical Accounting Policies and Estimates
The Company’s financial statements are prepared in accordance with accounting principles that are generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, as well as the disclosure of contingent assets and liabilities. Management evaluates its estimates and judgments, including those related to revenue recognition, allowances for doubtful accounts, inventory valuation allowances, useful lives of property, plant and equipment, derivative contracts, pension benefits and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or based on different assumptions. The Company believes that the following significant accounting policies are very complex and their application involves a high degree of judgment.
Revenue Recognition. The Company recognizes revenue when title transfers to the customer and all requirements of the sale are complete. The timing of the sale and transfer of ownership depends on the individual customer and is agreed to before order acceptance. Typically, title transfers are completed when product leaves one of the Company’s warehouses.
Allowance for Doubtful Accounts. The Company maintains an allowance for doubtful accounts for estimated losses that might result from its customers failing to make required payments. The Company bases its allowances on the likelihood of recovery of accounts receivable based on past experience and current collection trends. If economic or specific industry trends worsen beyond the Company’s estimates, the Company would increase its allowance for doubtful accounts by recording additional expense.
– 7 –
Pension Benefits. The amounts recognized in the financial statements related to pension benefits are determined on an actuarial basis, the calculation of which requires many assumptions. A significant assumption used in determining the Company’s net pension cost is the expected long-term rate of return on plan assets. Based on input from the Company’s actuarial firm, the Company assumed an expected long-term rate of return on plan assets of 7.50% for both fiscal 2002 and 2001. Another significant estimate that affects the Company’s pension cost is the discount rate used in the annual actuarial valuation of pension benefit. The discount rate represents the interest rate that is used to determine the present value of future cash flows required to settle the pension obligations. Based on input from the Company’s actuarial firm, the Company assumed a discount rate of 6.50% and 7.25% in fiscal 2002 and 2001, respectively.
Income Taxes. The Company records deferred tax assets and liabilities using enacted tax rates for the effect of temporary differences between the book and tax basis of assets and liabilities. If enacted tax rates change, the Company would adjust its deferred tax assets and liabilities through the provision for income taxes. The Company evaluates the need for a valuation allowance of its deferred tax assets based on the likelihood of expected future benefits.
Results of Operations
The following table sets forth, for the periods indicated, consolidated statement of income data as a percentage of net sales.
| THREE MONTHS ENDED | SIX MONTHS ENDED | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | 2002 | 2003 | 2002 | |||||||||||
| Net Sales | 100 | .0% | 100 | .0% | 100 | .0% | 100 | .0% | ||||||
| Cost of Sales | 109 | .6% | 89 | .7% | 97 | .2% | 90 | .9% | ||||||
| Gross Profit (Loss) | (9 | .6%) | 10 | .3% | 2 | .8% | 9 | .1% | ||||||
| Selling, General and Administrative | 24 | .9% | 20 | .2% | 20 | .0% | 19 | .8% | ||||||
| Operating Loss | (34 | .5%) | (9 | .9%) | (17 | .2%) | (10 | .7%) | ||||||
| Other Expense, Net | 3 | .8% | * | 1 | .3% | * | ||||||||
| Loss Before Income Taxes | (38 | |||||||||||||