Item  1		Financial Statements
		Consolidated Balance Sheets		4
		Consolidated Statements of Operations		5
		Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income		6
		Consolidated Statements of Cash Flows		7
		Notes to the Interim Consolidated Financial Statements		8
Item 2		Management’s Discussion and Analysis or Plan of Operation		13
Item 3		Controls and Procedures		23
PART II		Other Information
Item 1		Legal Proceedings		24
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3		Defaults Upon Senior Securities		24
Item 4		Submission of Matters to a Vote of Security Holders		24
Item 5		Other Information		24
Item 6		Exhibits		24

 

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Forward-Looking Statements

Certain oral statements made by management of Kreisler Manufacturing Corporation (the “Company”) from time to time and certain statements contained herein or in other periodic reports filed by the Company with the Securities and Exchange Commission are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to results of operations and the business of the Company. All such statements, other than statements of historical facts, including those regarding market trends, the Company’s financial position and results of operations, business strategy, projected costs, and plans and objectives of management for future operations, are forward-looking statements. In general, such statements are identified by the use of forward-looking words or phrases including, but not limited to, “estimates,” “intended,” “will,” “should,” “may,” “believes,” “expects,” “expected,” “anticipates,” and “anticipated” or the negative thereof or variations thereon or similar terminology. These forward-looking statements are based on the Company’s current expectations. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. These forward-looking statements represent the Company’s current judgment. The Company disclaims any intent or obligation to update its forward looking statements. Because forward-looking statements involve risks and uncertainties, the Company’s actual results could differ materially from those set forth in or underlying the forward-looking statements.

 

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PART I FINANCIAL INFORMATION

 

Item 1

Financial Statements

Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Balance Sheets

 

		(Unaudited) 9/30/2007			6/30/2007
Assets
Cash and cash equivalents		$	6,297,104		$	5,068,325
Short-term investments			550,000			550,000
Accounts receivable – trade, net (net of $20,000 allowance for uncollectible accounts at September 30, 2007 and June 30, 2007)			2,778,760			2,366,177
Inventories			5,588,985			5,546,983
Deferred tax asset			9,754			96,312
Other current assets			337,097			66,200
Total current assets			15,561,700			13,693,997
Property, plant and equipment, net			1,939,473			2,425,098
Deferred tax asset			123,942			123,942
Total non-current assets			2,063,415			2,549,040
TOTAL ASSETS		$	17,625,115		$	16,243,037
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable – trade		$	1,312,024		$	1,130,990
Accrued expenses			542,436			520,540
Deferred revenue			948,000			500,000
Product warranties			43,391			148,185
Income taxes payable			266,029			—
Obligations under capital leases, current portion			120,389			115,731
Total current liabilities			3,232,269			2,415,446
Obligations under capital leases, net of current portion			225,044			258,343
Accrued environmental cost			430,790			426,117
Total long-term liabilities			655,834			684,460
Commitments and contingencies
Stockholders’ Equity
Common stock, $0.125 par value – 6,000,000 shares authorized; 1,867,948 shares issued and outstanding at September 30, 2007 and June 30, 2007			233,494			233,494
Additional paid-in capital			949,786			909,625
Retained earnings			12,415,749			11,928,989
Accumulated other comprehensive income			137,983			71,023
Total stockholders’ equity			13,737,012			13,143,131
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	17,625,115		$	16,243,037

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

Three Months Ended September 30,		2007				2006
Net sales		$	6,696,947			$	5,082,985
Cost of goods sold			5,448,461				4,164,635
Selling, general and administrative expenses			485,144				298,596
Total costs and expenses			5,933,605				4,463,231
Income from operations			763,342				619,754
Interest and other income			63,715				48,109
Interest and other expenses			(12,357	)			(13,559	)
Income before income taxes			814,700				654,304
Income taxes			(327,940	)			(262,000	)
Net income		$	486,760			$	392,304
Net income per common share:
Net income – basic		$	0.26			$	0.21
Net income – diluted		$	0.26			$	0.21
Weighted average common shares – basic			1,867,948				1,830,447
Weighted average common shares – diluted			1,900,338				1,857,103

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income

Three months ended September 30, 2007

 

		Common Stock Outstanding					Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
		Shares		Amounts
Balances, June 30, 2007		1,867,948		$	233,494		$	909,625		$	11,928,989		$	71,023		$	13,143,131
Comprehensive income:
Net income											486,760						486,760
Foreign currency translation adjustment(1)														66,960			66,960
Total comprehensive income																	553,720
Stock-based compensation								40,161									40,161
Balances, September 30 , 2007 (unaudited)		1,867,948		$	233,494		$	949,786		$	12,415,749		$	137,983		$	13,737,012

(1)	Net of tax expense of $44,640

The accompanying notes are an integral part of these interim consolidated financial statements.

 

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Kreisler Manufacturing Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

 

Three Months Ended September 30,		2007				2006
Cash Flows from Operating Activities:
Net income		$	486,760			$	392,304
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			206,164				135,932
Deferred tax asset			41,918				22,590
Stock-based compensation			40,161				—
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
Accounts receivable – trade, net			(412,583	)			171,470
Inventories			(42,002	)			(681,778	)
Other current assets			(270,897	)			(26,543	)
Accounts payable – trade			181,034				583,483
Accrued expenses			21,896				(250,012	)
Deferred revenue			448,000				—
Product warranties			(104,794	)			—
Income taxes payable			266,029				247,151
Accrued environmental costs			4,673				—
Net Cash Provided by Operating Activities			866,359				594,597
Cash Flows from Investing Activities:
Foreign grant for property and equipment placed in service			448,817				—
Purchases of property and equipment			(169,356	)			(307,971	)
Net Cash Provided by (Used in) Investing Activities			279,461				(307,971	)
Cash Flows from Financing Activities:
Repayment of obligations under capital leases			(28,641	)			(26,282	)
Repayment of line of credit			—				(54,810	)
Net Cash (Used in) Financing Activities			(28,641	)			(81,092	)
Effect of foreign currency translation			111,600				7,752
Increase in cash and cash equivalents			1,228,779				213,286
Cash and cash equivalents, beginning of period			5,068,325				3,295,947
Cash and cash equivalents, end of period		$	6,297,104			$	3,509,233
Supplemental Disclosure of Cash Flow Information
Cash paid during the periods for:
Interest		$	7,253			$	13,559
Supplemental Schedule of Non-cash Investing and Financing Activities:
Equipment acquired under capital leases			—			$	67,241

The accompanying notes are an integral part of these interim consolidated financial statements

 

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Kreisler Manufacturing Corporation and Subsidiaries

Notes to the Interim Consolidated Financial Statements

(Unaudited)

1. Principles of Consolidation

The interim consolidated financial statements include the accounts of Kreisler Manufacturing Corporation (the “Company”) and its wholly-owned subsidiaries, Kreisler Industrial Corporation (“Kreisler Industrial”) and Kreisler Polska Sp. z o.o (“Kreisler Polska”), after the elimination of inter-company transactions and accounts. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair presentation of such interim consolidated financial statements have been included. Interim results are not necessarily indicative of results for a full year.

The interim consolidated financial statements and notes are presented as required by SEC Regulation S-B, and do not contain certain information included in the Company’s annual consolidated financial statements and notes. Accordingly, these statements should be read in conjunction with the consolidated financial statements and notes thereto appearing in the Annual Report on Form 10-KSB of the Company for the fiscal year ended June 30, 2007.

2. Recently Issued Accounting Pronouncements

Effective July 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). There were no unrecognized tax benefits as of July 1, 2007 and as of September 30, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at July 1, 2007. There was no change to this balance at September 30, 2007. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position. The adoption of the provisions of FIN 48 did not have a material impact on the Company’s financial position, results of operations and cash flows.

3. Contingencies

Certain federal and state laws authorize the United States Environmental Protection Agency (“EPA”) and similar state agencies to issue orders and bring enforcement actions to compel responsible parties to take investigative and remedial actions at any site that is determined to present an imminent and substantial danger to the public or the environment because of an actual or threatened release of one or more hazardous substances. These statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remedial costs at sites where substances that are classified as hazardous are or were produced or handled. The Company generally provides for the disposal or processing of such substances through licensed, independent contractors.

In July 1999, the Company became aware of historical releases of hazardous substances at its manufacturing facility located at 180 Van Riper Avenue, Elmwood Park, New Jersey. The Company promptly notified the New Jersey Department of Environmental Protection (“NJDEP”) as required by the New Jersey Spill Compensation and Control Act (“Spill Act”), N.J.S.A. 58:10-23.11, and retained the services of environmental remediation consultants to perform a full site characterization in accordance with the NJDEP’s Technical Requirement for Site Remediation, N.J.A.C. 7:26E-1.1. In June 2001, the Company entered into a Fixed Price Remediation Agreement (“FPRA”) with Resource Control Corporation (“RCC”). At September 30, 2007, the remaining cost estimated for remediation of the site under the FPRA with RCC was approximately $431,000 (the present value at an interest rate of 6.16%, per annum), virtually all of which is expected to be paid by the Company in fiscal 2010, provided that RCC achieves specific milestones contained in the FPRA. On October 18, 2007, the Company received an updated remediation status report from RCC indicating that

 

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the original remediation cost of $2,115,122, as specified in the FPRA, will be exceeded by approximately $381,000. The Company purchased a Remediation Stop Loss insurance policy in 2001 in order to further protect the Company against remediation cost overruns. The insurance policy provided coverage for cost overruns in excess of $3,002,654 incurred during the term of the insurance policy. The difference between remediation costs of $3,002,654, which are not covered by the insurance policy, and $2,115,122 under the FPRA, represented a self-insured retention amount which is the responsibility of RCC, and not the Company. The Remediation Stop Loss insurance policy expired on July 2, 2007 and was not renewed. However, even in the absence of the Remedial Stop Loss insurance policy and in accordance with the terms of the FPRA, RCC, not the Company, is responsible for any unexpected or unanticipated remediation cost increases. The Company monitors the project status and believes that RCC is capable of meeting RCC’s contractual obligations under the FPRA.

At September 30, 2007, estimated remediation payments are as follows:

 

Estimated Remediation Payments as of September 30, 2007
2008		$	—
2009			—
2010			467,630
2011			14,700
			482,330
Unamortized discount			(51,540	)
		$	430,790

In a letter dated February 23, 2006, the Company received a Notice of Assessment Related to Final Audit Determination from the New Jersey Division of Taxation that Kreisler Industrial’s Business Tax Returns for the fiscal years ended June 30, 2002 and June 30, 2001 are subject to additional income tax. The amount of the final audit determination totaled $89,591 of which $59,493 is additional income tax expense, $5,503 is for penalties and $24,595 is for interest through March 15, 2006. In accordance with the appropriate New Jersey statutes, the Company protested the final audit determination and requested an informal administrative conference with the Conference and Appeals Branch. While the Company’s tax counsel was informally advised by the Conference and Appeals Branch that the Company’s appeal was likely to be presented in the fall of 2007, as of November 13, 2007, the Company received no additional information. The amount of interest potentially due is dependent on the final settlement date and is subject to increase.

4. Inventories

At September 30, 2007 and June 30, 2007, inventories consisted of the following:

 

		(unaudited) September 30, 2007			June 30, 2007
Raw materials		$	3,730,109		$	3,463,696
Work in process			1,673,746			1,567,170
Finished goods			185,130			516,117
		$	5,588,985		$	5,546,983

The Company periodically evaluates inventory to determine the likely future usage of those items in inventory. As a result, the Company will typically record a charge against inventory that has historical limited usage. The Company also makes judgments as to future demand requirements based upon customer orders in backlog or the propensity of a customer to order a component from the Company. If such future demand requirements are unlikely, the Company will record a charge against inventory.

 

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5. Net Income per Common Share

Basic net income per common share is computed by dividing net income by the weighted-average common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted-average common shares outstanding plus shares issuable upon the exercise of employee stock options net of shares assumed purchased with option proceeds.

 

(Unaudited)		Three Months Ended September 30,
		2007			2006
Net income		$	486,760		$	392,304
Weighted-average shares outstanding			1,867,948			1,830,447
Dilutive impact of stock options			32,390			26,656
Weighted-average shares outstanding assuming dilution			1,900,338			1,857,103
Net income per common share:
Basic		$	0.26		$	0.21
Diluted		$	0.26		$	0.21

6. Segment Information

The Company manages its business based principally upon geographic areas. The Company evaluates performance and allocates resources based on net sales, operating income (loss) and net assets employed. Net sales are attributed to geographic areas based on the location of the assets producing the sales.

Geographic information regarding the Company’s net sales and long-lived assets for the three months ended September 30, 2007 and 2006 is as follows: