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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, 2000
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[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to
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Commission file number: 333-17305
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International Knife & Saw, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 57-0697252
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1299 Cox Avenue
Erlanger, Kentucky 41018
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(Address of principal executive offices)
(859) 371-0333
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(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 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 __
As of July 31, 2000, there were 481,971 shares of the registrant's common stock
outstanding, all of which were owned by an affiliate of the registrant.
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International Knife & Saw, Inc. and Subsidiaries
Index
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets ............................................................. 3
Consolidated Statements of Income ...................................................... 5
Consolidated Statements of Cash Flows .................................................. 6
Notes to Consolidated Financial Statements ............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk .............................. 13
Part II. Other Information
Item 1. Legal Proceedings ..................................................................... 14
Item 2. Change in Securities ..................................................................... 14
Item 3. Defaults Upon Senior Securities........................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 14
Item 5. Other Information ........................................................................ 14
Item 6. Exhibits and Reports on Form 8-K ......................................................... 14
(a) Exhibits ................................................................... 14
(b) Reports on Form 8-K ......................................................... 14
Signatures ....................................................................................... 15
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
International Knife & Saw, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2000 1999
---------------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 3,337 $ 1,862
Accounts receivable, trade, less allowances for
doubtful accounts of $2,008 and $1,856 29,466 25,620
Inventories 30,483 27,922
Due from parent 1,191 1,159
Other current assets 2,723 2,759
---------------------------------
Total current assets 67,200 59,322
Other assets:
Goodwill 15,019 17,015
Debt issuance costs 2,504 2,736
Other noncurrent assets 2,834 2,163
---------------------------------
20,357 21,914
Property, plant and equipment-net 47,397 46,382
---------------------------------
Total assets $ 134,954 $ 127,618
=================================
See accompanying notes.
3
International Knife & Saw, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2000 1999
------------------------------------
(in thousands, except share amounts)
Liabilities and shareholder's deficit
Current liabilities:
Notes payable $ 14,214 $ 4,362
Current portion of long-term debt 2,902 2,465
Accounts payable 11,078 13,007
Accrued liabilities 13,989 10,619
-----------------------------------
Total current liabilities 42,183 30,453
Long-term debt, less current portion 111,129 112,391
Other liabilities 10,165 6,557
-----------------------------------
Total liabilities 163,477 149,401
Minority interest 1,105 1,063
Shareholder's deficit:
Common stock, no par value - authorized - 580,000 shares;
issued - 526,904 shares; outstanding - 481,971 shares 5 5
Additional paid-in capital 10,153 10,153
Accumulated deficit (31,796) (25,898)
Accumulated other comprehensive loss (4,558) (3,674)
Treasury stock, at cost (3,432) (3,432)
------------------------------------
Total shareholder's deficit (29,628) (22,846)
------------------------------------
Total liabilities and shareholder's deficit $ 134,954 $ 127,618
====================================
See accompanying notes.
4
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Quarter ended Six months ended
June 30, June 30,
2000 1999 2000 1999
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(in thousands, except per share amounts)
Net sales $ 41,253 $ 37,280 $ 84,916 $ 76,516
Cost of sales 30,780 26,934 62,189 54,510
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Gross profit 10,473 10,346 22,727 22,006
Selling, general and administrative expenses 11,473 8,348 21,025 16,615
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Operating income (loss) (1,000) 1,998 1,702 5,391
Other expenses (income):
Interest income (45) (34) (66) (57)
Interest expense 3,260 3,144 6,364 6,311
Minority interest 68 127 134 181
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3,283 3,237 6,432 6,435
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Loss before income taxes (4,283) (1,239) (4,730) (1,044)
Provision (benefit) for income taxes 498 (435) 1,168 (356)
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Net loss $ (4,781) $ (804) $ (5,898) $ (688)
=================================================================
Net loss per common share $ (9.92) $ (1.67) $ (12.24) $ (1.43)
See accompanying notes.
5
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2000 1999
-------------------------
(in thousands)
Operating activities
Net loss $ (5,898) $ (688)
Adjustments to reconcile net loss to net cash (used)
Provided by operating activities:
Depreciation and amortization 3,959 3,307
Loss on disposition of businesses 1,981 -
Loss on sale of property, plant and equipment 44 31
Minority interest in income of subsidiary 134 181
Changes in operating assets and liabilities, net of effects
from purchases of operations:
Accounts receivable (1,696) (754)
Inventories 1,721 2,605
Accounts payable (4,101) (190)
Accrued liabilities (161) 821
Other 786 (337)
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Net cash (used) provided by operating activities (3,231) 4,976
Investing activities
Purchases of operations, net of cash acquired (956) -
Purchases of property, plant and equipment (2,802) (3,731)
Proceeds from sale of property, plant and equipment 80 423
Proceeds from disposition of businesses 1,290 -
Decrease (increase) in notes receivable and other assets (22) 322
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Net cash used by investing activities (2,410) (2,986)
Financing activities
Decrease (increase) in amounts due from parent 32 (1,048)
Increase in notes payable and long-term debt 16,967 15,366
Repayment of notes payable and long-term debt (9,790) (14,733)
Cash received from investees 28 -
------------------------
Net cash provided (used) by financing activities 7,237 (415)
Effect of exchange rates on cash and cash equivalents (120) (32)
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Increase in cash and cash equivalents 1,475 1,543
Cash and cash equivalents at beginning of period 1,862 2,032
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Cash and cash equivalents at end of period $ 3,337 3,575
========================
See accompanying notes.
6
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands)
1. Basis of Presentation
The unaudited interim consolidated financial statements contain all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of the
management of International Knife & Saw, Inc. and its consolidated subsidiaries
("the Company"), necessary to present fairly the consolidated financial position
and consolidated results of operations and cash flows of the Company. Results of
operations for the periods presented are not necessarily indicative of the
results for the full fiscal year.
These financial statements should be read in conjunction with the audited
consolidated financial statements and related notes included in the Company's
Form 10-K for the year ended December 31, 1999. The consolidated balance sheet
at December 31, 1999, has been derived from the audited consolidated financial
statements at that date. Certain 1999 amounts have been reclassified to conform
to the current year presentation.
2. Acquisitions
In January 2000, the Company's German subsidiary acquired all of the shares of
Boehler Miller Messer und Saegen GmbH ("BMMS"). BMMS is headquartered in
Waidhofen, Austria. The purchase price consisted of 13,300 Austrian Schillings
(approximately $956) in cash, net of cash acquired, and 63,000 Austrian
Schillings (approximately $4,530) in assumed debt. The Company's lines of credit
were increased in order to finance the cash payment. Additional consideration is
contingent upon BMMS achieving certain annual earnings and would be payable in
2002. BMMS produces knives, saws and ground flats for the wood, paper and metal
industries with annual sales of approximately 300,000 Austrian Schillings
(approximately $21,600). The acquisition was accounted for under the purchase
method. There was no goodwill on this acquisition.
3. Comprehensive Income
The Company includes minimum pension liabilities and foreign currency
translation adjustments in other comprehensive income. For the quarters ended
June 30, 2000 and 1999, total comprehensive losses amounted to $5,004 and $939,
respectively, including $223 and $135 of other comprehensive losses related to
foreign currency translation adjustments. For the six months ended June 30, 2000
and 1999, total comprehensive losses amounted to $6,782 and $2,201,
respectively, including $884 and $1,513 of other comprehensive losses related to
foreign currency translation adjustments.
7
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
4. Notes Payable and Long -Term Debt
June 30, December 31,
2000 1999
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Notes payable:
Notes payable on demand in German Marks to a German bank,
issued under revolving credit agreements, interest payable
quarterly $ 5,896 $ 1,347
Notes payable on demand in Chinese Yuan Renminbi to
Chinese banks, issued under revolving credit agreements,
interest payable monthly 1,630 1,765
Notes payable on demand in Austrian Schillings to an Austrian
bank 1,388 -
Notes payable on demand in U.S. Dollars to a German bank,
issued under revolving credit agreements, interest payable
quarterly 5,300 1,250
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$ 14,214 $ 4,362
==============================
June 30, December 31,
2000 1999
-------------------------------
Long-term debt:
11-3/8% Senior Subordinated Notes due 2006 $ 90,000 $ 90,000
Notes payable in German Marks to a German bank 15,159 16,399
Notes payable in Chinese Yuan Renminbi to
Chinese banks 1,379 1,680
Capitalized lease obligations in U.S. dollars to U.S. lenders 3,757 4,261
Notes payable in Austrian Schillings to an Austrian bank 1,892 -
Promissory note payable in Dutch Guilders to a
former shareholder of the Diacarb Company 1,778 2,414
Other 66 102
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114,031 114,856
Less current portion 2,902 2,465
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$ 111,129 $ 112,391
==============================
At June 30, 2000, the Company had committed global, multi-currency credit
facilities of US $41,054. Unused committed lines of credit from these facilities
were US $16,327, compared to US $16,801 at December 31, 1999. A facility fee of
0.25% per annum is charged on the unused portion of the U.S. dollar component of
the facility.
8
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
5. Income Taxes
IKS Corporation, of which the Company is a wholly-owned subsidiary, files a
consolidated Federal income tax return which includes the Company. The Company's
provision/benefit for income taxes includes U.S. federal, state, and local
income taxes as well as non-U.S. income taxes in certain jurisdictions. The
current and deferred tax provision and benefit for the Company are recorded as
if it filed on a stand-alone basis. All participants in the consolidated income
tax return are separately liable for the full amount of the taxes, including
penalties and interest, if any, which may be assessed against the consolidated
group. The current provision/benefit for United States income taxes is recorded
to the intercompany account with IKS Corporation. The Company did not record a
tax benefit related to the pre-tax losses in the United States for the six
months ended June 30, 2000 in accordance with income tax accounting rules.
6. Inventories
June 30, December 31,
2000 1999
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Finished goods $ 17,865 $ 17,120
Work in process 5,248 5,088
Raw materials and supplies 7,370 5,714
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$ 30,483 $ 27,922
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9
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
7. Disposition of Businesses and Other Non-recurring Charges
The operating loss for the second quarter includes non-recurring charges of
$2,600, comprised primarily of a $1,981 loss on the sale of certain service
centers and $449 in severance costs related to the resignation of the Company's
former CEO.
In May and June, 2000 the Company completed the sale of six service centers for
a combined selling price of $1,480, comprised of $1,290 in cash and a $190 note
receivable. These service centers were located in Illinois, Wisconsin, Oregon,
Virginia, Tennessee and Georgia. The decision to sell the service centers was
made in order to redeploy assets to the Company's strategic core initiatives.
On April 25, 2000, P. Daniel Miller, the Company's President and CEO, submitted
his resignation to the Board of Directors of the Company effective May 1, 2000.
As of that date, the Board of Directors established an executive committee
comprised of Messrs. Thomas W.G. Meyer, Executive Vice President, Europe and
Asia; William M. Schult, Executive Vice President-CFO, Treasurer and Secretary;
Bradley H. Widmann, Vice President - Operations for the Americas; and Jeffrey H.
Welday, Vice President of Sales and Marketing for the Americas. This committee
is responsible for all operations of the Company and reports directly to the
Board of Directors.
10
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward looking statements. Certain matters discussed in
this filing could be characterized as forward looking statements, such as
statements relating to plans for future expansion, other capital spending,
financing sources and effects of regulation and competition. Such forward
looking statements involve important risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward looking
statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included in the Company's
Form 10-K as of and for each of the three years in the period ended December 31,
1999.
General
The Company is a global leader in the manufacturing, servicing and
marketing of industrial and commercial machine knives and saws. The Company has
been manufacturing knives and saws for nearly 100 years, beginning in Europe and
expanding its presence to the United States in the 1960s. The Company operates
on an international basis with facilities in North America, Europe, Asia and
South America and sells products in over 75 countries. The Company offers a
broad range of products, used for various applications in numerous markets.
Presence outside the U.S.
The Company's North American operations account for 58% of its net
sales and 17% of its operating income for the first half of 2000, excluding the
effect of $2.6 million of non-recurring charges discussed in Note 7. Its other
international operations account for the remainder and are located primarily in
Europe, 35% first half net sales, and 73% of first half 2000 operating income,
excluding the effect of the $2.6 million of non-recurring charges.
The Company's operating results are subject to fluctuations in foreign
currency exchange rates as well as the currency translation of its foreign
operations into U.S. Dollars. The Company manufactures products in the U.S.,
Germany, Austria, Canada and China and exports products to more than 75
countries. The Company's foreign sales, the majority of which occur in European
countries, are subject to exchange rate volatility. In addition, the Company
consolidates German, Austrian, Dutch, French, Canadian, Mexican, Chinese and
other Asian operations and changes in exchange rates relative to the U.S. Dollar
have impacted financial results. As a result, a decline in the value of the U.S.
Dollar relative to these other currencies can have a favorable effect on the
profitability of the Company and an increase in the value of the U.S. Dollar
relative to these other currencies can have a negative effect on the
profitability of the Company. Comparing exchange rates for the first six months
of 2000 to the first six months of 1999, there was a negative impact of $2.7
million (net of the currency impact on the BMMS sales) on sales with a minimal
impact on net income. In addition, in the first half of 2000 there was a
decrease in shareholder's equity from December 31, 1999 due to a $.9 million
change in foreign currency translation adjustment. To mitigate the short-term
effect of changes in currency exchange rates on the Company's foreign currency
based purchases and its functional currency based sales, the Company
occasionally hedges its exposure by entering into foreign exchange and U.S.
Dollar forward contracts to hedge a portion of its budgeted (future) net foreign
exchange and U.S. Dollar transactions over periods ranging from one to six
months.
Results of Operations
As used in the following discussion of the Company's results of
operations, (i) the term "gross profit" means the dollar difference between the
Company's net sales and cost of sales and (ii) the term "gross margin" means the
Company's gross profit divided by its net sales.
11
Second quarter and six months ended June 30, 2000 compared to second quarter and
six months ended June 30, 1999
Net Sales: Net sales increased 10.7% to $41.3 million for the second
quarter and 11.0% to $84.9 million for the first half of 2000 from $37.3 and
$76.5 million for the same periods in 1999 primarily attributable to the
acquisition of BMMS in January 2000. The Company experienced sales reductions in
its North American operations (1.2% to $23.8 million) for the second quarter and
(1.8% to $49.0 million) for the first half of 2000 compared to the same periods
in 1999 primarily attributable to continuing organizational issues and to
softness in the North American market. On April 25, 2000, P. Daniel Miller, the
Company's President and CEO resigned from the Company effective May 1, 2000. An
executive committee, comprised of four officers of the Company, reporting
directly to the Board of Directors, was established. The Company experienced
sales improvements (32.6% to $17.5 million) in its other operations for the
second quarter and (35.0% to $35.9 million) for the first half of 2000 compared
to the same period in 1999 primarily attributable to the BMMS acquisition.
Gross Profit: Gross profit increased slightly to $10.5 and $22.7
million for the second quarter and first half of 2000 up from $10.3 and $22.0
million for the same periods in 1999. Excluding the effect of the non-recurring
charges discussed in Note 7, gross profit would have been $11.0 and $23.2
million for the second quarter and first half of 2000, respectively. Gross
margin decreased to 25.4% and 26.8% for the second quarter and first half of
2000 compared to 27.8% and 28.8% for the same periods in 1999 primarily
attributable to the factors noted above and the second quarter non-recurring
charges. Excluding the second quarter non-recurring charges, gross profit for
the second quarter and first six months of 2000 would have been 26.6% and 27.3%,
respectively. The Company experienced gross profit declines in its North
American operations (15.0% to $5.1 million) for the second quarter and (14.2% to
$11.5 million) for the first half of 2000 compared to the same periods in 1999
primarily attributable to the factors noted above. Excluding the second quarter
non-recurring charges, the North American operations decline in gross profit
would have been 6.7% to $5.6 million for the second quarter and a decline of
10.4% to $12.0 million in the first half of 2000. The Company experienced gross
profit improvements (25.6% to $5.4 million) in its other operations for the
second quarter and (30.2% to $11.2 million) for the first half of 2000 compared
to the same periods in 1999 primarily attributable to the BMMS acquisition in
January 2000.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses were $11.5 and $21.0 million for the second quarter and
first half of 2000 compared to $8.3 and $16.6 million for the same periods in
1999. Excluding the second quarter non-recurring charges, selling, general and
administrative expenses would have been $9.4 and $18.9 million for the second
quarter and first half of 2000, respectively. The increase, net of the second
quarter non-recurring charges, is primarily attributable to the BMMS
acquisition. Selling, general and administrative expenses increased to 27.8% and
24.8% from 22.4% and 21.7% of sales for the respective periods. Excluding the
second quarter non-recurring charges, selling, general and administrative
expenses would have increased slightly to 22.8% for the second quarter and 22.3%
for the first half of 2000.
Interest Expense, net: Net interest expense remained relatively
constant at $3.2 and $6.3 million for the second quarter and first half of 2000
compared to the same periods in 1999.
Income Taxes: Due to pre-tax losses in the United States in the second
quarter and first half of 2000 for which the Company did not record the related
current tax benefits in accordance with income tax accounting rules, and as a
result of pre-tax income in the Company's other operations for which the Company
recorded related tax provisions, the Company has recorded a consolidated
provision for income tax on a consolidated pre-tax loss of $4,730,000. Due to
pre-tax losses in the United States in the second quarter and first half of
1999, the Company recorded related tax benefits which resulted in a consolidated
tax benefit at effective tax rates of 35.1% and 34.1% respectively. The
significant change in income taxes from 1999 is due to the above factors and the
recording of tax benefits related to the pre-tax losses in the United States in
1999, but not in 2000.
12
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working
capital needs, to meet required debt and interest payments, and to complete
planned maintenance and expansion expenditures. The Company anticipates that its
operating cash flow, together with available borrowings of $16.3 million under
existing credit facilities, will be sufficient to meet its capital requirements.
As of June 30, 2000, the Company's total long term debt and shareholder's
deficit was $114.0 and $29.6 million, respectively.
Net cash flow used in operations aggregated $3.2 million for the first
half of 2000 compared to $5.0 million provided by operations for the same period
in 1999. This decrease was primarily attributable to a $5.2 million decrease in
net income and a $5.6 million increase in working capital offset by the $2.0
loss on the disposition of businesses.
Cash used in investing activities for the first half of 2000 was $2.5
million compared to $3.0 million for the same period in 1999. The decreased use
of cash is primarily due to a decrease in net capital expenditures compared to
1999.
Cash provided by financing activities for the first half of 2000 was
$7.3 million compared to cash used of $.4 million for the same period in 1999.
The increase in cash provided compared to the prior year is primarily due to
increased net borrowings in 2000 compared to 1999 due to the BMMS acquisition
and increased working capital needs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information required by Item 3 is included in Item 2 on page 11 of this
Form 10-Q.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time involved in legal proceedings arising
in the normal course of business. The Company believes there is no outstanding
litigation which could have a material impact on its financial position or
results of operations.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit
No. Description
------- ------------------------------------------------
10.15 Summary of Permitted Indebtedness, Commitments
from Banks, and Availability at June 30, 2000
10.16 Letter agreement dated November 16, 1998 between
Deutsche Bank and IKS Klingelnberg GmbH.
10.17 Letter agreement dated January 19, 1999 between
Deutsche Bank and the Company.
10.18 Letter agreement dated May 12, 1999 between
Deutsche Bank and the Company.
10.19 Letter agreement dated March 16, 2000 between
Deutsche Bank and IKS Klingelnberg GmbH.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL KNIFE & SAW, INC.
By: /s/ William M. Schult
------------------------------------
William M. Schult
Executive Vice President - Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer, and Executive
Committee member)
August 11, 2000
15
EXHIBIT INDEX
Exhibit
No. Description
- -------- -------------------------------------------------------------------
10.15 Summary of Permitted Indebtedness, Commitments from Banks, and
Availability at June 30, 2000
10.16 Letter agreement dated November 16, 1998 between Deutsche Bank and
IKS Klingelnberg GmbH.
10.17 Letter agreement dated January 19, 1999 between Deutsche Bank
and the Company.
10.18 Letter agreement dated May 12, 1999 between Deutsche Bank and the
Company.
10.19 Letter agreement dated March 16, 2000 between Deutsche Bank and IKS
Klingelnberg GmbH.
27 Financial Data Schedule
16