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 September 30, 2001
[ ] 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: 333-17305
International Knife & Saw, Inc.
(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
(Address of principal executive offices)
(859) 371-0333
(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
--- ---
As of October 31, 2001, there were 481,971 shares of the registrant's common
stock outstanding, all of which were owned by an affiliate of the registrant.
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 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 2. Change in 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 and Reports on Form 8-K 25
(a) Exhibits
(b) Reports on Form 8-K 25
Signatures 26
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2001 2000
----------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 1,394 $ 3,392
Accounts receivable, trade, less allowances for
doubtful accounts of $1,211 and $2,428 10,486 24,223
Inventories 11,055 29,526
Due (to) from parent (125) 34
Other current assets 536 2,898
----------------------------
Total current assets 23,346 60,073
Other assets:
Goodwill 7,084 14,773
Debt issuance costs - 2,271
Other noncurrent assets 689 2,478
----------------------------
7,773 19,522
Property, plant and equipment-net 19,647 46,796
----------------------------
Total assets $ 50,766 $ 126,391
============================
See accompanying notes.
3
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2001 2000
----------------------------
(in thousands)
Liabilities and shareholder's deficit
Current liabilities subject to compromise:
Accrued interest $ 8,787 $ -
Other accrued liabilities 122 -
Senior subordinated notes 90,000 -
----------------------------
Total current liabilities subject to compromise 98,909 -
Current liabilities not subject to compromise:
Notes payable 3,000 19,208
Current portion of long-term debt 956 4,027
Accounts payable 3,639 10,807
Accrued liabilities 5,154 13,745
----------------------------
Total current liabilities not subject to compromise 12,749 47,787
Long-term debt, less current portion 1,458 108,321
Other liabilities 301 8,865
----------------------------
Total liabilities 113,417 164,973
Minority interest - 1,072
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 (66,856) (41,427)
Accumulated other comprehensive loss (2,521) (4,953)
Treasury stock, at cost (3,432) (3,432)
----------------------------
Total shareholder's deficit (62,651) (39,654)
----------------------------
Total liabilities and shareholder's deficit $ 50,766 $ 126,391
============================
See accompanying notes.
4
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Income
(Unaudited)
Quarter ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-----------------------------------------------------
(in thousands, except per share amounts)
Net sales $ 18,147 $ 37,652 $ 88,297 $124,219
Cost of sales 14,637 27,816 67,425 91,656
---------------------------------------------------------
Gross profit 3,510 9,836 20,872 32,563
Selling, general and administrative expenses 4,261 8,721 20,374 29,746
---------------------------------------------------------
Operating income (loss) (751) 1,115 498 2,817
Other expenses (income):
Interest income (10) (30) (203) (96)
Interest expense (contractual interest of
$2,784 and $9,301 in 2001) 2,614 3,242 9,131 9,606
Minority interest - 59 103 193
---------------------------------------------------------
2,604 3,271 9,031 9,703
Loss before reorganization expenses and ---------------------------------------------------------
income taxes (3,355) (2,156) (8,533) (6,886)
Reorganization expenses 3,931 - 17,244 -
---------------------------------------------------------
Loss before income taxes (7,286) (2,156) (25,777) (6,886)
Provision (benefit) for income taxes (71) 178 (348) 1,346
---------------------------------------------------------
Net loss $ (7,215) $ (2,334) $ (25,429) $ (8,232)
==========================================================
Net loss per common share $ (14.97) $ (4.84) $ (52.76) $ (17.08)
See accompanying notes.
5
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2001 2000
----------------------------
(in thousands)
Operating activities
Net loss $ (25,429) $ (8,232)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization 4,558 5,780
Loss on disposition of businesses 11,233 1,981
Loss on sale of property, plant and equipment 85 63
Minority interest in income of subsidiary 103 193
Changes in operating assets and liabilities, net of effects from
purchases of operations and disposition of businesses:
Accounts receivable (576) 337
Inventories 2,921 1,254
Accounts payable (3,910) (2,495)
Accrued liabilities 7,816 605
Other 118 568
----------------------------
Net cash (used) provided by operating activities (3,081) 54
Investing activities
Purchases of operations, net of cash acquired - (956)
Purchases of property, plant and equipment (2,720) (4,043)
Proceeds from sale of property, plant and equipment 119 628
Proceeds from disposition of businesses, net of cash disposed 9,252 1,290
Decrease (increase) in notes receivable and other assets 90 (283)
----------------------------
Net cash provided (used) by investing activities 6,741 (3,364)
Financing activities
Increase in amounts due to parent 159 5
Increase in notes payable and long-term debt 8,549 21,289
Repayment of notes payable and long-term debt (16,574) (16,247)
Write off of debt issue costs 2,370 -
Cash received from investees 18 51
----------------------------
Net cash (used) provided by financing activities (5,478) 5,098
Effect of exchange rates on cash and cash equivalents (180) (377)
----------------------------
Increase (decrease) in cash and cash equivalents (1,998) 1,411
Cash and cash equivalents at beginning of period 3,392 1,862
----------------------------
Cash and cash equivalents at end of period $ 1,394 $ 3,273
============================
See accompanying notes.
6
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands)
1. Basis of Presentation and Plan of Reorganization
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, 2000. The consolidated balance sheet
at December 31, 2000 has been derived from the audited consolidated financial
statements at that date. Certain 2000 amounts have been reclassified to conform
to the current year presentation.
On September 24, 2001 (the "Petition Date"), the Company, together with IKS
Corporation, which owns 100% of the Company, filed a petition for relief under
Chapter 11 (the "Filing") of the U.S. Bankrupcty Code (the "Bankruptcy Code")
with the U.S. Bankruptcy Court for the District of Delaware (the "Court"). The
Company is managing its business as a debtor-in-possession pursuant to the
Bankruptcy Code. The terms of the Company's proposed plan of reorganization (the
"Proposed Plan") were pre-negotiated between the Company and certain of its
noteholders. The confirmation of the Proposed Plan is expected to be completed
by December 31, 2001.
The Proposed Plan provides that, upon consummation, approximately $90,000 of
outstanding indebtedness (plus accrued interest) of the Company will be
exchanged for 100% of the equity interests in the reorganized IKS Corporation,
subject to dilution on account of any management equity incentive plans. All
outstanding IKS Corporation debt and equity interests will be cancelled. A
disclosure statement and the Proposed Plan were filed with the Court on October
10, 2001 and amendments were filed on November 13, 2001. The hearing to consider
approval of the disclosure statement is scheduled for November 14, 2001. The
hearing to consider confirmation of the Proposed Plan is scheduled for December
17, 2001.
The unaudited consolidated financial statements have been presented in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 90-7 ("SOP No. 90-7"), Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, which provides guidance for financial
reporting by entities that have filed voluntary petitions for relief under, and
have reorganized in accordance with, the Bankruptcy Code.
7
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
1. Basis of Presentation and Plan of Reorganization (continued)
The Company is subject to the jurisdiction and supervision of the Court during
the period from the Petition Date until its emergence from bankruptcy. Pursuant
to the provisions of the Bankruptcy Code, certain claims against the Company in
existence prior to the filing of the petition for relief under the bankruptcy
laws are stayed while the Company continues business operations as a
debtor-in-possession. These claims are reflected in the September 30, 2001
balance sheet as "liabilities subject to compromise."
As a result of the Filing, certain pre-petition liabilities were reclassified to
liabilities subject to compromise at September 24, 2001. These claims are
expected to be settled in accordance with the Proposed Plan. The liabilities
subject to compromise are reflected on the consolidated balance sheet as of
September 30, 2001 as follows:
Senior subordinated notes $ 90,000
Accrued interest 8,787
Other accrued liabilities 122
Total liabilities subject to compromise $ 98,909
Reorganization expenses incurred in the period subsequent to the Petition Date
to September 30, 2001, totaled $2,855. Prior to the Petition Date, the Company
incurred certain costs related to the Proposed Plan, approximating $14,389, that
are classified as reorganization expenses on the Consolidated Statements of
Income. Of these reorganization expenses, cash was paid of $3,156 primarily for
professional fees and severance costs, $2,370 related to non-cash charges for
the write-off of debt issue costs, and $11,233 represents the loss on the sale
of IKS Klingelnberg GmbH ("IKSK"), a wholly owned German subsidiary of the
Company (see Note 7 of the Notes to the Consolidated Financial Statements).
Additional claims (liabilities subject to compromise) may arise subsequent to
the Petition Date resulting from rejection of executory contracts, including
leases, and from the determination by the Court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed amounts. Any
actions to collect upon claims secured by the Company's assets ("secured
claims") also are stayed, although the holders of such claims have the right to
move the court for relief from the stay. Secured claims are secured primarily by
liens on the Company's property, plant, and equipment.
8
The Company received approval from the Court to pay or otherwise honor certain
of its pre-petition obligations, including employee wages and related employee
benefits and expenses,
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
1. Basis of Presentation and Plan of Reorganization (continued)
customer returns and credit policies, and all pre-petition claims of trade
creditors who agree to provide credit, goods and/or services in accordance with
customary terms in the industry.
On June 21, 2001, the Company entered into an agreement with Chilmark Fund II,
L.P. ("Chilmark") for a six-month senior secured credit facility for up to
$5,000. At September 30, 2001, the interest rate on this facility was 7.75% and
the Company had $3,000 outstanding under this facility. As a result of the
Filing, the Company is in default on this facility. To provide the Company with
operating capital during the restructuring process, on October 17, 2001, the
Company obtained a commitment of $7,000 in debtor-in-possession financing from
two lenders under a Senior Secured Super-Priority Debtor-in-Possession Loan and
Security Agreement ("DIP Facility"). The DIP Facility matures on the earlier of
February 1, 2002, or when a plan of reorganization becomes effective. The
interest rates on borrowings under the DIP Facility are at 1% per annum in
excess of the U.S. prime rate as to U.S. prime rate loans but not less than
7.75% per annum.
At September 30, 2001, the Company had $0 available under the senior secured
credit facility and approximately $1,394 of cash on hand. At October 31, 2001,
the Company had approximately $6,700 available under the DIP Facility and
approximately $2,433 of cash on hand.
The financial statements have been prepared using accounting principles
applicable to a going concern, which contemplates the realization of assets and
the payment of liabilities in the ordinary course of business. As a result of
the Filing, such realization of assets and satisfaction of liabilities is
subject to uncertainty. Further, implementation of the Proposed Plan could
materially change the amounts reported in the consolidated financial statements.
These financial statements do not give effect to any adjustments to the carrying
value of assets or amounts of liabilities that might be necessary as a
consequence of implementing the Proposed Plan. The ability of the Company to
continue as a going concern is dependent upon, among other things,
9
confirmation of the Proposed Plan, the ability to comply with
debtor-in-possession financing agreements, the ability to generate sufficient
cash from operations and financing sources to meet obligations and ultimately,
its return to future profitable operations. Additionally, the
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
1. Basis of Presentation and Plan of Reorganization (continued)
accompanying unaudited consolidated financial statements do not include any
adjustments that would be required if the Company were to be liquidated.
Prior to the Filing, the Company did not make its May 15, 2001 interest payment
on its $90,000 11 3/8% Senior Subordinated Notes due 2006 (the "Subordinated
Notes") due to insufficient liquidity. As a result of the Filing and not making
the May 15, 2001 interest payment, the Company is in default of the terms of its
Subordinated Notes. Accordingly, approximately $90,000 of such debt outstanding
is classified as liabilities subject to compromise on the Company's consolidated
balance sheet. Contractual interest on those obligations amounted to $7,678 for
the nine months ended September 30, 2001, which is $170 in excess of reported
interest expense. The Company has discontinued accruing interest on these
obligations.
As part of the Company's restructuring initiative, on June 6, 2001, the Company
sold all of the issued and outstanding capital stock of IKSK for $11,724 in cash
(see Note 7 of the Notes to the Consolidated Financial Statements). The proceeds
from the sale were immediately applied to repay all indebtedness and other
obligations owed by the Company to Deutsche Bank, AG, the Company's former
senior lender.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. In accordance with SOP No. 90-7, at the earlier of its
emergence from bankruptcy or the first quarter of 2002, the Company will apply
the new rules on accounting for goodwill and other intangible assets.
Application of the non-amortization provisions of the Statement is expected to
result in an increase in net income of approximately $400 ($0.83 per share) per
year. When adopted, the Company will perform the first of the required
impairment tests of goodwill and indefinite lived intangible assets. The Company
has not yet determined what the effect of these tests will be on the earnings
and financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Impairment or Disposal of Long-lived Assets, effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of, and provides a single accounting model for long-
10
lived assets to be disposed of. In accordance with SOP No. 90-7, at the earlier
of its emergence from bankruptcy or the first quarter of 2002, the Company will
apply the new rules on long-lived assets. The Company has not yet determined
what the effect of the adoption of this Statement will be on the earnings and
financial position of the Company.
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
2. Entity in Reorganization Proceedings
SOP No. 90-7 requires separate financial statements of the entities in
reorganization proceedings when consolidated financial statements include one or
more entities in reorganization and one or more entities not in reorganization.
The following unaudited financial information includes balance sheets as of
September 30, 2001 and December 31, 2000, statements of income for the quarter
and nine months ended September 30, 2001 and 2000, and statements of cash flows
for the nine months ended September 30, 2001 and 2000 of International Knife &
Saw, Inc., with investments in subsidiaries accounted for using the equity
method of accounting.
September 30, December 31,
2001 2000
--------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 1,159 $ 1
Accounts receivable, trade, less allowances for
doubtful accounts of $997 and $822 7,795 9,318
Inventories 8,365 11,537
Intercompany receivables 2,291 1,685
Other current assets 357 1,160
--------------------------
Total current assets 19,967 23,701
Other assets:
Goodwill 7,050 7,349
Debt issuance costs - 2,271
Investment in subsidiaries 2,653 21,916
Other non current assets 190 207
--------------------------
9,893 31,743
Property, plant and equipment-net 18,577 19,607
--------------------------
Total assets $ 48,437 $ 75,051
==========================
11
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. Entity in Reorganization Proceedings (continued)
September 30, December 31,
2001 2000
(in thousands)
-------------------------------
Liabilities and shareholder's deficit
Current liabilities subject to compromise:
Accrued interest $ 8,787 $ -
Other accrued liabilities 122 -
Senior subordinated notes 90,000 -
-------------------------------
Total current liabilities subject to compromise 98,909 -
Current liabilities not subject to compromise:
Notes payable 3,000 10,219
Current portion of long-term debt 956 1,096
Accounts payable 2,062 5,134
Accrued liabilities 4,476 5,773
-------------------------------
Total current liabilities not subject to compromise 10,494 22,222
Long-term debt, less current portion 1,458 92,138
Other liabilities 227 345
-------------------------------
Total liabilities 111,088 114,705
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 (66,856) (41,427)
Accumulated other comprehensive loss (2,521) (4,953)
Treasury stock, at cost (3,432) (3,432)
-------------------------------
Total shareholder's deficit (62,651) (39,654)
-------------------------------
Total liabilities and shareholder's deficit $ 48,437 $ 75,051
===============================
13
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. Entity in reorganization proceedings (continued)
Quarter ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
----------------------------------------------------------
(in thousands, except per share amounts)
Net sales $ 16,619 $ 19,853 $ 52,183 $ 65,472
Cost of sales 13,597 15,727 42,479 51,621
-----------------------------------------------------------
Gross profit 3,022 4,126 9,704 13,851
Selling, general and administrative expenses 3,676 4,514 11,888 16,728
-----------------------------------------------------------
Operating loss (654) (388) (2,184) (2,877)
Other expenses (income):
Interest income (6) (14) (154) (27)
Interest expense (contractual interest of
$2,784 and $8,630 in 2001) 2,614 2,839 8,460 8,405
-----------------------------------------------------------
2,608 2,825 8,306 8,378
-----------------------------------------------------------
Loss before reorganization expenses and
income taxes (3,262) (3,213) (10,490) (11,255)
Reorganization expenses 3,931 - 17,244 -
-----------------------------------------------------------
Loss before income taxes (7,193) (3,213) (27,734) (11,255)
Provision (benefit) for income taxes - - (1,008) -
Equity income (loss) in undistributed
earnings of subsidiaries (22) 879 1,297 3,023
-----------------------------------------------------------
Net loss $ (7,215) $ (2,334) $ (25,429) $ (8,232)
===========================================================
Net loss per common share $ (14.97) $ (4.84) $ (52.76) $ (17.08)
14
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2. Entity in Reorganization Proceedings (continued)
Nine months ended
September 30,
2001 2000
-----------------------
(in thousands)
Operating activities
Net loss $ (25,429) $ (8,232)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization 2,989 3,029
Loss on disposition of businesses 11,233 1,981
Loss on sale of property, plant and equipment 98 74
Changes in operating assets and liabilities, net of effects from purchases
of operations and disposition of businesses:
Accounts receivable 760 1,931
Inventories 3,172 2,008
Accounts payable (4,351) (5,334)
Accrued liabilities 7,612 2,541
Other 156 392
-------------------------------
Net cash used by operating activities (3,768) (1,610)
Investing activities
Purchases of property, plant and equipment (1,484) (1,607)
Proceeds from sale of property, plant and equipment 76 386
Proceeds from disposition of businesses, net of cash disposed 11,724 1,290
Decrease (increase) in notes receivable and other assets 101 (50)
-------------------------------
Net cash provided by investing activities 10,417 19
Financing activities
Increase in amounts due to parent 159 5
Increase in notes payable and long-term debt 6,000 10,555
Repayment of notes payable and long-term debt (14,039) (9,020)
Write off of debt issue costs 2,370 -
Cash received from investees 18 51
-------------------------------
Net cash (used) provided by financing activities (5,492) 1,591
Increase in cash and cash equivalents 1,157 -
Cash and cash equivalents at beginning of period 1 1
-------------------------------
Cash and cash equivalents at end of period $ 1,158 $ 1
===============================
15
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
3. Comprehensive Income
The Company includes foreign currency translation adjustments in other
comprehensive income. For the quarters ended September 30, 2001 and 2000, total
comprehensive losses amounted to $7,484 and $3,368, respectively, including $269
and $1,032 of other comprehensive losses related to foreign currency
translation. For the nine months ended September 30, 2001 and 2000, total
comprehensive losses amounted to $22,997 and $10,150, respectively, including
$2,432 of other comprehensive gains and $1,916 of other comprehensive losses
related to foreign currency translation.
4. Notes Payable and Long -Term Debt
September 30, December 31,
2001 2000
------------ ------------
Notes payable:
Note payable on demand in German Marks to a German bank,
issued under revolving credit agreements, interest payable quarterly $ - $ 5,499
Note payable on demand in U.S. Dollars to a German bank,
issued under revolving credit agreements, interest payable quarterly - 8,719
Notes payable on demand in Chinese Yuan Renminbi to
Chinese banks, issued under revolving credit agreements,
interest payable monthly - 2,125
Note payable on demand in Austrian Schillings to an Austrian bank - 1,365
Note payable on demand in U.S. Dollars to a U.S. bank - 1,500
Note payable in U.S. Dollars to a U.S. lender 3,000 -
--------------------------------
$ 3,000 $ 19,208
================================
September 30, December 31,
2001 2000
------------ ------------
Long-term debt:
11-3/8% Senior Subordinated Notes due 2006, subject to compromise $90,000 $ 90,000
Notes payable in German Marks to a German bank - 14,559
Notes payable in Chinese Yuan Renminbi to Chinese banks - 1,017
Capitalized lease obligations to U.S. lenders 2,384 3,199
Promissory notes payable in Austrian Schillings to an
Austrian bank - 1,746
Promissory note payable in Dutch Guilders to a former
shareholder of the Diacarb Company - 1,792
Other 30 35
--------------------------------
92,414 112,348
Less current portion 90,956 4,027
--------------------------------
$ 1,458 $108,321
================================
16
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
4. Notes Payable and Long -Term Debt (continued)
As a result of the Filing, the Subordinated Notes are held by a class of
creditors that are subject to compromise. (See Note 1 of the Notes to the
Consolidated Financial Statements.)
On June 6, 2001, the Company sold all of the issued and outstanding capital
stock of IKSK for approximately $11,724 in cash (see Note 7 of the Notes to the
Consolidated Financial Statements). The purchase price included the assumption
of all related debt of IKSK and its subsidiaries by the buyer. The proceeds from
the sale were immediately applied to repay all U.S. indebtedness and other
obligations owed by the Company to Deutsche Bank AG, the Company's former senior
lender.
On June 21, 2001, the Company entered into an agreement with Chilmark for a
six-month senior secured credit facility for up to $5,000 to replace its former
Deutsche Bank facilities. At September 30, 2001, the interest rate on this
facility was at 7.75% and the Company had $3,000 outstanding under this
facility. As a result of the Filing, the Company is in default on this facility.
To provide the Company with operating capital during the restructuring process,
on October 17, 2001, the Company obtained a commitment of $7,000 in
debtor-in-possession financing from two lenders under a Senior Secured
Super-Priority Debtor-in-Possession Loan and Security Agreement ("DIP
Facility"). The DIP Facility matures on the earlier of February 1, 2002, or when
a plan of reorganization becomes effective. The interest rates on borrowings
under the DIP Facility are at 1% per annum in excess of the U.S. prime rate as
to U.S. prime rate loans but not less than 7.75% per annum.
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 quarter
and nine months ended September 30, 2001 in accordance with income tax
accounting rules, but did record the benefit of a $1,108 federal tax refund
received in the first quarter of 2001.
17
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
6. Inventories
September 30, December 31,
2001 2000
-----------------------------------
Finished goods $ 8,102 $ 18,275
Work in process 1,460 4,795
Raw materials and supplies 1,493 6,456
-----------------------------------
$ 11,055 $ 29,526
===================================
7. Disposition of Businesses
On June 6, 2001, the Company sold all of the issued and outstanding capital
stock of IKSK to Diether Klingelnberg and TKM GmbH i.G., a company organized
under the laws of Germany ("TKM" and, together with Mr. Klingelnberg, the
"Purchasers"), for approximately $11,724 in cash. The Company recorded a loss on
the sale of IKSK of approximately $11,233. The proceeds from the sale were
immediately applied to repay all indebtedness and other obligations owed by the
Company to Deutsche Bank AG, the Company's former senior lender.
Mr. Klingelnberg and Thomas W.G. Meyer are managing directors and stockholders
of TKM. Mr. Meyer is a minority stockholder of IKS Corporation, a Delaware
corporation and the parent of the Company ("Parent"). In addition, until April
20, 2001 Mr. Klingelnberg served as a director of the Company and Parent, and
until May 31, 2001 Mr. Meyer served as an Executive Vice President of the
Company and Parent. At the time of the sale, Mr. Meyer was the Chief Executive
Officer of IKSK. The amount of consideration paid to the Company for the issued
and outstanding capital stock of IKSK was determined by arms-length negotiation
between the Board of Directors of the Company and the Purchasers.
In connection with the sale, the Purchasers agreed that, for a period of 18
months and subject to certain conditions, IKSK would continue the existing
trading arrangements between the Company and IKSK with respect to current
products manufactured by IKSK and purchased by the Company. However, the
continued existence of that agreement is in dispute.
18
International Knife & Saw, Inc. and Subsidiaries
(Debtor-in-Possession)
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(in thousands)
7. Disposition of Businesses (continued)
Prior to the sale, the holders of a majority in aggregate principal amount of
the Company's Subordinated Notes consented to the sale and waived compliance by
the Company with the provisions of Section 4.14 (Limitation on Transactions with
Affiliates), Section 4.15 (Change of Control), Section 4.16 (Limitation on Asset
Sales) and article five of the indenture governing the Subordinated Notes, as
well as any other relevant provisions of such Indenture, to the extent
applicable to the transaction.
19
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward looking statements. Statements regarding the Company's
ability to complete its bankruptcy reorganization proceedings timely, the
outcome of the Proposed Plan, the Company's ability to sustain current
operations during the pendency of the reorganization including its ability to
maintain normal relationships with customers, the ability of the Company to
establish normal terms and conditions with suppliers and vendors, the cost of
the reorganization process, the adequacy of financing arrangements during the
reorganization period, future market prices, operating results, future operating
efficiencies, cost savings and other statements which are not historical fact
contained in this Quarterly Report on Form 10-Q are "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act. The words
"expect", "project", "estimate", "believe", "anticipate", "plan", "intend",
"could", "should", "may", "predict" and similar expressions are also intended to
identify forward looking statements. Such statements involve risks,
uncertainties and assumptions, including, without limitation, the results of the
bankruptcy proceedings, court decisions and actions, the negotiating positions
of various constituencies, the results of negotiations, market factors, the
effect of economic conditions, the ability of the Company to realize planned
cost savings and other factors detailed in this and other filings with the
Securities and Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual outcomes may vary materially.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion 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, 2000.
General
The Company is in the business of manufacturing, servicing and marketing of
industrial and commercial machine knives and saws. Together with its
predecessors, 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 offers a broad range of products, used for various
applications in numerous markets.
On September 24, 2001, the Company, together with IKS Corporation, the
parent of the Company ("the Parent"), filed a petition for relief under Chapter
11 of the U.S. Bankrupcty Code with the U.S. Bankruptcy Court for the District
of Delaware. The Company is managing its business as a debtor-in-possession
pursuant to the Bankruptcy Code. The terms of the Company's proposed plan of
reorganization were pre-negotiated between the Company and certain of its
noteholders. The confirmation of the Proposed Plan is expected to be completed
by December 31, 2001.
As part of the Company's restructuring initiative, on June 6, 2001, the
Company sold all of the issued and outstanding capital stock of IKSK to Diether
Klingelnberg and TKM, the "Purchasers," for approximately $11.7 million in cash.
Mr. Klingelnberg and Thomas W.G. Meyer are managing directors and stockholders
of TKM. Mr. Meyer is a minority stockholder of
20
Parent. In addition, until April 20, 2001 Mr. Klingelnberg served as a director
of the Company and Parent, and until May 31, 2001 Mr. Meyer served as an
Executive Vice President of the Company and Parent. At the time of the sale, Mr.
Meyer was the Chief Executive Officer of IKSK. The amount of consideration paid
to the Company for the issued and outstanding capital stock of IKSK was
determined by arms-length negotiation between the Board of Directors of the
Company and the Purchasers.
IKSK comprised all of the Company's non-North American operations and
accounted for approximately one half of the Company's 2001 net sales through the
sale date and approximately 34% of its net sales during the first nine months of
2001. In connection with the sale, the Purchasers agreed that, for a period of
18 months and subject to certain conditions, IKSK would continue its existing
trading arrangements with the Company with respect to current products
manufactured by IKSK and purchased by the Company. However, the continued
existence of that agreement is in dispute.
Presence outside the U.S.
The Company's presence outside the U.S. was significantly diminished by the
sale of IKSK. The Company's remaining operations are in the U.S., Canada, Mexico
and Indonesia. The Company's remaining operations are predominately in North
America which accounted for approximately 65% of its net sales during the first
nine months of 2001.
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's foreign sales are subject to
exchange rate volatility. In addition, the Company's consolidation of its
foreign 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 nine months
of 2001 to the first nine months of 2000, excluding IKSK, there was a negative
impact of $.6 million on net sales with a minimal impact on operating income. In
addition, in the first nine months of 2001 there was a decrease of $2.4 million
in accumulated other comprehensive loss from December 31, 2000 due to the
realization of $4.2 million of foreign currency translation losses related to
IKSK partially offset by a $1.8 million increase 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 enters 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
fifteen 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.
21
Third quarter and nine months ended September 30, 2001 compared to third
quarter and nine months ended September 30, 2000
Net Sales: Net sales decreased 51.8% to $18.1 million for the third quarter
and 28.9% to $88.3 million for the first nine months of 2001 from $37.7 and
$124.2 million for the same periods in 2000 primarily attributable to the sale
of IKSK in June of 2001 as discussed in Note 7 and to a lesser extent to the
poor results in North America (attributable in large part to leadership changes
at the Company in 1999 and 2000 and to market softness worldwide). The Company
experienced sales reductions in its North American operations of 17.1% to $18.0
million for the third quarter and 20.4% to $57.1 million for the first nine
months of 2001 from $21.7 million and $71.7 million for the same periods in
2000. IKSK primarily comprised the remaining $31.2 million of net sales for the
first nine months of 2001.
Gross Profit: Gross profit decreased to $3.5 and $20.9 million for the
third quarter and first nine months of 2001 from $9.8 and $32.6 million for the
same periods in 2000. Gross margin decreased to 19.3% and 23.6% for the third
quarter and first nine months of 2001 compared to 26.1% and 26.2% for the same
periods in 2000. The Company experienced gross profit declines in its North
American operations of 28.6% to $3.5 million for the third quarter and 31.7% to
$11.2 million for the first nine months of 2001 from $4.9 million and $16.4
million for the same periods in 2000 while gross margin also declined to 19.4%
and 19.6% from 22.8% and 22.9%, respectively. IKSK primarily comprised the
remaining $9.7 million of gross profit for the first nine months of 2001. The
decrease in gross profit and the decrease in gross margin in North America are
attributable to the factors noted above.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses were $4.3 and $20.4 million for the third
quarter and first nine months of 2001 compared to $8.7 and $29.7 million for the
same periods in 2000. Excluding the non-recurring charges in the second quarter
of 2000, SG&A expenses would have been $27.6 million for the first nine months
of 2000. SG&A expenses increased to 23.5% and decreased to 23.1% from 23.1% and
23.9% of net sales for the respective prior periods. Excluding the non-recurring
charges in the second quarter of 2000, SG&A expenses would have been 22.3% for
the first nine months of 2000.
Interest Expense, net: Net interest expense decreased to $2.6 and $8.9
million for the third quarter and first nine months of 2001 compared to $3.2 and
$9.5 million for the same periods in 2000 primarily due to the sale of IKSK. In
accordance with SOP No. 90-7, the Company has ceased accruing interest on the
Subordinated Notes as of the Petition Date.
Reorganization expenses: Reorganization expenses for the third quarter and
first nine months of 2001 are comprised primarily of the loss on the sale of
IKSK, $0 and $11.2 million; professional fees, $1.1 million and $3.0 million;
write off of debt issue costs, $2.4 million and $2.4 million; and severance
costs, $0.4 million and $0.5 million, respectively.
Income Taxes: The Company did not record a tax benefit related to its
pre-tax losses in the United States in the third quarter or in the first nine
months of 2001 in accordance with income tax accounting rules, but did record
the benefit of a $1.1 million federal tax refund received in the first quarter
of 2001. This benefit more than offsets the tax provisions recorded on pre-tax
income in the Company's other operations for the first nine months of 2001. As a
22
result, the Company has recorded a $0.1 million and a $0.3 million consolidated
benefit for income tax on a consolidated third quarter and first nine months of
2001 pre-tax loss of $7.3 million and $25.8 million, respectively. The only
significant change in income taxes from 2000 is due to the benefit recorded on
the federal tax refund in the first quarter of 2001 and the sale of IKSK.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working capital
needs, to meet required debt payments and to complete planned maintenance and
expansion expenditures. The Company believes that the $7.0 million commitment
under the DIP Facility will provide adequate financing to meet the Company's
working capital and operational needs during the reorganization. The DIP
Facility matures on the earlier of February 1, 2002, or when a plan of
reorganization becomes effective. The interest rates on borrowings under the DIP
Facility are at 1% per annum in excess of the U.S. prime rate as to U.S. prime
rate loans but not less than 7.75% per annum. At October 31, 2001, the Company
had approximately $6.7 million available under its DIP Facility and
approximately $2.4 million cash on hand.
The Proposed Plan provides that upon confirmation, approximately $90
million of outstanding indebtedness (plus accrued interest) will be eliminated
by the exchange of this debt for 100% of the fully diluted equity interests of
reorganized Parent, subject to dilution on account of any management equity
incentive plans. At September 30, 2001, the only other debt obligations of the
Company are capitalized lease obligations (totaling $2.4 million) and
obligations outstanding under its senior credit facility (totaling $3.0
million).
The Company does not have any significant capital expenditure commitments
in the remainder of 2001 or in 2002 that cannot be deferred; however, deferral
of planned maintenance and expansion expenditures may negatively impact the
Company's operations. In addition, the Company is pursuing aggressive cost
cutting programs.
The sufficiency of the Company's liquidity and capital resources is
dependent upon the confirmation of the Proposed Plan, the ability to comply with
debtor-in-possession agreements, generating sufficient positive cash from
operations and financing sources to meet obligations, and ultimately, its return
to future profitable operations. Because the terms of the Proposed Plan were
pre-negotiated between the Company and certain of its note holders, the Company
believes the Proposed Plan will be approved and implemented in a timely manner.
The Company is currently negotiating with potential lenders for an exit credit
facility in an amount between $10 million and $15 million. Following
confirmation of the Proposed Plan, the proceeds of the exit facility will be
used for working capital, capital expenditures and other corporate purposes.
Net cash flow used by operations aggregated $3.1 million for the first nine
months of 2001 compared to cash provided of $.1 million for the same period in
2000. The decrease was primarily attributable to an increased net loss of $7.9
million, net of loss on sale of businesses, partially offset by a $6.1 million
decrease in working capital primarily due to $7.2 million of interest accrued on
the Subordinated Notes that was due on May 15, 2001 but that was not paid.
23
Cash provided by investing activities for the first nine months of 2001 was
$6.7 million compared to cash used of $3.4 million for the same period in 2000.
The increase is primarily due to the proceeds from the sale of IKSK.
Cash used by financing activities for the first nine months of 2001 was
$5.5 million compared to cash provided of $5.1 million for the same period in
2000. The decrease is primarily due to decreased net borrowings of $13.1 million
due to the $11.7 million repayment of indebtedness and other obligations to the
Company's former senior lender with proceeds from the sale of IKSK.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. In accordance with SOP No. 90-7, at the earlier of its
emergence from bankruptcy or the first quarter of 2002, the Company will apply
the new rules on accounting for goodwill and other intangible assets.
Application of the non-amortization provisions of the Statement is expected to
result in an increase in net income of approximately $.4 million ($0.83 per
share) per year. When adopted, the Company will perform the first of the
required impairment tests of goodwill and indefinite lived intangible assets.
The Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, Impairment or Disposal of Long-lived Assets, effective for fiscal years
beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of, and provides a single accounting model for long-lived assets to
be disposed of. In accordance with SOP No. 90-7, at the earlier of its emergence
from bankruptcy or the first quarter of 2002, the Company will apply the new
rules on long-lived assets. The Company has not yet determined what the effect
of the adoption of this Statement will be on the earnings and financial position
of the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Information required by Item 3 is included in Item 2 on page 20 of this
Form 10-Q.
24
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.
Information required by Item 1 related to the Company's bankruptcy
proceedings is included in Part I, Item 1 on pages 7 - 10 of this Form 10-Q.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Prior to the Filing for protection under Chapter 11 of the U.S. Bankruptcy
Code on September 24, 2001, as described in Note 1 to the Consolidated Financial
Statements, the Company had suspended payments of interest on its Subordinated
Notes. The following table sets forth the scheduled debt payment that was not
made during the second quarter of 2001:
Debt Series and Aggregate Principal Type and Date of Amount Unpaid in
Amount Outstanding Payment Due in Quarter Quarter
11 3/8% Subordinated Notes due 2006 Interest, May 15, 2001 $5.1 million
($90 million)
As a result of the Filing, the Company is also in default on its senior
secured credit facility. As a result of these defaults, the holders of the
Subordinated Notes and the lender under the Company's senior secured credit
facility have the right to demand acceleration of this debt. At the date of this
filing, total arrearages of principal and interest are $5.1 million.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
A report on Form 8-K/A dated August 9, 2001 was filed regarding the
Company's sale of IKSK.
26
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/ Frederick F. Schauder
--------------------------------------
Frederick F. Schauder
President and Chief Executive Officer
By: /s/ William M. Schult
--------------------------------------
William M. Schult
Executive Vice President - Chief
Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
November 14, 2001
27