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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
- -------------------------------------------------------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2002 Commission File Number 333-19257
KINETEK, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
ArborLake Centre, Suite 550 60015
1751 Lake Cook Road (Zip Code)
Deerfield, Illinois
(Address of Principal Executive Offices)
Registrant's telephone number, including area code:
(847) 945-5591
Former name, former address and former fiscal year, if changed since last
report: Not applicable
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 twelve (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 ninety (90)
days.
Yes x No
--- ---
The aggregate market value of voting stock held by non-affiliates
of the Registrant is not determinable as such shares were privately placed
and there is currently no public market for such shares.
The number of shares outstanding of Registrant's Common Stock as of
August 14, 2002: 10,000.
KINETEK, INC.
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (Unaudited) 3
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk
Part II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security 13
Holders
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-k 13
Signatures 14
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
--------------------------------
PAGE NO.
Condensed Consolidated Balance Sheets at June 30, 2002 4
and December 31, 2001
Condensed Consolidated Statements of Operations for the 5
three and six months ended June 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the six 6
months ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 7-8
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
June 30, December 31,
2002 2001
------------------- -------------------
------------------- -------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 16,703 $ 17,558
Accounts receivable, net 54,939 50,875
Inventories 43,861 41,313
Prepaid expenses and other current assets 1,000 1,695
Due from affiliated company 4,458 5,370
--------- --------
Total Current Assets 120,961 116,811
Property, plant, and equipment, net 31,902 19,651
Goodwill, net 177,624 196,469
Deferred financing costs, net 11,130 10,693
Deferred income taxes 2,510 2,510
Investment in affiliate 12,344 12,344
Other assets, net 950 937
--------- --------
Total Assets $357,421 $359,415
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET CAPITAL DEFICIENCY)
Current Liabilities:
Accounts payable $ 29,366 $ 21,853
Accrued interest payable 4,059 4,292
Accrued expenses and other current liabilities 12,241 10,826
Current portion of long term debt 12,317 8,135
--------- --------
Total Current Liabilities 57,983 45,106
Long-term debt 301,954 300,620
Other non-current liabilities 5,093 3,005
Shareholder's Equity (Net Capital Deficiency):
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated other comprehensive loss (12,984) (13,104)
Accumulated deficit (44,631) (26,218)
--------- ---------
Total Shareholder's Equity (Net Capital (7,609) 10,684
--------- ---------
Deficiency)
Total Liabilities and Shareholder's Equity
(Net Capital Deficiency) $357,421 $359,415
======== ========
See accompanying notes to condensedconsolidated financial statements.
4
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $74,243 $74,244 $142,441 $152,541
Cost of sales, excluding
depreciation 47,723 47,880 91,423 97,164
Selling, general and
administrative expenses 12,105 12,362 24,566 25,343
Depreciation 1,683 1,696 3,209 3,079
Amortization of goodwill
and other intangibles 123 2,128 227 4,234
Management fees and other 745 738 1,437 1,531
-------- -------- ------- -------
Operating Income 11,864 9,440 21,579 21,190
Other (income)/ expense:
Interest expense 8,453 8,198 16,551 16,529
Interest income (74) (85) (149) (186)
Miscellaneous, net (69) 16 (74) 93
--------- --------- -------- -------
Income before income taxes and
cumulative effect of accounting change 3,554 1,311 5,251 4,754
Provision for income taxes 1,600 591 2,364 2,140
--------- --------- ------- -------
Income before cumulative effect of
accounting change 1,954 720 2,887 2,614
--------- --------- ------- -------
Cumulative effect of change in
accounting principle, net of tax - - (21,300) -
--------- --------- -------- -------
Net Income (loss) $ 1,954 $ 720 $(18,413) $ 2,614
======= ===== ========= ========
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Six Months Ended
June 30,
--------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $(18,413) $ 2,614
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting
principle 21,300 -
Depreciation and amortization 4,676 7,958
Deferred income taxes 176 1,018
Changes in operating assets and liabilities net of effects from
acquisitions:
Current assets 354 544
Current liabilities 3,986 (1,187)
Non-current assets & liabilities (1,921) 76
Due from affiliated company 912 (561)
--------- ---------
Net cash provided by operating activities 11,070 10,462
Cash flows from investing activities:
Capital expenditures, net (1,949) (2,085)
Acquisition of subsidiary (9,503) (731)
-------- ---------
Net cash used in investing activities (11,452) (2,816)
Cash flows from financing activities:
Net repayment of borrowings under revolving
credit facility and other long-term debt (22,048) (1,980)
Proceeds from issuance of long term debt 20,456 -
Cash acquired in purchase of subsidiary 892 -
Additional purchase price for acquisition (100) -
--------- --------
Net cash used in financing activities (800) (1,980)
Effect of exchange rate changes on cash 327 728
--------- --------
Net increase (decrease) in cash and cash equivalents (855) 6,394
Cash and cash equivalents at beginning of period 17,558 8,490
------- --------
Cash and cash equivalents at end of period $16,703 $ 14,884
======= =========
See accompanying notes to condensed consolidated financial statements.
6
KINETEK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. Organization
The unaudited condensed consolidated financial statements, which reflect
all adjustments that management believes necessary to present fairly the
results of interim operations and which are of a normal recurring nature,
should be read in conjunction with the Company's consolidated financial
statements for the year ended December 31, 2001, included in the Company's
annual report on Form 10-K. The Company conducts its operations exclusively
through its subsidiaries. Results of operations for the interim periods are
not necessarily indicative of annual results of operations.
2. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of
Kinetek, Inc. and its subsidiaries. Material intercompany transactions and
balances are eliminated in consolidation. Operations of certain
subsidiaries outside the United States are included for periods ending two
months prior to the Company's year-end and interim periods to ensure timely
preparation of the condensed consolidated financial statements.
3. Inventories
Inventories are summarized as follows:
June 30, December 31,
2002 2001
----------------------------- ---------------------
(Dollar amounts in thousands)
Raw materials $22,601 $22,268
Work in process 15,210 12,864
Finished goods 6,050 6,181
------- -------
$43,861 $41,313
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three and six months ended June
30, 2002 and 2001 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------
(Dollar amounts in thousands)
-----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 1,954 $ 720 $(18,413) $ 2,614
Foreign currency
translation adjustment 2,477 (2,107) 120 2,252
--------- ------- --------- -------
Comprehensive income (loss) $ 4,431 $(1,387) $(18,293) $ 4,866
========= ======== ========= =======
7
5. Acquisitions
On April 11, 2002, the Company formed a cooperative joint venture with
Shunde De Sheng Electric Motor Group Co., Ltd. ("De Sheng Group"), which is
named Kinetek De Sheng (Shunde) Motor Co., Ltd. (the "JV"). The Company
initially contributed approximately $8.0 million for 80% ownership of the JV,
with an option to purchase the remaining 20% in the future. The JV acquired
all of the net assets of Shunde De Sheng Electric Motor Co., Ltd. ("De Sheng"),
a subsidiary of De Sheng Group. The JV also assumed approximately $7.2 million
of outstanding debt.
6. Financing
On April 12, 2002, Kinetek Industries, Inc., a wholly-owned subsidiary of
the Company, issued $15 million principal amount of 5% Senior Secured Notes
and $11 million principal amount of 10% Senior Secured Notes for net
proceeds of approximately $20.5 million. The notes are due in 2007 and are
guaranteed by the Company and substantially all of its domestic
subsidiaries. The notes are also secured by a second priority lien on
substantially all of the assets of the issuer and the guarantors, which
lien is subordinate to the existing lien securing the Company's credit
facility. Interest is payable semi-annually on May 1 and November 1 of each
year.
7. New Accounting Standards
The Company adopted the non-amortization provisions of Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002, which resulted in a $2.0 million
increase in the second quarter's net earnings and a $4.0 million increase to
the first six month's net earnings. The adoption of SFAS No. 142 is expected
to increase full-year net earnings by approximately $8.0 million.
The Company completed the transitional impairment review of its reporting
units during the second quarter and recorded a non-cash pretax and
after-tax charge of $21.3 million. This charge has been recorded as a
cumulative effect of a change in accounting principle retroactive to
January 1, 2002 and therefore reduced the previously reported first quarter
2002 net earnings of $0.9 million to a net loss of $20.4 million.
The impaired goodwill was in the Motors segment and relates to the 1997
acquisition of FIR Electromeccanica and the 1999 acquisition of the
L'Europea product line. The impairment is primarily attributable to a
change in the evaluation criteria for goodwill utilized under previous
accounting guidance, to the fair value approach stipulated in SFAS No. 142.
Various external factors, especially foreign currency devaluation has
negatively impacted the value of the FIR and L'Europea acquisitions.
The Company determined the fair value of each reporting unit using a
discounted cash flow approach taking into consideration projections based
on the individual characteristics of the reporting units, historical trends
and market multiples for comparable businesses. The cash flow estimates
incorporate assumptions on future cash flow growth, terminal values and
discount rates. Any such valuation is sensitive to these assumptions.
8
The following table provides comparative operating results had the
non-amortization provisions of SFAS No. 142 been adopted for all periods
presented:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
(Dollar amounts in thousands)
-----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income (loss) $1,954 $ 720 $(18,413) $2,614
Goodwill amortization - 2,003 - 3,996
---------- ---------- ---------- ---------
Adjusted net income (loss) $1,954 $2,723 $(18,413) $6,610
========== ========== ========== ==========
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 were as follows:
Motors Controls Consolidated
-------------- ------------- --------------
(Dollar amounts in thousands)
-----------------------------
Balance as of January 1, 2002 $160,599 $ 35,870 $196,469
Foreign exchange (97) - (97)
Acquisitions 2,552 - 2,552
Impairment loss (21,300) - (21,300)
------- -------- ---------
Balance at June 30, 2002 $141,754 $ 35,870 $177,624
======== ========= =========
As of June 30, 2002, the Company had no indefinite-lived intangible assets
and $485 of other intangible assets, which is net of $1,636 accumulated
amortization, which will continue to be amortized over their remaining
useful lives ranging from 1 to 6 years. Amortization expense is estimated
to be $100 in each of the next five years. These other intangible asset
amounts are included in other assets in the Company's balance sheets.
On January 1, 2002, the company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." There was no impact to the
Company's operating results or financial position related to the adoption
of this standard.
8. Business Segment Information
See Part 1 "Financial Information" - Item 2 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for the
Company's business segment disclosures. There have been no changes from the
Company's December 31, 2001 consolidated financial statements with respect
to segmentation or the measurement of segment profit.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary financial information included in the financial statements of the
Company is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ --------------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
(Dollar amounts in thousands)
Net sales
Motors $53,485 $53,872 $101,918 $110,697
Controls 20,758 20,372 40,523 41,844
-------- ------- -------- --------
74,243 74,244 142,441 152,541
Operating income
Motors 11,794 9,470 21,277 21,057
Controls 2,469 2,456 5,080 5,315
-------- ------- -------- -------
14,263 11,926 26,357 26,372
Management fees and unallocated
corporate overhead 2,399 2,486 4,778 5,182
-------- ------- -------- --------
Total operating income 11,864 9,440 21,579 21,190
Interest expense 8,453 8,198 16,551 16,529
Interest income and other (143) (69) (223) (93)
-------- -------- --------- ---------
Income before income taxes and cumulative
effect of accounting change $ 3,554 $ 1,311 $5,251 $4,754
======== ======== ======== =======
Consolidated Results of Operations
Net sales for the second quarter of 2002 were equal to those of the same
period for 2001 at $74.2 million. Net sales for the first six months of
2002 decreased 6.6% ($10.1 million) from 2001. The decline in sales
resulted from general softness in substantially all of the Company's
principal markets. The motors segment delivered a 0.7% decrease in second
quarter sales versus 2001, with year to date sales 7.9% below the same
period in 2001. Net sales of subfractional motors increased 3.6% for the
second quarter and decreased 2.1% year to date, driven by protracted
weakness in the bottle and can vending market, which was offset in part by
increased demand for refrigeration appliance motors and by the Company's
10
new product introductions. Net sales of fractional/integral motors
decreased 3.4% for the second quarter and 11.4% for the year to date,
compared with the same periods in 2001. The reductions in sales were led by
sharp declines in sales of DC products used in material handling
applications and moderately reduced demand for AC and DC products used in
the floor care end market, and a weak market in Europe. The addition of the
Kinetek DeSheng joint venture (see footnote 5) resulted in $1.7 million in
added sales during the second quarter of 2002. Net sales in the controls
segment rose 1.9% in the second quarter but fell 3.2% for the year to date
compared with 2001 performance, driven by general softness and moderate
pricing pressures in the elevator modernization market.
Gross margins (excluding depreciation) improved slightly from 35.5% of
sales for the second quarter of 2001 to 35.7% in 2002. For the first six
months, gross margins (excluding depreciation) decreased from 36.3% of
sales in 2001 to 35.8% of sales for 2002. Price competition in several key
markets and a shift in mix toward less profitable product lines have placed
downward pressure on gross margins in 2002. This has been offset in part by
the Company's continued emphasis on cost reduction through productivity and
sourcing initiatives. Operating income for the motors segment increased
24.5% for the quarter to $11.8 million and increased 1.0% to $21.3 million
for the year to date. The operating income of the controls segment
increased 0.5% to $2.5 million for the quarter ending on June 30, 2002, and
decreased 4.4% to $5.1 million for the six-month period then ending.
Operating margins increased from 16.1% to 19.2% of sales for the three
months ended June 30, 2001 and 2002, respectively, and from 17.3% to 18.5%
for the six months ended June 30, 2001 and 2002, respectively. The higher
operating margins are driven by the non-amortization of goodwill due to the
Company's adoption of Statement of Accounting Standards No. 142, Goodwill
and Other Intangible Assets, which resulted in a $2.0 million reduction in
amortization expense ($1.6 million and $0.4 million for motors and controls
segments, respectively) for the second quarter, and a $4.0 million
reduction in amortization expense ($3.3 million and $0.7 million for motors
and controls segments, respectively) for the six month period. The improved
operating margins also reflect lower selling, general, and administrative
expenses from the Company's cost control efforts such as facility closings
and reductions in staff. These reductions in cost compared to the prior
year are offset by unfavorable manufacturing leverage resulting from the
decreased sales described above, and to increased research and development
costs related to future products.
Management fees and unallocated corporate overhead during the second
quarter was $2.4 million, which was $0.1 million or 3.5% lower than in the
previous year. For the six months ending June 30, management fees and
unallocated overhead was $4.8 million, which is $0.4 million or 7.8% lower
than in the same period in 2001. The lower costs are due to the impact of
lower sales on the management fee and to actions taken by the Company to
reduce administrative and headquarters costs.
In the second quarter a non-cash pretax and after-tax charge of $21.3
million was recognized as a result of adopting SFAS No. 142 "Goodwill and
Other Intangible Assets"(see Note 7).
11
Liquidity and Capital Resources
In general, the Company requires liquidity for working capital, capital
expenditures, interest, taxes, debt repayment and its acquisition strategy.
Of primary importance are the Company's working capital requirements, which
increase whenever the Company experiences strong incremental demand or
geographical expansion. The Company expects to satisfy its liquidity
requirements through a combination of funds generated from operating
activities and the funds available under its revolving credit facility.
Operating activities. Net cash provided by operating activities for the six
months ended June 30, 2002 was $11.1 million, compared to $10.5 million
provided from operating activities for the six months ended June 30, 2001.
The increase is due to improved working capital management during the year
2002, which more than offset the Company's lower operating performance
discussed under the heading "Consolidated Results of Operations".
Investing activities. In the first half of 2002, the Company made $1.9
million in payments for capital expenditures. In addition, the Company made
$9.5 million in payments for the De Sheng acquisition, including related
transaction costs.
Financing activities. The Company is party to a Credit Agreement under
which the Company is able to borrow up to approximately $35.0 million to
fund acquisitions and provide working capital, and for other general
corporate purposes. Borrowings are secured by the stock and substantially
all of the assets of the Company. As of August 14, 2002, the Company has
approximately $22.1 million of available funds under this Credit Agreement.
On April 12, 2002, Kinetek Industries, Inc., a wholly-owned subsidiary of
the Company, issued $15 million principal amount of 5% Senior Secured Notes
and $11 million principal amount of 10% Senior Secured Notes for net
proceeds of approximately $20.5 million.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's debt obligations are primarily fixed-rate in nature and, as
such, are not sensitive to changes in interest rates. At June 30, 2002 the
Company had variable rate debt outstanding of $5.3 million. A
one-percentage point increase in interest rates would increase the amount
of annual interest paid by approximately $0.1 million. The Company does not
believe that its market risk from financial instruments on June 30, 2002
would have a material effect on future operations or cash flow.
The Company is exposed to market risk from changes in foreign currency
exchange rates, including fluctuations in the functional currency of
foreign operations. The functional currency of operations outside the
United States is the respective local currency. Foreign currency
translation effects are included in accumulated other comprehensive income
in shareholder's equity.
12
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGES 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
None
Item 5. OTHER INFORMATION
Since the Company does not have securities registered under
Section 12 of the Securities Exchange Act of 1934 and is not
required to file periodic reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, the Company is
not an "issuer" as defined in the Sarbanes-Oxley Act of
2002, and therefore the Company is not filing the written
certification statement pursuant to Section 906 of such Act.
The Company files periodic reports with the Securities and
Exchange Commission because it is required to do so by the
terms of the indentures governing its notes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On May 8, 2002 the Company filed a Current Report on Form
8-K in order to announce the notes offering by Kinetek
Industries, Inc. and in order to file certain exhibits.
13
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.
KINETEK, INC.
By: /s/ Daniel Drury
-----------------
Daniel Drury
Chief Financial Officer
August 14, 2002
14