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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 September 30, 2003 Commission File Number 333-19257
KINETEK, INC.
(Exact name of registrant as specified in charter)
Delaware 36-4109641
(State or other jurisdiction (I.R.S. Employer
of 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No x
--- ---
The number of shares outstanding of Registrant's Common Stock as of
November 14, 2003: 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 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Item 4. Controls and Procedures 12
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 September 30, 2003 4
and December 31, 2002
Condensed Consolidated Statements of Operations for the 5
three and nine months ended September 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the nine 6
months ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 7-8
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
2003 2002
-------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 17,177 $ 14,654
Accounts receivable, net 60,448 53,495
Inventories 52,050 47,524
Deferred income taxes 3,138 4,545
Prepaid expenses and other current assets 3,340 4,261
Due from affiliated company 5,390 6,540
-------- --------
Total Current Assets 141,543 131,019
Property, plant, and equipment, net 30,463 32,148
Goodwill, net 180,130 179,069
Deferred financing costs, net 7,954 9,939
Investment in affiliate 12,344 12,344
Other assets, net 984 738
-------- --------
Total Assets $373,418 $365,257
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY (NET
CAPITAL DEFICIENCY)
Current Liabilities:
Accounts payable $27,667 $ 27,083
Accrued interest payable 11,852 4,989
Accrued expenses and other current liabilities 11,285 12,313
Current portion of long term debt 12,261 17,448
-------- --------
Total Current Liabilities 63,065 61,833
Long-term debt 296,311 295,517
Deferred income taxes 18,127 16,067
Other non-current liabilities 5,396 5,046
Shareholder's Equity (Net Capital Deficiency):
Common Stock 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit (59,236) (55,997)
Accumulated other comprehensive loss (251) (7,215)
-------- --------
Total Shareholder's Equity (Net Capital
Deficiency) $(9,481) $(13,206)
-------- --------
Total Liabilities and Shareholder's Equity
(Net Capital Deficiency) $373,418 $365,257
======== ========
See accompanying notes to condensed consolidated financial statements.
4
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $72,655 $74,463 $215,847 $216,904
Cost of sales, excluding
depreciation 47,936 48,051 141,400 139,474
Selling, general and
administrative expenses 15,028 12,325 42,251 36,891
Depreciation 1,750 1,757 5,348 4,966
Amortization 27 129 113 356
Management fees and other 731 751 2,177 2,188
------- ------- -------- --------
Operating Income 7,183 11,450 24,558 33,029
Other (income)/ expense:
Interest expense 8,724 8,267 26,159 24,818
Interest income - (176) (69) (325)
Miscellaneous, net 157 151 (5,063) 77
Income (loss) before income taxes and
cumulative effect of accounting change (1,698) 3,208 3,531 8,459
Income tax provision 168 1,442 6,770 3,806
------- ------- -------- --------
Income (loss) before cumulative effect
of accounting change (1,866) 1,766 (3,239) 4,653
------- ------- -------- --------
Cumulative effect of change in accounting
principle - - - (21,992)
------- ------- -------- --------
Net Income (loss) $ (1,866) $1,766 $(3,239) $(17,339)
======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Nine Months Ended
September 30,
----------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (3,239) $(17,339)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of change in accounting principle - 21,992
Depreciation and amortization 7,676 7,257
Deferred income taxes 3,467 (2,388)
Gain on extinguishment of debt, see note 7 (4,543) -
Changes in operating assets and liabilities net of
effects of acquisitions:
Current assets (10,558) (6,708)
Current liabilities 7,113 17,285
Non-current assets & liabilities 121 (1,613)
Due from (payable to) affiliated company 1,150 (47)
--------- --------
Net cash provided by operating activities 1,187 18,439
Cash flows from investing activities:
Capital expenditures, net (2,920) (3,579)
Acquisition of subsidiary - (9,503)
--------- --------
Net cash used in investing activities (2,920) (13,082)
Cash flows from financing activities:
Net repayment of borrowings under revolving
credit facility and other long-term debt (775) (23,513)
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 (775) (2,265)
Effect of exchange rate changes on cash 5,031 1,788
--------- --------
Net increase in cash and cash equivalents 2,523 4,880
Cash and cash equivalents at beginning of period 14,654 17,558
--------- --------
Cash and cash equivalents at end of period $ 17,177 $ 22,438
========= ========
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, 2002, 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:
September 30, December 31,
2003 2002
------------- ------------
Raw materials $22,805 $23,445
Work in process 21,113 16,842
Finished goods 8,132 7,237
------- -------
$52,050 $47,524
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three and nine months ended
September 30, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ (1,866) $ 1,766 $(3,239) $(17,339)
Foreign currency
translation adjustment 967 4,024 6,964 4,144
-------- ------- ------- --------
Comprehensive income (loss) $ (899) $ 5,790 $ 3,725 $(13,195)
======== ======= ======= ========
7
5. Goodwill
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards, No. 142, "Goodwill and Other Intangible Assets". As a result, the
Company recorded a non-cash pretax and after-tax charge of $21,992, which has
been shown as a cumulative effect of a change in accounting principle.
6. 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, 2002 consolidated financial statements with respect to
segmentation or the measurement of segment profit.
7. Settlement of Litigation
In June 2003, the Company reached a settlement with the former shareholders of
ED&C in which the Company received $1,150 cash, and $3,850 in Subordinated
Notes Payable to the ED&C shareholders plus $693 of accrued and unpaid
interest was extinguished. The settlement is recognized as income on the
Condensed Consolidated Statement of Operations within Other (income)/expense -
Miscellaneous, net.
8. Income Taxes
The tax provision for the nine months ending September 30, 2003, consists
primarily of federal tax of approximately $2,524, state and local tax of
approximately $1,464 and foreign income tax of approximately $2,782. The tax
provision includes a charge of approximately $2,524 for the quarter ending
September 30, 2003, to increase the valuation allowance related to deferred
tax assets. As a result of the adoption of Statement of Financial Accounting
Standards, No. 142, "Goodwill and Other Intangible Assets", and ceasing
amortization of goodwill for book purposes, the reversal of the temporary
difference related to goodwill amortization for income tax purposes is
indefinite and can no longer be utilized to offset deferred tax assets.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
Overview
The following discussion and analysis of the Company's results of operations
and of its liquidity and capital resources should be read in conjunction with
the financial statements and the related notes thereto appearing elsewhere in
this Form 10-Q.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The statement regarding the Company in this
document that are not historical in nature, particularly those that utilize
terminology such as "may," "will," "should," "likely," expects,"
"anticipates," "estimates," "believes" or "plans," or comparable terminology,
are forward-looking statements based on current expectations about future
events, which the Company has derived from information currently available.
These forward-looking statements involve known and unknown risks and
uncertainties that may cause our results to be materially different from
results implied in such forward-looking statements. Those risks include, among
others, risks associated with the industry in which the Company operates, the
dependence on senior management, maintaining sufficient working capital
financing, competitive pressures, general economic conditions and a softening
of consumer acceptance of the Company's products leading to a decrease in
anticipated revenue and gross profit margins.
Summary financial information included in the financial statements of the
Company is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollar amounts in thousands)
Net sales
Motors $50,296 $53,690 $152,734 $155,608
Controls 22,359 20,773 63,113 61,296
------- ------- -------- --------
72,655 74,463 215,847 216,904
Operating income
Motors 9,255 10,806 28,435 32,083
Controls 2,241 2,964 7,287 8,044
------- ------- -------- --------
11,496 13,770 35,722 40,127
Management fees and
unallocated
corporate overhead 4,313 2,320 11,164 7,098
------- ------- -------- --------
Total operating income 7,183 11,450 24,558 33,029
Interest expense 8,724 8,267 26,159 24,818
Interest income - (175) (69) (325)
Miscellaneous, net 157 150 (5,063) 77
------- ------- -------- --------
Income (loss) before income
taxes and cumulative effect
of accounting change $ (1,698) $ 3,208 $ 3,531 $ 8,459
======== ======= ======== ========
9
Consolidated Results of Operations
Net sales for the third quarter of 2003 were 2.4% ($1.8 million) below those
of the same period for 2002 at $72.7 million. Net sales for the first nine
months of 2003 decreased 0.5% ($1.1 million) from 2002, to $215.8 million. The
declines in sales resulted from general softness in most of the Company's
principal markets, offset by moderate strength in the market for elevator
controls. The motors segment experienced a 6.3% decrease in third quarter
sales versus 2002, with year to date sales 1.8% below the same period in 2002.
Net sales of subfractional motors decreased 8.7% for the third quarter, and
are 1.8% below the prior year to date driven by protracted weakness in the
market for motors used in bottle and can vending, reduced demand for
refrigeration appliance motors, and the loss of value-added refrigeration
subassembly business. These reductions were offset in part by good demand for
other products, such as those used in medical, restaurant, and commercial
refrigeration end markets. Net sales of fractional/integral motors decreased
4.9% for the third quarter and decreased 1.2% for the year to date, compared
with the same periods in 2002. The reductions in sales were led by declines in
sales of DC products used in material handling and golf car applications,
reduced demand for DC products used in the floor care end market, and a weak
market in Europe. These declines were offset in part by the impact of Euro
currency translation on sales by FIR, which resulted in increases in sales of
$2.1 million and $5.5 million for the third quarter and year to date periods,
respectively. Net sales in the controls segment rose 7.6% in the third quarter
and 3.0% for the year to date compared with 2002 performance. The changes in
controls segment sales were driven by an improved elevator modernization
market (up 5.6% for the third quarter and up 1.1% for the first nine months of
2002) and by share gains in automotive conveyor controls.
Total company gross margin was $24.7 million in the third quarter, a decline
of 6.4% from 2002. For the nine-month period, gross margin fell 3.9% to $74.4
million. Gross margin as a percentage of sales fell from 35.5% in 2002's third
quarter to 34.0% in 2003. For the year to date, gross margin fell from 35.7%
of sales in 2002 to 34.5% in 2003. The slightly lower gross margins as a
percentage of sales are primarily attributable to unfavorable product sales
mix and to direct material cost inflation in China.
Total operating income for the third quarter of 2003 was $7.2 million, a
decline of $4.3 million, or 37.3% from the third quarter of 2002. Total year
to date operating income was $24.6 million, down $8.5 million, or 25.6% from
the same period of 2002. Operating income for the motors segment decreased
14.4% for the quarter ended on September 30, 2003 to $9.3 million, and
decreased 11.4% to $28.4 million for the year to date. The operating income of
the controls segment decreased 24.4% to $2.2 million for the quarter, and
decreased 9.4% to $7.3 million for the nine-month period then ended. Selling,
general, and administrative expenses ("SG&A") were $15.0 million for the third
quarter, an increase of 21.9% ($2.7 million) from 2002. The increases during
the third quarter are driven by a $1.0 million charge for prior year medical
insurance deficits, unallocated corporate overhead that was $0.9 million
higher, and increases in research and development costs at Motion Control
Engineering ("MCE") relating to upcoming new product introductions ($0.6
million). For the 2003 year to date, SG&A expenses were $42.3 million, an
increase of 14.5% ($5.4 million) from the previous year. The year to date
increases are driven by unallocated corporate overhead that was $2.8 million
higher, the aforementioned insurance deficit of $1.0 million, and new product
introduction costs at MCE of $1.0 million.
10
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 nine
months ended September 30, 2003 was $1.2 million, compared to $18.4 million
provided from operating activities for the nine months ended September 30,
2003. The decrease is due to the Company's lower operating performance
discussed under the heading "Consolidated Results of Operations", and to
stable working capital during the first nine months of 2003 in comparison to a
$10.6 million decrease in working capital for the same period in 2002. The
decrease in 2002 resulted primarily from increased Accounts Payable due to the
Company's efforts to lengthen payment terms with its suppliers.
Investing activities. In the first nine months of 2003, the Company made $2.9
million in payments for capital expenditures, an amount $0.7 million lower
than in the same period of 2002. In 2002, the Company made $9.5 million in
payments, including related transaction costs, to form the Kinetek De Sheng
joint venture.
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 November 14, 2003, the Company has approximately
$21.7 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 total 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 September 30, 2003
the Company had variable rate debt outstanding of $0.9 million. The Company
does not believe that its market risk from financial instruments on September
30, 2003 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.
11
Item 4. CONTROLS AND PROCEDURES
-----------------------
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-15 of the
Securities Exchange Act of 1934 ("Exchange Act") promulgated thereunder, our
chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report (the "Evaluation Date") with the Securities and
Exchange Commission. Based on such evaluation, our chief executive officer and
chief financial officer have concluded that our disclosure controls and
procedures were effective as of the Evaluation Date to ensure that information
required to be disclosed in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms. There have been no changes in our internal
controls over financial reporting during the period covered by this report
that were identified in connection with the evaluation referred to above that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
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
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) A list of exhibits filed with this report is contained on
the Exhibit Index immediately preceding such exhibits and
is incorporated herein by reference.
(b) None.
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
November 14, 2003
14
EXHIBIT INDEX
Exhibit
Number Description
31.1 Certificate of Chief Executive Officer pursuant to
Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certificate of Chief Financial Officer pursuant
to Rule 13a-14(a) or Rule 15d-14(a)
15