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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 March 31, 2003 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 ___
---
Indicate by check mark whether the registrant is an acceleratef filer (as
defined in Rule 12b-2 Registrant is not determinable as such shares were
privately placed and there is currently no public market for such shares.
Yes No x
--- ---
The number of shares outstanding of Registrant's Common Stock as of May
13, 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 Financia 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Item 4. Controls and Procedures 11
Part II OTHER INFORMATION
------- -----------------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security 12
Holders
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (Unaudited)
-------------------------------
PAGE NO.
Condensed Consolidated Balance Sheets at March 31, 2003 4
and December 31, 2002
Condensed Consolidated Statements of Operations for the 5
three months ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the three 6
months ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 7-11
3
KINETEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
March 31, December 31,
2003 2002
------------------------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 16,421 $ 14,654
Accounts receivable, net 59,305 53,495
Inventories 51,424 47,524
Deferred income taxes 4,747 4,545
Prepaid expenses and other current assets 4,165 4,261
Due from affiliated company 7,633 6,540
-------- ---------
Total current assets 143,695 131,019
Property, plant, and equipment, net 31,795 32,148
Goodwill, net 179,648 179,069
Deferred financing costs, net 9,277 9,939
Investment in affiliate 12,344 12,344
Other assets, net 800 738
-------- ---------
Total assets $377,559 $365,257
======== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable $ 30,497 $ 27,083
Accrued interest payable 12,647 4,989
Accrued expenses and other current liabilities 11,113 12,313
Current portion of long term debt 16,001 17,448
Total current liabilities 70,258 61,833
Long-term debt 295,603 295,517
Deferred income taxes 16,420 16,067
Other non-current liabilities 5,324 5,046
Shareholder's equity (net capital deficiency):
Common stock, $1 par value, 10,000 shares
authorized, issued and outstanding 10 10
Additional paid-in-capital 49,996 49,996
Accumulated deficit (58,153) (55,997)
Accumulated other comprehensive loss (1,899) (7,215)
--------- ---------
Total shareholder's equity (10,046) (13,206)
(net capital deficiency) --------- ---------
$377,559 $365,257
Total liabilities and shareholder's equity ========= =========
(net capital deficiency)
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
March 31,
------------------------------
2003 2002
---- ----
Net sales $71,252 $ 68,198
Cost of sales, excluding depreciation 46,378 43,700
Selling, general and administrative expenses 13,474 12,461
Depreciation 1,802 1,526
Amortization 55 104
Management fees and other 735 692
------- ---------
Operating income 8,808 9,715
Other (income)/ expense:
Interest expense 8,803 8,098
Interest income (48) (75)
Miscellaneous, net 316 (5)
-------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change (263) 1,697
Income tax provision 1,893 764
-------- ---------
Income (loss) before cumulative effect (2,156) 933
of accounting change
Cumulative effect of change in - (21,992)
accounting principle -------- ---------
Net loss $(2,156) $(21,059)
======== =========
See accompanying notes to condensed consolidated financial statements.
5
KINETEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(ALL DOLLAR AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
-----------------------
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (2,156) $(21,059)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Cumulative effect of change in accounting principle - 21,992
Depreciation and amortization 2,542 2,055
Deferred income taxes 151 25
Changes in operating assets and liabilities:
Current assets (9,614) (1,459)
Current liabilities 9,872 6,495
Non-current assets & liabilities 264 (202)
Payable to affiliated company (1,093) 738
--------- --------
Net cash (used in) provided by operating activities (34) 8,585
Cash flows from investing activities:
Capital expenditures, net (961) (922)
--------- ---------
Net cash used in investing activities (961) (922)
Cash flows from financing activities:
Borrowings (repayments) on revolving credit
facility 231 (9,206)
Repayment of other long-term debt (1,616) (2,321)
--------- ---------
Net cash used in financing activities (1,385) (11,527)
Effect of exchange rate changes on cash 4,147 (1,008)
--------- ---------
Net increase (decrease) in cash and cash equivalents 1,767 (4,872)
Cash and cash equivalents at beginning of period 14,654 17,558
--------- ---------
Cash and cash equivalents at end of period $16,421 $ 12,686
========== =========
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:
March 31, December 31,
2003 2002
-------------------- ---------------------
Raw materials $21,059 $23,445
Work in process 23,041 16,842
Finished goods 7,324 7,237
------- -------
$51,424 $47,524
======= =======
4. Comprehensive Income
Total comprehensive income (loss) for the three months ended March 31, 2003 and
2002 is as follows:
Three Months Ended
March 31,
----------------------------
2003 2002
---- ----
Net (loss) $(2,156) $(21,059)
Foreign currency translation adjustment 5,316 (2,357)
------- ---------
Comprehensive income (loss) $ 3,160 $(23,416)
======= =========
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.
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
March 31,
---------------------------------
2003 2002
---- ----
(Dollar amounts in thousands)
Net sales
Motors $51,330 $48,433
Controls 19,922 19,765
------- --------
71,252 68,198
Operating income
Motors 9,319 9,483
Controls 2,722 2,611
------- --------
12,041 12,094
Management fees and unallocated 3,233 2,379
corporate overhead ------- --------
Total operating income 8,808 9,715
Interest expense 8,803 8,098
Interest income (48) (75)
Miscellaneous, net 316 (5)
-------- --------
Income (loss) before income taxes $ (263) $ 1,697
======== ========
9
Consolidated Results of Operations
Net sales for the three months ended March 31, 2003 were $71.3 million, an
increase of $3.1 million, or 4.5% from the same period in 2002. Sales of the
Company's Motors segment increased $2.9 million, or 6.0% for the quarter.
Sales of subfractional motor products increased 7.3%, led by strong demand for
general business motor products (such as those used in restaurant, lottery and
medical applications). Sales of fractional and integral motor products
increased 5.1%, driven by the addition of sales by the Kinetek De Sheng joint
venture "KDS" ($2.3 million), and by the impact of Euro currency translation
on sales by FIR, which resulted in a $1.3 million increase in dollar sales.
These increases in sales of fractional and integral motor products were
partially offset by lower demand for products sold in the U.S., principally
for those used in material handling and golf cart end markets. Demand for
products in the U.S. floor care market and all markets in Europe was
essentially flat with the first quarter of 2002. Sales of the Company's
Controls segment increased $0.2 million, or 0.8%, over 2002 results. This
resulted from a $0.6 million increase in sales of conveyor controls driven by
share gains, offset by a $0.4 million decrease in elevator controls due to
general market sluggishness.
Total operating income for the first quarter of 2003 was $8.8 million, a
decline of $0.9 million, or 9.3% from the same quarter of the previous year.
Operating income for the first three months of 2003 in the Motors segment was
$9.3 million, which was $0.2 million, or 1.7%, lower than in the same period
of 2002. Operating income for the Controls segment was $2.7 million, which was
$0.1 million, or 4.3% higher than in 2002's first quarter. Total Company gross
margin was $24.9 million for the quarter, representing an increase of $0.4
million, or 1.5%, from the same period of 2002. The increased gross margin was
due mainly to the variances in sales discussed above. Gross margin was 34.9%
of sales in 2003, compared to 35.9% of sales in 2002. The decline in gross
margin as a percentage of sales is attributable to the addition of the sales
of KDS, where profitability is much lower than in the Company's other
businesses. Selling, general, and administrative expenses ("SG&A") were $13.5
million for the three-month period, an increase of $1.0 million, or 8.1%, from
the same period in 2002. This increase is due to increases in unallocated
corporate overhead of $0.8 million, and the addition of the SG&A of KDS in the
amount of $0.4 million. These increases were partially offset by modestly
lower SG&A in the Company's other business units.
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
three-month period ended March 31, 2003 was zero, compared to $8.6 million
provided by operating activities for the three months ended March 31, 2002.
The decrease is due primarily to the Company's net loss before cumulative
effort of accounting change for the quarter, which was $3.1 million
unfavorable to the net income reported in 2002, and to increased accounts
receivable during the 2003 quarter, which was $3.3 million larger than the
prior year's increase.
10
Investing activities. In the first quarter of 2003, the Company made $1.0
million in payments for capital expenditures.
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 May 13, 2003, the Company has approximately $22.5
million of available funds under this Credit Agreement.
The Company expects its principal sources of liquidity to be from its operating
activities and funding from the credit facility. The Company further expects
that these sources will enable it to meet its cash requirements for working
capital, capital expenditures, interest, taxes, and debt repayment for at least
the next 12 months.
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 December 31, 2002 the
Company had no variable rate debt outstanding.
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.
Item 4. CONTROLS AND PROCEDURES
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14 of the
Securities Exchange Act of 1934 ("Exchange Act") promulgated there under, our
chairman and chief financial officer have evaluated the effectiveness of our
disclosure controls and procedures as of a date within 90 days prior to the
date of the filing of this report (the "Evaluation Date") with the Securities
and Exchange Commission. Based on such evaluation, our chairman 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 significant changes in the internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of their most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
11
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
None
12
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
May 13, 2003
13
CERTIFICATE
I, Thomas H. Quinn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kinetek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
fulfilling the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Thomas H. Quinn
------------------------
Name: Thomas H. Quinn
Title: Chairman
14
CERTIFICATE
I, Daniel D. Drury, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kinetek, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
fulfilling the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 /s/ Daniel D. Drury
---------------------------
Name: Daniel D. Drury
Title: Chief Financial Officer
15