UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the year ended December 31, 1998
OR
[ ] 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 (I.R.S. Employer
of
incorporation or Identification No.)
organization)
1299 Cox Avenue
Erlanger, Kentucky 41018
(Address of registrant's principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (606) 371-0333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ].
As of January 1, 1999, there were 481,971 shares of the registrant's
common stock outstanding, all of which were owned by an affiliate of the
registrant.
Documents incorporated by reference: None
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Unless otherwise indicated, industry and market data used throughout
this report are based on Company estimates which, while believed by the Company
to be reliable, have not been verified by independent sources. Unless otherwise
indicated or the context otherwise requires, references to "IKS" or the
"Company" are to International Knife & Saw, Inc. and its consolidated
subsidiaries.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward looking statements. Certain matters discussed in
this filing could be characterized as forward looking statements, such as
statements relating to plans for future expansion, other capital spending,
financing sources and effects of regulation and competition. Such forward
looking statements involve important risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward looking
statements.
PART I
ITEM 1. BUSINESS
General
International Knife & Saw, Inc. ("IKS" or the "Company") is a
wholly-owned subsidiary of IKS Corporation, a Delaware corporation. The Company
is a global leader in the manufacturing, servicing and marketing of industrial
and commercial machine knives and saws, operating in an estimated worldwide
market of $1.0 billion. The Company's products, which are consumed in the normal
course of machine operation and need resharpening or replacement many times a
year, are mounted in industrial machines and are used in virtually every facet
of cutting, slitting, chipping and forming of materials. The Company serves the
following major market sectors: (i) Wood (43% of 1998 net sales); (ii) Paper &
Packaging (40%); (iii) Metal (11%); and (iv) Plastic & Recycling (6%). The
Company believes that it has a leading worldwide market share in each of these
market sectors and that there is no other company that serves all four such
sectors.
IKS traces its origins to 1814, when Klingelnberg Soehne was founded in
Germany as a textile and hardware trading house. Klingelnberg Soehne began
manufacturing industrial knives and saws in the early 1900s and by 1940 was
serving a variety of product segments. Klingelnberg Soehne expanded its sales
into the North American market during the 1960s and subsequently established
manufacturing and resharpening operations which were complemented by several
strategic acquisitions. The Company was incorporated in 1979, and by 1991 it had
acquired the European and North American operations of Klingelnberg Soehne.
Since 1991, the Company has expanded its resharpening operations by adding an
additional 21 service centers, commenced operations in Asia, Australia and Latin
America and expanded its manufacturing operations by acquiring three
manufacturing operations.
The Recapitalization
The Company issued $90 million in aggregate principal amount of 11 3/8%
Senior Subordinated Notes due 2006 (the "Notes") on November 6, 1996 under an
Indenture, dated as of November 6, 1996 (the "Indenture"), by and between the
Company and United States Trust Company of New York, as trustee. The Notes were
issued concurrently with the consummation of a recapitalization (the
"Recapitalization") of IKS Corporation. Prior to the Recapitalization, all of
the issued and outstanding capital stock of IKS Corporation was held by members
of the Klingelnberg family and the Company's issued and outstanding capital
stock was held approximately 97% by IKS Corporation and approximately 3% by
certain executive officers of the Company (the "Existing Management Investors").
The Recapitalization involved the following transactions: (i) the
Existing Management Investors exchanged their holdings of capital stock issued
by the Company for capital stock of IKS Corporation, and the Company became a
wholly-owned subsidiary of IKS Corporation; (ii) IKS Corporation amended its
charter to change its corporate name from "The Klingelnberg Corporation" to "IKS
Corporation" and to authorize three classes of capital stock, consisting of
preferred stock (the "Corp. Preferred Stock"), voting common stock (the "Corp.
Class A Stock") and non-voting common stock (the "Corp. Class B Stock" and,
together with the Corp. Class A Stock, the "Corp
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Common Stock"); (iii) the issued and outstanding capital stock of IKS
Corporation was exchanged for a recapitalization distribution (the
"Recapitalization Distribution") which consisted of (a) approximately $86.6
million in cash and (b) Junior Subordinated Debentures of IKS Corporation (the
"Corp. Debentures"), Corp. Preferred Stock and Corp. Class A Stock with an
aggregate value of approximately $9.4 million issued to Arndt Klingelnberg,
Diether Klingelnberg and John E. Halloran; (iv) John E. Halloran and Thomas
Meyer, together with certain other key employees of the Company who were not
Existing Management Investors (the "New Management Investors" and, together with
the Existing Management Investors, the "Management Investors"), purchased Corp.
Debentures, Corp. Preferred Stock and Corp. Class A Stock from IKS Corporation
for approximately $1.3 million in cash; and (v) Citicorp Venture Capital Ltd.
("CVC") purchased Corp. Debentures, Corp. Preferred Stock and Corp. Common Stock
from IKS Corporation for $14.3 million in cash.
The gross proceeds to the Company from the sale of the Notes, together
with the aggregate investment of $15.6 million made in IKS Corporation by John
E. Halloran, Thomas Meyer, the New Management Investors and CVC in connection
with the Recapitalization, were used to (i) finance the cash portion of the
Recapitalization Distribution (approximately $86.6 million), (ii) repay
approximately $11.4 million of outstanding indebtedness referred to below and
(iii) pay approximately $4.5 million of fees and expenses related to the
transactions.
In connection with the Recapitalization, the Company repaid
approximately $5.2 million of its existing indebtedness and entered into a new
$20.0 million revolving credit facility (the "Senior Credit Facility"). In
addition, a German subsidiary of the Company repaid approximately $6.2 million
of existing indebtedness under its term loan and entered into a new DM 7.5
million revolving credit facility (the "New German Credit Facility").
In accordance with certain provisions contained in the documentation
governing the Recapitalization, the amount of the Recapitalization Distribution
was adjusted upwards by approximately $2.8 million in March, 1997, and such
amount was paid in cash by the Company to the recipients of the Recapitalization
Distribution.
Business Strategy
The Company believes that it can enhance its leading market position
through the continued implementation of its business strategy. Key elements of
this strategy include (i) maximizing stable, high margin end-user sales; (ii)
increasing its global manufacturing, sourcing and marketing capabilities through
strategic alliances; (iii) growing its resharpening service center operations,
which increases direct access to end-users and enables the Company to capture
both resharpening and additional replacement business; (iv) expanding and
improving its product offering; (v) maintaining its focus on cost improvement
opportunities; and (vi) continuing to evaluate acquisitions in the highly
fragmented knife and saw industry. The Company is presently evaluating potential
acquisition opportunities and as part of its strategy will continue to do so in
the future. There can be no assurance that the Company will consummate any such
acquisitions or, if consummated, the timing thereof.
Products and Markets
The Company manufactures and sells its products in four major market
sectors including (i) Wood (43% of 1998 net sales); (ii) Paper & Packaging
(40%); (iii) Metal (11%); and (iv) Plastic & Recycling (6%). IKS offers an
extensive variety of knives and saws which are mounted in industrial machines
and are sold across a wide customer base and over numerous industries throughout
the world. The Company's knives and saws are consumed in the normal course of
machine operation and need resharpening or replacement many times per year.
Wood
IKS believes it is the largest manufacturer of industrial wood knives
and saws with 1998 net sales of approximately $65 million. Industrial wood
knives and saws are utilized in applications by companies such as Weyerhauser
Co. and Louisiana Pacific Corp. for sawing and chipping of lumber into specific
dimensional sizes for use in the housing industry; by companies such as Georgia
Pacific Corp., Union Camp Corp. and Boise Cascade Corp. for peeling large
diameter logs into veneer for use in the production of plywood, paneling and
furniture; and by companies such as Scott Paper Co., Inc. and International
Paper Co., Inc. for the production of wood chips used
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in their pulp mills to produce fine paper, newsprint and craft paper. In
addition, the Company's knives are used to cut wood into chips, used for fuel by
wood and coal burning power plants as well as generating power and steam for
large paper and pulp mills worldwide. Industrial wood cutting knives and saws
are consumed in the normal course of operation and due to their rough service
applications generally need resharpening as often as every six to eight hours
and 50 times over the life of the product. Wood circular and band saws are
generally resharpened and retensioned every two weeks and replaced after two
years.
As wood becomes more expensive, the industry is increasingly cognizant
of the need for more effective tree utilization and reducing material lost to
inefficient sawing. As a result, the industry is trending toward engineered and
composite materials made from specially sized wood chips leading to increased
sales of waferizer and flaker knives, and wear parts. In the past, plywood was
typically used in favor of engineered and composite materials. However, plywood
requires the use of large diameter logs as raw material, leaving considerable
waste on the forest floor, whereas wafer board and oriented strand board use
tighter tolerance waferizer and flaker knives to reduce smaller, less expensive
raw material logs into specifically sized and shaped wood chips. The chips are
then assembled with synthetic binders into boards, sheets and specialty
profiles, having properties superior to plywood or solid wood predecessors. The
Company believes that it is the leading North American manufacturer of these
specialty knives and has the ability to grow with this rapidly increasing
market.
The Company is a leader in the manufacture of carbide edger saws and
also one of the largest providers of stock saws for the secondary industry in
North America as a result of its purchase of the assets of the Systi-Matic
Company ("Systi-Matic") in April, 1997. Located near Seattle, WA, Systi-Matic
represents one of the most modern precision wood saw manufacturing facilities in
the U.S. Using automated equipment in combination with skilled craftsmen,
Systi-Matic produces extremely accurate saws used for primary wood, to mitre cut
wood moldings for cabinet making and furniture production. State-of-the-art
laser cutting equipment provides Systi-Matic with both extreme precision in the
manufacturing process and reduced costs due to automated production.
The Company is also a leader in the manufacture of long wood-peeling
and slicing veneer knives. Veneer knives are among the more difficult industrial
knives to manufacture due to their length (up to six meters) and quality
requirements. IKS is one of only a limited number of manufacturers that can
produce such a knife. As the market demands higher quality veneer knives, the
Company believes that its expertise in the design and manufacture of such knives
gives it a competitive advantage.
The Company increased its presence in the wood saw machinery market
with its acquisition of the assets of Cascade/Southern Saw Corp. ("Cascade") in
June, 1997. Located near Portland, OR and in Hot Springs, AR, Cascade provides
technical assistance to the primary wood industry particularly in the area of
thin kerf sawing for yield and productivity improvements. The highly trained,
experienced, technical sales staff provides primary wood end users with a
valuable resource to improve their mills' performance, thereby creating mutually
beneficial long-term exclusive supplier relationships for saws, saw maintenance
equipment, and supplies.
The market for wood cutting knives and saws is growing in Latin America
and other underdeveloped regions as many of the nations in these regions begin
to export products further along the production cycle. As the Company expands in
these regions, it believes that it will benefit from the increased exportation
of finished products. The Company is also using its service center operations to
increase its sales, as more wood cutting operations are outsourcing their knife
and saw servicing needs.
Paper & Packaging
The Company believes it is the largest manufacturer of industrial paper
& packaging knives with 1998 net sales of approximately $61 million. Among the
Company's four major markets, the paper & packaging knife market is the largest
and most diverse, with the widest variety of cutting methods. These knives are
used in applications by companies such as Kimberly-Clark Corp. and Proctor &
Gamble Co. for cutting and perforating tissue paper and paper towels and the
production of disposable diapers; by companies such as Frito-Lay, Inc. and M&M
Mars, Inc.
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which utilize Zig Zag knives to cut the top and bottom of snack food, salt and
pepper and candy packages sold by convenience stores and fast food chains; and
by companies such as Quebecor Corp., Champion International Corp. and RR
Donnelly & Sons Co., Inc. for cutting and trimming paper in the production of
copy paper, books and business forms. As a result of their many uses, paper &
packaging knives represent the largest category of the Company's approximately
10,000 products with more than 2,500 paper & packaging knife products relating
to every aspect of paper & packaging manufacturing and converting.
Paper knives are made from a wide range of steel grades, from inlaid
carbon steels to carbide. Recent trends in the paper industry, including an
increase in the use of recycled fiber and a change in paper chemistry to more
abrasive alkaline additives, have required upgrades by paper producers to higher
quality, more expensive knife materials and designs which are better suited for
more sophisticated and diverse cutting applications. As a result, the market for
industrial paper knives is experiencing price and margin expansion as higher-end
knives are increasing in demand. The Company has developed an expertise in the
manufacture of these more sophisticated cutting tools which allow the paper
converter to run longer and produce better quality cuts. The Company believes
that few of its competitors have the expertise to manufacture machine knives out
of the more expensive materials, which gives IKS a competitive edge and
positions it to offer the most complete package of new knife products and
services in the world paper market.
The Company expanded its presence in the printing market with its
acquisition of the assets of the Rolf Meyer Company ("Rolf Meyer") in April,
1997. Located in northern Germany, Rolf Meyer, over the past 30 years, has
developed a reputation of being a leading producer of high precision printing
press knives and spare parts. By acquiring Rolf Meyer's technical expertise and
proprietary machining methods, IKS has also been able to expand its precision
toothed knife manufacturing capabilities into the packaging and food industry,
growing markets for the IKS group. Further plans call for expansion of the Rolf
Meyer facility, greatly increasing manufacturing capacity to support rapid
growth occurring by IKS' expansion in the North American market. The Company's
sales and marketing staff has been expanded in the graphic arts area to include
market specialists from the industry providing valuable consulting to major
graphic arts customers as part of the IKS supplier package.
Industrial paper knives are generally consumed rapidly in the normal
course of operation and can need resharpening as often as once per week and 50
times over the life of the product. The Company has a strong presence in the
knife servicing market in North America, capitalizing on the preference of users
of paper knives to outsource their knife servicing needs rather than resharpen
their knives themselves. Customers often find that the performance of these
tools can be better maintained if the sharpening is outsourced to professional
service shops having more specialized equipment and technically trained
personnel. The Company believes that it has the largest network of
Company-owned, strategically located service shops equipped with the IKS
Hyperhone system, which system maintains new knife performance throughout the
life of a tool and is not available at most other independent or in-house
grinding shops. The Company's acquisitions of three strategically located
service centers in Tennessee (2) and Wisconsin in the fourth quarter of 1997 and
one each in Atlanta, Chicago, France and the Netherlands in 1998, further
strengthened its network of service shops. These acquired shops focus primarily
on the graphic arts, printing and paper converting industries. Through Company
owned service facilities in strategic locations, IKS can offer customers a local
supply of consumable cutting tools as well as factory trained service facilities
to sharpen and maintain cutting tools for peak performance and productivity. In
addition to Company owned service centers, the Company works very closely with
independently owned dealers and regrind shops. The Company is continuously
expanding its paper knife servicing business by educating paper mills on the
benefits of outsourcing their knife resharpening needs to the Company's service
centers.
The Company believes that the market for paper & packaging knives is
strong worldwide and is growing in Europe, Latin America and Asia. The Company
should benefit in Asia and Latin America as consumer markets in those regions
emerge and the use of packaged consumer products rapidly increases. The Company
has expanded its penetration of the European market to include packaging and
food knives previously not marketed in Europe through the IKS organization,
primarily due to the increased capacities in precision serrated edge tool
products the Company obtained when it acquired Rolf Meyer. The Company believes
that, through its continued emphasis on providing specialized technical
assistance, it will continue to grow in these markets.
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Metal
The Company believes it is the second largest manufacturer of metal
knives with 1998 net sales of approximately $16 million. The Company's metal
knives are used by steel processing facilities such as Heyco Corp., Edgecomb
Metals Co. and Allegheny Ludlum Corp. and metal products manufacturers such as
Deere & Co. Inc., Caterpillar, Inc. and Steelcase Corp.; in the cutting,
shearing and chopping of steel being produced in steel mills used by companies
such as Bethlehem Steel Corp., Rouge Steel Co. and USX Corp.; and in cutting
metal sheets and slitting strips from rolls of sheet steel processed by
companies such as California Steel Corp. and Joseph T. Ryerson & Son, Inc.
Steel circular slitter knives are highly accurate, requiring tolerances
of up to 40 millionths of an inch for a high degree of precision and
customization. There is a trend toward increased tensile strengths of metals and
maximizing the efficiency of metal slitting machines. This trend requires tool
technology that extends the normal resharpening cycle. The Company is a leader
in this field, utilizing fine-grained raw materials and triple-tempered vacuum
heat treatment procedures to produce finely lapped surfaces which enable this
degree of precision.
In setting up their steel slitting lines, the Company's customers order
knives specifically designed for the particular demands and characteristics of
each production line. IKS offers expert technical and computer software
assistance to companies setting up such a line. The Company has developed a
proprietary software package, Slitting Assembly Very Easy (SAVE), which assists
customers in choosing and setting up metal slitting knives. The IKS (SAVE)
technology makes use of custom computer software to guide the personnel setting
up the arbor in the selection of the individual slitter knife and spacer
combination to an exact thickness, assuring that, as the arbor is loaded, the
accumulated error is maintained near zero. The accuracy of this knife clearance
directly affects the cut edge quality of the steel strip. By offering this
technology, as well as personal technical assistance, the Company is an integral
part of the steel slitting knife purchasing process, which the Company believes
increases the likelihood that a customer will choose an IKS product.
Another method the Company utilizes to maintain its position with its
customers of steel slitting knives is its focus on metal knife resharpening
centers. Metal knives are consumable and generally need resharpening as often as
once per week and as often as 100 times over the life of a product. Although
most users of metal knives have expertise in metalworking and typically
resharpen their own knives, there is a trend among steel mills in the United
States to outsource their resharpening requirements due to the increasing
sophistication and tolerance required of metal knives. IKS is capitalizing on
this opportunity. The market for industrial metal knives is dependent upon the
steel usage by numerous industries including the automotive industry and metal
and consumer product manufacturers, such as aluminum can and appliance
manufacturers.
Plastic & Recycling
The Company believes it is the largest manufacturer of industrial
plastic & recycling knives with 1998 net sales of approximately $8 million.
Industrial plastic granulator knives are used for the manufacture of plastic,
typically by companies such as Mobil Chemical Corp. and I.C.I. Americas, Inc.
where pelletizing knives are used to cut plastic into small, precise pieces for
processing; by companies such as E.I. DuPont de Nemours & Co. for cutting
artificial fibers; by companies such as Wellman Inc. for recycling plastic
containers; and by companies such as Waste Recovery Corp. for the environmental
recycling of styrofoam, rubber and glass. The Company manufactures knives for
all of these uses, as well as related knives used to cut computer tape, foil and
film by companies such as Alcoa Aluminum Co. of America, Inc. and Eastman Kodak
Co. and household products produced by Hasbro Corp. and Rubbermaid Inc.
IKS is North America's largest manufacturer of plastic granulator
knives and is also a leader in the manufacture of such knives in Europe.
Although the current market for plastic granulator knives is relatively small,
the Company believes it will grow rapidly as the machinery that uses plastic
cutting knives is adapted for an increasing number of cutting and
recycling-related applications. The market for industrial plastic granulator
knives is currently strong in Europe as a result of government mandated
recycling programs and is also growing in North America due to the increased
focus on the environment and recycling. There is a growing emphasis on recycling
with
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respect to reclaiming the reusable value of material in plastic, rubber, glass
and metal products, as well as with respect to easing the disposal of urban
waste, medical waste, aluminum cans and soda bottles in accordance with
environmental regulations.
The Company is also is a leader in the development and production of
knives used in the size reduction and recycling of automobile tires and glass.
The Company believes the use of tire granulating knives will continue to
increase as new uses are developed for the reprocessed material. The Company
believes that the recycling of copper and aluminum cable and wires will also
increase as fiber optic and satellite communication technologies become more
widespread. The Company manufactures the knives which are used in the granulator
systems used in recycling these materials and is thus well positioned to benefit
as demand for these products increases. Industrial plastic granulator knives are
consumed in the normal course of machine operation and need resharpening as
often as once per month and as many a 15 times over the life of a product. Most
users of industrial plastic granulator knives do not service their own knives
and the servicing of such knives is also an important area for the potential
expansion of the Company's customer base.
Marketing and Distribution
The Company is the only industrial knife and saw manufacturer with
operations in North America, Europe, Asia, Australia and Latin America and
products sold in more than 75 countries. Historically, the Company's sales have
been principally in North America and Europe. However the Company has recently
expanded operations into the emerging markets of Asia and Latin America, and
plans to continue its international growth, entering new geographic markets
while broadening existing ones.
The Company has one of the largest direct salesforces focused on
industrial knives and saws. Complementing the Company's knowledgeable worldwide
salesforce, the Company has a significant staff of product managers who are
experts in their respective fields and are responsible for product coordination
among the Company's salespeople, customers and manufacturing operations. The
Company concentrates its sales efforts on end-users, which represent 89% of 1998
net sales, through its direct sales force, distributors, agents and
Company-owned and independent resharpening service centers. The remaining 11% of
the Company's net sales are to original equipment manufacturers ("OEM")
manufacturers of cutting machines through its direct sales force.
In order to better serve its customers, the Company strategically
places its inventory around the world to best suit geographical and customer
needs. This results in the Company being able to ship most products to the
end-users more rapidly than many of its competitors and as a result the Company
is often able to command a premium price for its products.
End-users -- Direct Salesforce and Company-Owned Service Centers.
Approximately 64% of the Company's 1998 net sales were direct to end-users
through the Company's salesforce and Company-owned service centers, representing
approximately 7,500 customer accounts. The Company believes that it has been
successful in selling to end-users because of its large and knowledgeable
salesforce, broad product offering, customer service, the strategic placement of
its inventory and its relationships with OEMs. The Company's salesforce develops
close working relationships with end-users, continually providing customers with
direct technical support, offering advice about the types of knives, materials
and specifications which would be appropriate for their specific machines.
The Company is afforded additional direct access to end-users by
providing resharpening services to end-users of both its own and its
competitors' products through its 21 service centers, fourteen in the United
States, three in Canada, one in the Netherlands, one in France, one in Mexico,
and one in Chile. In addition to company owned service centers, the Company
works very closely in conjunction with a network of independently owned dealers
and regrind shops. This enables the Company to create even closer customer
relationships which better position it to be the first choice of the end-user
when a replacement is needed. Since industrial knives and saws are consumable,
and generally need resharpening at least once per week and as often as 50 times
over the life of a product, resharpening revenues can be significantly in excess
of the cost of the product.
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The resharpening service centers also act as distributors as they sell
replacement knives and saws. By owning and operating these service centers, the
Company can replace competitors' products with IKS products, including IKS
products that the service center may not have previously sold. The Company
believes that the number of service center users will continue to increase as a
result of an emerging trend toward outsourcing resharpening operations. This
outsourcing trend results from end-users implementing overhead reductions and
requiring expertise in resharpening blades that are increasingly more
sophisticated in materials and design. Such sales are typically high margin
sales since end-users will pay a higher price for the Company's technical
support resulting in greater satisfaction. In 1998, the Company had
approximately $11.7 million in net sales from its resharpening operations.
End-users -- Distributors and Independent Service Centers. The Company
sells approximately 25% of its net sales to end-users through distributors and
independent resharpening service centers. The Company's long term relationships
with these distributors, agents and independent resharpening service centers
complement its salesforce by providing the opportunity to access additional
niche markets. The Company will continue to utilize its distribution network to
expand its sales reach and carry the IKS products in their inventory, ready to
be sold to end-users.
OEMs. Approximately 11% of IKS' 1998 net sales were directly to a
variety of OEM manufacturers. The Company believes it is the leading supplier to
the OEM market, placing the original knife or saw in the OEM machine, and has a
close relationship with many of the major cutting machine manufacturers
worldwide. The Company has developed and maintains these close relationships by
providing advice to OEM manufacturers about the types of knives, materials and
specifications which would be appropriate for their particular machines. In
supplying over 350 OEMs, the Company's market managers have an enhanced ability
to identify the needs of its customers and to coordinate the Company's technical
capabilities with those needs. As a result, the Company believes that it has
greater opportunities to place its products into OEM machines and by doing so
provides itself with a competitive advantage in capturing the resultant end-user
replacement sales.
Strategic Alliances
The Company's strategic alliances include over 50 business
relationships with suppliers of finished industrial knives and saws throughout
the world, five joint ventures and several strategic relationships with
independent resharpening centers. These alliances enable the Company to expand
its international presence, increase its product offerings and align itself with
local entrepreneurs in international markets where local market expertise is
needed while broadening its customer base with limited additional investment.
Finished Goods Suppliers. The Company's relationships with suppliers of
finished goods are typically with small manufacturers throughout the world. The
Company's relationships with finished goods suppliers allow it the flexibility
to manufacture or source a product based upon cost and delivery time, the
quality of product needed, the region to be supplied and the material to be
used. The more significant of these relationships provide the Company with the
exclusive or semi-exclusive rights to market certain of its partners' products
within the Company's markets and allow the Company to purchase finished goods
for a relatively low cost and then resell these products at attractive margins
often using the Company's trademarks and tradenames. The Company generally has
at least two suppliers for most of the products it sources. In addition, the
loss of any particular supplier would not have a material effect upon the
Company, since the Company is able to manufacture substantially all of the
products it sources.
Joint Ventures. The Company also maintains its international presence
through joint ventures in Asia, Australia, and Latin America. These include two
joint ventures which commenced operations in January 1996 with the leading
industrial paper cutting machinery manufacturer in China. The Company has a 51%
interest in both ventures. The Company's partner in the China joint ventures is
Shanghai Printing and Packaging Machinery General Corporation, which currently
has approximately an 80% share of the paper knife machine market in China,
manufacturing cutting equipment which consumes the Company's paper knives. These
joint ventures sell products domestically within China and IKS exclusively
exports these products to the rest of the world, providing the Company with a
relatively low cost source of supply for resale to its customers. These joint
ventures provide a distribution network for the Company to import its products
from North America and Europe into the rapidly developing market in China as the
economy expands and demands a greater variety of cutting tool products. The
Company's other joint venture interests are a 42.5% interest in a distributor
and service center in Chile which had net
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sales of approximately $1.1 million in 1998, a 30% interest in a distributor in
the Philippines which had net sales of approximately $.7 million in 1998, and a
45% interest in a distributor in Australia which had net sales of approximately
$.6 million in 1998.
Raw Materials
The Company has numerous suppliers of raw materials, including over 20
raw material suppliers of steel. IKS's steel purchase volume is typically large
enough to allow the Company to purchase steel directly from steel mills, which
results in reduced raw material costs. The Company believes that its
relationships with all of its steel vendors are good. The Company is not
dependent on any one of its suppliers for all of its raw materials.
In 1995, the Company experienced an unexpected increase in the price of
tool steel because of an unusual general market price increase which affected
the knife industry worldwide. This price escalation is attributable to a major
reduction in specialty tool steel production resulting from the closing of a
major German steel mill and the consolidation of steel producers in Latin
America and Europe coupled with a strong demand for raw materials in North
America and Europe. The resultant shortage in tool steel caused deliveries from
suppliers to be extended from nine months to fourteen months. As the Company
sells primarily to end-users which requires prompt and timely delivery, the
Company was forced to purchase expensive substitutes. Due to the unexpected
nature of the price increase, the Company was not able to pass along this
increase to its customers on a timely basis. The Company has taken measures to
prevent such a reoccurrence by negotiating a 90-day fixed price term into most
of its sales contracts as opposed to the previous one year term, increasing
prices on a more regular basis and expanding the number of its steel suppliers.
In 1996 there was an increase in the number of suppliers of tool steel,
and prices for tool steel decreased from the 1995 levels.
Backlog Orders
As of February 28, 1999, the dollar amount of backlog orders believed
by the Company to be firm totaled approximately $37 million. It is expected that
a significant portion of all such orders will be filled during 1999. As of
February 28, 1998, the dollar amount of backlog orders totaled approximately $38
million.
Competition
The industrial knife and saw market is highly fragmented with numerous
participants. The Company competes principally on the basis of price, service,
delivery, quality and technical expertise. The Company's competitors vary in
each of the market sectors that the Company serves. There is no one company
which competes with the Company in all four of the market sectors which the
Company serves and there is no one company which is dominant in any of such
market sectors. The Company believes that the reputation it has established over
its long history for quality products, sales and service network and its
in-depth product knowledge provide it with a competitive advantage in all the
market sectors it serves.
Trademarks and Tradenames
The Company markets its products under certain trademarks, including
"IKS(TM)," "IKS Klingelnberg," "Cascade Southern", "Chromavan," "Chromalit,"
"Compaflex," "Compalloy," "Durapid," "Duritan," "Dynabloc(TM)," "Dynapren,"
"Dynatherm," "KeyMatic", "Klirit," "KSFmicroplan," "Novacrom(TM)," "Novador,"
"QCP," "Quality Cut Knife Maintenance Program and Design," "Rolf Meyer", "SAVE,"
"Sawyer's Choice," "Stop," "Surekut(TM)," "Systi-Matic", "Tecalloy(TM),"
"Tecnolite(TM)," "Tungsten Carbide Quattro," "Diamond Cut," "New Wave,"
"Dialux," "Ultrid," and "Workalit." In addition, the Company uses the following
tradenames: American Custom Metals; Ban-Carb; Buland; Canadian Knife & Saw;
Diacarb; AK Vander Wijngaart Beheer; Diacarb Stansvormen; Mayemyton Trading;
Durakut; Econokut; Hannaco; Hyperhone; IKS de Mexico; IKS Shanghai; Kodiak; SPS;
Tuff-Tip; and Ultrakut.
I-8
<PAGE>
Employees
At December 31, 1998, the Company had 1,475 full-time employees. Of
such employees, 808 were located in North America, 328 were located in Europe
and 339 were located in Asia. The Company considers its relations with its
employees to be good.
The Company's employees are primarily non-union. The Company's Bergisch
Born, Germany facility, its China facilities (operated in connection with its
joint venture arrangements) and its Systi-Matic facility in Kirkland, Washington
are the only facilities which employ union workers. The Company estimates that
45 of its German employees and 68 of its U.S employees are union members. The
majority of the 324 employees at the facilities of the two China joint ventures
are part of a governmental bargaining unit. The Company considers its relations
with the unions to be good.
Environmental and Regulatory Matters
As with most industrial companies, the Company's facilities and
operations are required to comply with and are subject to a wide variety of
federal, state, local and foreign environmental and worker health and safety
laws, regulations and ordinances, including those related to air emissions,
wastewater discharges and chemical and hazardous waste management and disposal
("Environmental Laws"). Certain of these Environmental Laws hold owners or
operators of land or businesses liable for their own and for previous owners' or
operators' releases of hazardous or toxic substances, materials or wastes,
pollutants or contaminants, including petroleum and petroleum products.
Compliance with Environmental Laws also may require the acquisition of permits
or other authorizations for certain activities and compliance with various
standards or procedural requirements. The nature of the Company's operations,
the long history of industrial uses at some of its current or former facilities,
and the operations of predecessor owners or operators of certain of the
businesses expose the Company to risk of liabilities or claims with respect to
environmental and worker health and safety matters. There can be no assurance
that material costs or liabilities will not be incurred in connection with such
liabilities or claims.
In connection with the Recapitalization, the Company obtained an
indemnity for fines and penalties for violations of Environmental Laws and for
losses suffered by the Company with respect to certain environmental conditions
occurring prior to the Recapitalization. The environmental indemnities are
subject to certain time limitations depending on the nature of the environmental
claim, a $15.0 million cap and, except for fines and penalties for violations of
Environmental Laws, a $2.5 million deductible. Based on the Company's experience
to date and the indemnities obtained in connection with the Recapitalization,
the Company believes that the future cost of compliance with existing
Environmental Laws (or liability for known environmental liabilities or claims)
should not have a material adverse effect on the Company's business, financial
condition or results of operations. However, future events, such as changes in
existing laws and regulations or their interpretation, may give rise to
additional compliance costs or liabilities that could have a material adverse
effect on the Company's business, financial condition or results of operations.
Compliance with more stringent laws or regulations, as well as more vigorous
enforcement policies of regulatory agencies or stricter or different
interpretations of existing laws, may require additional expenditures by the
Company that may be material.
ITEM 2. PROPERTIES
The Company is headquartered in Erlanger, Kentucky, located a few miles
south of Cincinnati, Ohio. The Company currently owns or leases 30 facilities in
North America, Europe, Asia, and Australia that are used for manufacturing,
distribution, sales, warehousing and service center activity.
I-9
<PAGE>
The following table sets forth the location, square footage and
principal functions of each of the Company's facilities.
<TABLE>
<CAPTION>
Location Approx. Sq. Ft. Use
--------------------------------- --------------- -------------------------
<S> <C> <C>
North American Facilities
Florence, SC................... 106,600 Manufacturing/Service
Center/Distribution/Sales
Erlanger, KY (corporate
Headquarters).............. 99,700 Manufacturing/Service
Center/Distribution/Sales
Camden, AL..................... 44,700 Manufacturing/Service
Center/Distribution/Sales
McMinnville, OR................ 55,000 Manufacturing/Service
Center/Distribution/Sales
Granby, Quebec*................ 20,000 Manufacturing/Service
Center/Distribution/Sales
Langley, British Columbia...... 19,200 Manufacturing/Service
Center/Distribution/Sales
Elmhurst, IL*.................. 18,500 Service Center/Distribution/Sales
Kirkland,WA *.................. 30,000 Manufacturing/Service
Center/Distribution/Sales
Milwaukie, OR *................ 8,600 Manufacturing/Service Center
Hot Springs, AR................ 6,700 Distribution/Sales
Atlanta, GA *.................. 3,900 Service Center/Distribution/Sales
Appleton, WI *................. 5,000 Service Center/Distribution/Sales
Nashville, TN *................ 2,400 Service Center/Distribution/Sales
Bangor, ME..................... 12,400 Service Center/Distribution/Sales
Mississauga, Ontario*.......... 11,800 Service Center/Distribution/Sales
West Monroe, LA................ 7,500 Service Center/Distribution/Sales
Richmond, VA *................. 7,400 Service Center/Distribution/Sales
Mexico City, Mexico*........... 3,500 Service Center/Distribution/Sales
Statesboro, GA*................ 2,700 Service Center/Distribution/Sales
European Facilities
Bargteheide, Germany........... 64,500 Manufacturing/Distribution/Sales
Bergisch Born, Germany......... 56,000 Manufacturing/Distribution/Sales
Geringswalde, Germany.......... 30,700 Manufacturing
Rotterdam, the Netherlands.... 23,700 Service Center/Distribution/Sales
Palaiseau, France.............. 17,200 Service Center/Distribution/Sales
Asian Facilities
Jakarta, Indonesia*............ 2,700 Distribution/Sales
Kuala Lumpur, Malaysia*........ 1,000 Distribution/Sales
Joint Venture Facilities
Shanghai, China** (51%)........ 32,000 Manufacturing/Distribution/Sales
Coffs Harbour, Austrialia*(45%) 2,000 Distribution/Sales
Concepcion, Chile (42.5%)....... 3,700 Service Center/Distribution/Sales
Manila, Philippines (30%)....... 2,500 Distribution/Sales
</TABLE>
- ----------
* Leased.
** Facility owned, land leased.
The Company believes that its facilities are suitable for its operations
and provide sufficient capacity to meet the Company's requirements for the
foreseeable future.
I-10
<PAGE>
The Company places a strong emphasis on producing high quality
products. The Company's European facility located in Bergisch Born, Germany has
been awarded ISO 9001 certification, while its Erlanger, Kentucky facility has
been awarded ISO 9002 certification indicating that these facilities have
achieved and sustained a high degree of quality and consistency with respect to
their production systems. The Company believes that ISO certification is an
increasingly important selling feature both domestically and internationally, as
it provides evidence to purchasers that the Company's systems have achieved
specified standards and are being sustained.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in legal proceedings arising
in the ordinary course of business. The Company believes there is no outstanding
litigation which could have a material impact on its financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
This item is not applicable to the registrant for this filing on Form
10-K.
I-11
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company is a wholly owned subsidiary of IKS Corporation. The
Company's common equity is not publicly traded and, accordingly, an established
market does not exist for such common equity.
IKS Corporation has two classes of common equity outstanding as well as
two classes of preferred stock. As of March 1, 1999, there were 38 holders of
IKS Corporation's outstanding common equity. In August and September 1997, IKS
Corporation issued 11,319 shares of Class A Stock, 96 shares of Series A 12%
Cumulative Compounding Preferred Stock and 96 shares of Series B 12% Cumulative
Compounding Preferred Stock to Participants for total consideration of $305,190.
During 1998, IKS Corporation issued 200 shares of Class A Stock, 24 shares of
Series A 12% Cumulative Compounding Preferred Stock and 24 shares of Series B
12% Cumulative Compounding Preferred Stock to Participants for total
consideration of $50,000. The above securities were purchased under certain
employee stock purchase plans in reliance upon the exemptions available under
Section 4 (2) of the Securities Act of 1993, as amended, and Regulation D
thereunder. See "Item 12. Security Ownership of Certain Beneficial Owners and
Management."
On November 6, 1996, IKS Corporation completed the Recapitalization.
See "Item 1. Business - The Recapitalization." As part of the Recapitalization,
the Company paid a special cash dividend of approximately $63.5 million to IKS
Corporation to finance, in part, the cash portion of the Recapitalization
Distribution. See "Item 1. Business - The Recapitalization."
The Notes were issued pursuant to the Indenture, which prohibits the
Company from declaring or paying any dividend or making any distribution on
account of the Company's equity interests unless certain conditions, as outlined
in the Indenture, exist at the time of such payment. The Company is not
prohibited from declaring or paying dividends in the form of capital stock of
the Company.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected historical financial data of the
Company as of and for each of the five years in the period ended December 31,
1998. The information contained in this table should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations", and the Company's historical consolidated financial statements,
including the notes thereto, included elsewhere herein.
II-1
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
(dollars in thousands)
1998 1997 1996 1995 1994
---------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales $ 150,132 $ 142,265 $ 118,996 $ 107,030 $ 92,447
Cost of sales 105,020 99,176 83,122 77,026 62,634
--------- --------- --------- --------- --------
Gross profit 45,112 43,089 35,874 30,004 29,813
Selling, general and
administrative expenses 30,299 27,681 23,952 19,734 19,241
--------- --------- --------- --------- --------
Operating income 14,813 15,408 11,922 10,270 10,572
Interest expense, net 12,006 11,687 3,245 1,416 1,727
Minority interest 71 174 (271) - -
--------- --------- --------- --------- --------
Income before income taxes 2,736 3,547 8,948 8,854 8,845
Provision for income taxes 1,146 1,499 2,924 3,606 3,663
--------- --------- --------- --------- --------
Net income $ 1,590 $ 2,048 $ 6,024 $ 5,248 $ 5,182
========= ========= ========= ========= ========
Other Data:
EBITDA (1) $ 20,803 $ 20,027 $ 17,055 $ 14,687 $ 13,542
Net cash provided by operating
activities 10,694 7,282 9,999 2,963 6,902
Net cash used in investing
activities (17,687) (25,183) (8,998) (3,783) (2,251)
Net cash provided by financing
activities 6,690 8,676 965 4,494 764
Depreciation and amortization (2) 5,620 5,145 4,596 3,786 3,522
Capital expenditures (3) 9,320 7,734 8,157 4,663 3,383
Gross margin 30.0% 30.3% 30.1% 28.0% 32.2%
EBITDA margin 13.9% 14.1% 14.3% 13.7% 14.6%
EBITDA including LIFO charges
and credits $ 20,434 $ 20,553 $ 16,518 $ 14,056 $ 14,094
Balance Sheet Data:
Working capital $ 26,095 $ 32,910 $ 40,753 $ 32,564 $ 30,687
Total assets 134,726 115,274 101,275 85,697 72,641
Debt (4) 122,455 109,265 100,075 23,716 17,055
Shareholders' equity (18,093) (19,607) (19,644) 38,029 34,734
</TABLE>
(1) EBITDA is defined as operating income plus depreciation and
amortization adjusted to exclude LIFO charges (credits) of $370,
($526), $537, $631 and ($552) for the years ended December 31, 1998,
1997, 1996, 1995 and 1994, respectively. EBITDA should not be construed
as an alternative to operating income, net income or cash flows from
operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an
indication of the Company's operating performance or as a measure of
liquidity. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The EBITDA measure
presented by the Company may not be comparable to similarly titled
measures reported by other companies.
(2) Depreciation and amortization as presented will not agree to the
consolidated statement of cash flows because of the amortization of
debt issuance costs reported below the operating income line.
(3) 1998 includes $2,172 of capital expenditures related to the
implementation of a new computer system (SAP) and related system
software. 1996 includes $1,524 of capital expenditures related to the
consolidation of the Company's west coast operations and the expansion
of the Cincinnati facility, and $1,105 of capital expenditures related
to the expansion of the China joint venture operations.
(4) Debt includes notes payable and current portion of long-term debt and
excludes capital lease obligations.
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes.
General
The Company is a global leader in the manufacturing, servicing and
marketing of industrial and commercial machine knives and saws. Together with
its predecessor, the Company has been manufacturing knives and saws for nearly
100 years, beginning in Europe and expanding its presence to the United States
in the 1960s. The Company operates on an international basis with facilities in
North America, Europe, Asia and Latin America and products sold in over 75
countries. The Company offers a broad range of products, used for various
applications in numerous markets.
Presence outside the U.S.
The Company's North American operations accounted for 71% of its 1998
net sales and operating income. The Company's other international operations
account for the remainder and are located primarily in Europe, 25% of 1998
sales, and to a lesser extent in Asia.
Historically, the Company had focused its sales efforts in North
America and Europe, only recently establishing itself in other areas of the
world and has increased sales in these other markets from 1% in 1995 to 4% of
1998 net sales. During 1994, 1995 and 1996, the Company entered into joint
ventures to establish itself in these emerging markets.
The Company's operating results are subject to fluctuations in foreign
currency exchange rates as well as the currency translation of its foreign
operations into U.S. dollars. The Company manufactures products in the U.S.,
Germany, Canada and China and exports products to more than 75 countries. The
Company's foreign sales, the majority of which occur in Canada and European
countries, are subject to exchange rate volatility. In addition, the Company
consolidates German, Dutch, French, Canadian, Chinese and other Asian operations
and changes in exchange rates relative to the U.S. dollar have impacted
financial results. As a result, a decline in the value of the 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 dollar relative to these other
currencies can have a negative effect on the profitability of the Company.
Comparing exchange rates for 1998 to 1997, the weaker Canadian Dollar and
Indonesian Rupiah had the translation effect of decreasing 1998 sales by $.7
million and $.3 million, respectively, with an immaterial impact on 1998
operating income. To mitigate the short-term effect of changes in currency
exchange rates on the Company's foreign currency based purchases and its
functional currency based sales, the Company occasionally hedges by entering
into foreign exchange and U.S. dollar forward contracts to hedge a portion of
its budgeted (future) net foreign exchange and U.S. dollar transactions over
periods ranging from one to six months.
At December 31, 1998 the result of a hypothetical 10% adverse change in
foreign currency rates would not significantly impact the Company's future
results of operations, cash flows or financial position. This calculation
assumes that each exchange rate would change in the same direction relative to
the U.S. dollar. In addition to the direct effects of the changes in exchange
rates, changes in exchange rates also affect the volume of sales or the foreign
currency sales price as competitors' products become more or less attractive.
The Company's sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in the potential change in sales levels or local
currency prices.
Results of Operations
The following table sets forth the items in the Company's consolidated
statements of income as percentages of its net sales for the periods indicated:
II-3
<PAGE>
Year Ended December 31,
1998 1997 1996
---------- ---------- ----------
Net sales.............................. 100.0% 100.0% 100.0%
Cost of sales.......................... (70.0)% (69.7)% (69.9)%
---------- ---------- ----------
Gross margin................. 30.0% 30.3% 30.1%
Selling, general and administrative
expenses........................... (20.2)% (19.5)% (20.1)%
---------- ---------- ----------
Operating income............. 9.8% 10.8% 10.0%
Interest expense, net.................. 8.0% 8.2% 2.7%
Minority Interest...................... 0.0% 0.1% (0.2)%
---------- ---------- ----------
Income before income taxes... 1.8% 2.5% 7.5%
Provision for income taxes............. (0.8)% (1.1)% (2.5)%
---------- ---------- ----------
Net income................... 1.0% 1.4% 5.0%
========== ========== ==========
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.
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Net Sales: Net sales increased 5.5% to $150.1 million in 1998 from
$142.2 million in 1997, primarily attributable to 1998 and 1997 acquisitions,
significantly offset by softness in the wood, paper and metal industries caused
by pricing pressures from Asian, South American, Russian and domestic
competitors. The Company experienced sales improvements in its North American
operations (2.6% to $106.1 million) compared to $103.4 million in 1997,
primarily attributable to the above mentioned factors and the negative
translation effects of a weaker Canadian dollar that had the effect of
decreasing sales by $.7 million. The Company experienced sales improvements
(13.1% to $44.0 million) in its other operations compared to $38.9 million in
1997, attributable to increased sales from the Buland and Diacarb acquisitions
in the fourth quarter of 1998 which accounted for about half of the increase,
and the Rolf Meyer acquisition in the second quarter of 1997, partially offset
by the factors noted above.
Gross Profit: Gross profit increased to $45.1 million in 1998 up from
$43.1 million in 1997, primarily attributable to the 1998 and 1997 acquisitions,
significantly offset by softness in the wood, paper and metal industries caused
by pricing pressures from Asian, South American, Russian and domestic
competitors. Gross margin decreased slightly to 30.0% for 1998 compared to 30.3%
for 1997. The Company experienced slight gross profit improvements in its North
American operations (.6% to $32.4 million) for 1998 compared to $32.2 million
for 1997, although gross margin declined to 30.5% from 31.2%. The increase in
gross profit and slight decline in gross margin is attributable to the factors
noted above. The Company also experienced gross profit improvements (16.5% to
$12.7 million) in its other operations for 1998 compared to $10.9 million for
1997, and gross margin increased to 28.9% from 28.0%. The gross profit and gross
margin improvement was primarily due to the fourth quarter 1998 acquisitions of
Buland and Diacarb and the second quarter 1997 Rolf Meyer acquisition, partially
offset by the factors noted above.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses were $30.3 million for 1998 compared to $27.7
million for 1997 and increased to 20.2% of sales from 19.5% of sales for the
respective periods. The increase in SG&A expenses was primarily due to
acquisitions.
Interest Expense, net: Net interest expense increased to $12.0 million
in 1998 from $11.7 in 1997 due to an increase in borrowings primarily related to
the Diacarb and Buland acquisitions in the fourth quarter of 1998, and the Rolf
Meyer acquisition in the second quarter of 1997.
Income Taxes: The Company's effective tax rate remained relatively
constant at 41.9% compared to 42.3% in 1997.
II-4
<PAGE>
Year Ended December 31, 1997 Compared To Year Ended December 31, 1996
Net Sales: Net sales increased 19.6% to $142.3 million in 1997 from
$119.0 million in 1996, primarily attributable to 1997 acquisitions. The Company
experienced sales improvements in its North American operations (23.4% to $103.4
million) compared to $83.8 million in 1996, primarily attributable to increased
sales from the Systi-Matic and Cascade acquisitions in the second quarter of
1997 and the four service center acquisitions in the fourth quarter of 1997. The
Company experienced sales improvements (10.5% to $38.9 million) in its other
operations compared to $35.2 million in 1996, primarily attributable to
increased sales from the Rolf Meyer acquisition in the second quarter of 1997,
partially offset by the negative translation effects of a weaker German Mark and
Indonesian Rupiah. The effects of a weaker German Mark and Indonesian Rupiah in
1997 compared to 1996 rates resulted in a translation effect that reduced 1997
sales by $4.6 million and $.3 million, respectively.
Gross Profit: Gross profit increased to $43.1 million in 1997 up from
$35.9 million in 1996, primarily attributable to the 1997 acquisitions. Gross
margin increased slightly to 30.3% for 1997 compared to 30.1% for 1996. The
Company experienced gross profit improvements in its North American operations
(22.9% to $32.2 million) for 1997 compared to $26.2 million for 1996, although
gross margin declined to 31.2% from 31.3%. The increase in gross profit is
attributable to the 1997 acquisitions while the slight decline in gross margin
is also attributable to the 1997 acquisitions and to the introduction of new
products in 1997. The Company also experienced gross profit improvements (12.4%
to $10.9 million) in its other operations for 1997 compared to $9.7 million for
1996, and gross margin increased to 28.0% from 27.6%. The gross profit
improvement was primarily due to the second quarter Rolf Meyer acquisition
offset by to the weaker German Mark and Indonesian Rupiah which had a negative
translation effect of $1.3 million and $.1 million on 1997 gross profit
respectively. The increase in gross margin was due primarily to the Rolf Meyer
acquisition.
Selling, General and Administrative Expenses: SG&A expenses were
$27.7 million for 1997 compared to $24.0 million for 1996 and decreased to 19.5%
of sales from 20.1% of sales for the respective periods. The reduction in SG&A
expenses was primarily due to start up costs related to the acquisition of the
Chinese joint ventures in 1996 and the Company's strategy of controlling SG&A
expenses in a period of sales growth.
Interest Expense, net: Net interest expense increased to $11.7 million
in 1997 from $3.2 in 1996 due to the issuance of $90 million of Notes in
connection with the Recapitalization in November 1996, and an increase in
borrowings primarily related to the Rolf Meyer acquisition.
Income Taxes: The Company's provision for income taxes decreased to
$1.5 million for 1997 down from $2.9 million for 1996 while the Company's
effective tax rate increased to 42.3% from 32.7% for 1996. The Company's 1996
effective tax rate was favorably affected by increased profits in the Company's
European operations for which no tax provision was recorded because of the
availability of net operating loss carry forwards ("NOLs"). In 1997, due to the
minimal amount of NOLs available ($65,000) to offset European income and
additional non-U.S. losses for which no benefits are being recognized because it
is more likely than not that they will not be realized in certain non-U.S.
jurisdictions, the 1997 effective tax rate exceeds the U.S. statutory rate and
the prior year consolidated effective tax rate.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund working
capital needs, to meet required debt and interest payments and to complete
planned maintenance and expansion expenditures. Concurrent with the
Recapitalization, the Company entered into a $20.0 million senior credit
facility and its German subsidiary entered into a DM 7.5 million senior credit
facility. In the third quarter of 1997 and the fourth quarter of 1998, the
Company's German subsidiary entered into two additional DM 8.5 million senior
credit facilities. The Company anticipates that its operating cash flow,
together with available borrowings of $15.2 million under existing credit
facilities, will be sufficient to meet its capital requirements. The 11-3/8%
Notes impose, and other debt instruments of the Company may impose, various
restrictions and covenants on the Company which could potentially limit the
Company's ability to respond to market conditions, to provide for unanticipated
capital investments or to take advantage of business opportunities. As of
December 31, 1998, the Company's total long-term debt and shareholder's deficit
were $110.5 million and $18.1 million, respectively.
II-5
<PAGE>
Net cash flow from operations aggregated $10.7 million for 1998 as
compared to $7.3 million for 1997. The increase was primarily attributable to a
$2.7 million decrease in working capital compared to 1997. Net cash flow from
operations aggregated $7.3 million for 1997 as compared to $10.0 million for
1996. The decrease was primarily attributable to a $4.0 million decrease in net
income offset by a $.4 million increase in working capital and a $.4 million
increase in minority interest compared to 1996.
Cash used in investing activities for 1998 was $17.7 million as
compared to $25.2 million for 1997 and $9.0 million for 1996. The decreased use
of cash in 1998 compared to 1997 is primarily due to a $7.8 million decrease in
purchases of operations net of cash acquired. The increased use of cash in 1997
over 1996 was due to a $16.9 million increase in purchases of operations, net of
cash acquired.
Cash provided by financing activities for 1998 was $6.7 million as
compared to $8.7 million for 1997 and $1.0 million for 1996. The cash provided
by financing activities in 1998 primarily represents a net increase of $7.5
million in notes payable and long term debt due primarily to the acquisitions of
Buland and Diacarb in the fourth quarter of 1998, offset by a $.8 million
decrease in amounts due to parent. The cash provided by financing activities in
1997 primarily represents a net increase of $9.2 million in notes payable and
long-term debt due primarily to the purchase of Rolf Meyer in the second quarter
of 1997, offset by a $.6 million decrease in amounts due to parent. The cash
provided by financing activities in 1996 primarily represents a net increase of
$72.4 million in notes payable and long-term debt due primarily to the
Recapitalization, offset by decreases in amounts due to parent of $2.4 million,
an increase in debt issuance costs related to the Recapitalization of $4.5
million, and a dividend payment to IKS Corporation as part of the
Recapitalization of $64.7 million.
The Company is currently involved in active discussions with potential
acquisition candidates. If consummated, the consideration for such acquisitions
would likely be funded from a combination of the Company's existing cash and
cash equivalent balances as well as its borrowing availability under its senior
credit facilities. However, any material acquisitions could require the Company
to obtain additional sources of financing. There can be no assurance that the
Company will consummate any such acquisitions or, if consummated, the timing
thereof.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in fiscal years beginning after June 15, 1999. The
statement will require the Company to recognize any derivatives on the balance
sheet at fair value. The Company does not anticipate that the adoption of the
new Statement will have a significant effect on its earnings or financial
position.
Year 2000
The Year 2000 problem exists because many computer systems and
applications use two-digit fields to designate a year. As the century date
change occurs, date sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to recognize or properly treat the year 2000 may
cause systems to process financial and operational information incorrectly.
In 1996, the Company began to develop a plan to upgrade its information
systems to enable it to realize cost savings through centralization of functions
that would result in reductions in working capital items such as inventory and
accounts receivable. This plan also was developed to assess and resolve Year
2000 compliance issues potentially affecting the Company, both with respect to
internal systems and systems on which the Company's major vendors, suppliers,
and distributors are reliant. To date, the Company has completed the assessment
phase of its internal information systems and an implementation plan to resolve
potential problems has been developed. The Company is currently in the process
of converting, modifying, and upgrading its systems and software to Year 2000
compliant systems and software, as necessary. The Company believes that about
75% of its critical systems are Year 2000 compliant, and that the remaining
critical systems will be compliant by May 1999.
The Company has also assessed the embedded systems that operate such
items as manufacturing, phone, security, heating and air conditioning systems.
This assessment was completed by September 30, 1998. Non-compliant embedded
systems will be replaced or modified as necessary by May 1999.
II-6
<PAGE>
The Company has incurred approximately $2.9 million in costs primarily
to upgrade its systems, and to a lesser extent to address Year 2000 issues. The
Company estimates costs associated with scheduled system upgrades for 1999 will
approximate $1.7 million, including minor upgrades to address Year 2000
compliance issues. The Company anticipates that it will be able to achieve Year
2000 compliance with respect to internal systems and software and embedded
systems and does not currently anticipate any material disruption in its
business operations to achieve this goal.
The Company has made inquiries and gathered information regarding Year
2000 compliance exposures faced by its principal vendors and suppliers, and its
major dealers and distributors. No major part or critical operation of any
segment of the Company's business is reliant on a single source for raw
materials, supplies, or services, and the Company has multiple distribution
channels for most of its products. Based on our inquiries, the Company believes
that no critical supplier, vendor or distributor will be adversely affected or
experience business interruptions due to Year 2000 issues. However, should this
occur, the Company believes it will be able to find cost-competitive,
alternative sources for raw materials, supplies, and services necessary to
continue production and distribution.
The costs of the project and the completion dates are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the availability of certain resources, third party
Year 2000 compliance modification plans, and other factors. There can be no
guarantee that the Company will be completely successful in its efforts to
address Year 2000 issues, or that these estimates will be achieved and actual
results could differ materially from these estimates. The Company has no
contingency plans in place in the event it does not complete all phases of the
Year 2000 program. The Company plans to evaluate the status of completion in
June, 1999 to determine whether such contingency plans are necessary, although
at this time the Company knows of no reason its Year 2000 program will not be
completed in a timely manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by Item 7a is included in Item 7 on page II-3 of
this form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INTERNATIONAL KNIFE & SAW, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................. II-8
Consolidated Balance Sheets as of December 31, 1998 and 1997............... II-9
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996......................................... II-11
Consolidated Statements of Changes in Shareholder's Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996..................... II-12
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996......................................... II-13
Notes to Consolidated Financial Statements................................. II-14
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
International Knife & Saw, Inc.
We have audited the accompanying consolidated balance sheets of
International Knife & Saw, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
shareholder's equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the index at Item 14(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
International Knife & Saw, Inc. and Subsidiaries at December 31, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Cincinnati, Ohio
February 26, 1999
II-8
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1998 1997
----------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 2,032 $ 2,349
Accounts receivable, trade, less allowances for
doubtful accounts of $1,780 and $1,480 25,595 24,253
Inventories 30,981 29,335
Other current assets 2,964 3,738
----------------------
Total current assets 61,572 59,675
Other assets:
Goodwill 18,284 12,087
Debt issuance costs 3,203 3,670
Other noncurrent assets 2,307 2,356
----------------------
23,794 18,113
Property, plant and equipment-net 49,360 37,486
======================
Total assets $134,726 $115,274
======================
See accompanying notes.
II-9
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1998 1997
-----------------------------
(in thousands)
<S> <C> <C>
Liabilities and shareholder's deficit
Current liabilities:
Notes payable $ 12,667 $ 5,683
Current portion of long-term debt 2,555 2,218
Accounts payable 9,546 9,444
Accrued liabilities 10,958 8,859
Due (from) to parent (249) 561
-----------------------------
Total current liabilities 35,477 26,765
Long-term debt, less current portion 107,954 102,314
Other liabilities 7,004 3,415
-----------------------------
Total liabilities 150,435 132,494
Minority interest 2,384 2,387
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
Retained deficit (22,508) (24,098)
Accumulated other comprehensive loss (2,311) (2,235)
Treasury stock, at cost (3,432) (3,432)
-----------------------------
Total shareholder's deficit (18,093) (19,607)
-----------------------------
Total liabilities and shareholder's deficit $ 134,726 $ 115,274
=============================
</TABLE>
See accompanying notes.
II-10
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Income
Year Ended December 31,
1998 1997 1996
---------------------------------------
(in thousands, except per share amounts)
Net sales $ 150,132 $ 142,265 $ 118,996
Cost of sales 105,020 99,176 83,122
-------------------------------------
Gross profit 45,112 43,089 35,874
Selling, general and administrative
expenses 30,299 27,681 23,952
-------------------------------------
Operating income 14,813 15,408 11,922
Other expenses (income):
Interest income (175) (261) (601)
Interest expense 12,181 11,948 3,846
Minority interest 71 174 (271)
-------------------------------------
12,077 11,861 2,974
-------------------------------------
Income before income taxes 2,736 3,547 8,948
Provision for income taxes 1,146 1,499 2,924
-------------------------------------
Net income $ 1,590 $ 2,048 $ 6,024
=====================================
Net income per common share $ 3.30 $ 4.25 $ 12.50
See accompanying notes.
II-11
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholder's Equity (Deficit)
<TABLE>
<CAPTION>
Accumulated Total
Additional Retained Other Shareholder's
Common Paid-in Earnings Comprehensive Treasury Equity
Stock Capital (Deficit) Income (Loss) Stock (Deficit)
----------- -------------- ------------ ------------------ ------------ ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 5 $ 8,125 $ 32,557 $ 774 $ (3,432) $ 38,029
Net income for the year 6,024 6,024
Foreign currency translation
adjustments (998) (998)
------------
Total comprehensive income 5,026
Goodwill adjustment 2,028 2,028
Cash dividends (64,727) (64,727)
----------- -------------- ------------- ----------------- ------------ ----------------
Balance at December 31, 1996 5 10,153 (26,146) (224) (3,432) (19,644)
Net income for the year 2,048 2,048
Foreign currency translation
adjustments, net of tax of $53 (2,011) (2,011)
----------------
Total comprehensive income 37
----------- -------------- ------------- ----------------- ------------ ----------------
Balance at December 31, 1997 5 10,153 (24,098) (2,235) (3,432) (19,607)
Net income for the year 1,590 1,590
Minimum pension liability adjustment (297) (297)
Foreign currency translation
adjustments, net of tax of $50 221 221
----------------
Total comprehensive income 1,514
----------- -------------- ------------- ----------------- ------------ ----------------
Balance at December 31, 1998 $ 5 $ 10,153 $(22,508) $ (2,311)(1) $ (3,432) $ (18,093)
=========== ============== ============= ================= ============ ================
</TABLE>
(1) At December 31, 1998, accumulated comprehensive income was a loss of $2,311
comprised of net foreign currency translation adjustments of $2,014 and a
minimum pension liability of $297.
See accompanying notes.
II-12
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
-----------------------------------------
(in thousands)
<S> <C> <C> <C>
Operating activities
Net income $ 1,590 $ 2,048 $ 6,024
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,087 5,606 4,680
Deferred income taxes 1,032 699 181
Loss (gain) on sale of property, plant and
equipment 89 (342) (109)
Minority interest in income (loss) of subsidiary 71 174 (271)
Changes in operating assets and liabilities net
of effects from purchases of operations:
Accounts receivable 1,832 (1,526) (990)
Inventories (336) 811 445
Accounts payable (502) 1,357 (1,819)
Accrued liabilities 31 (2,478) 3,112
Other 800 933 (1,254)
-------------------------------------------
Net cash provided by operating activities 10,694 7,282 9,999
Investing activities
Purchases of operations, net of cash acquired (9,418) (17,198) (282)
Purchases of property, plant and equipment (9,320) (7,734) (8,157)
Proceeds from sale of property, plant and equipment 349 411 166
Decrease (increase) in notes receivable and other
assets 702 (662) (725)
-------------------------------------------
Net cash used in investing activities (17,687) (25,183) (8,998)
Financing activities
Decrease in amounts due to parent (810) (559) (2,431)
Increase in notes payable and long-term debt 20,538 15,457 92,943
Repayment of notes payable and long-term debt (13,042) (6,257) (20,509)
Cash received from investees 4 35 189
Debt issuance costs - - (4,500)
Dividends paid - - (64,727)
-------------------------------------------
Net cash provided by financing activities 6,690 8,676 965
Effect of exchange rate on cash and cash equivalents (14) (127) (538)
-------------------------------------------
Increase (decrease) in cash and cash equivalents (317) (9,352) 1,428
Cash and cash equivalents at beginning of year 2,349 11,701 10,273
------------------------------------------
Cash and cash equivalents at end of year $ 2,032 $ 2,349 $ 11,701
===========================================
</TABLE>
See accompanying notes.
II-13
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands)
1. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of International
Knife & Saw, Inc. and its majority-owned subsidiaries (the "Company").
Investments in business entities in which the Company does not have control, but
has the ability to exercise significant influence over operating and financial
policies are accounted for by the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market. Cost in the United States
is determined principally by use of the last-in, first-out method. Subsidiaries
use the first-in, first-out method.
Property, Plant, and Equipment
Property, plant and equipment are stated at cost or, for assets acquired through
business combinations, at fair value at the dates of the respective
acquisitions. Depreciation is computed by the straight-line method based on the
estimated useful lives of the assets. Depreciation expense includes amortization
of assets recorded under capitalized leases.
Amortization of Intangibles
Goodwill is being amortized over 10-40 years by the straight-line method. The
carrying value of goodwill is periodically reviewed using estimated undiscounted
cash flows for the businesses acquired over the remaining amortization periods.
Amortization charged to earnings amounted to $633, $489 and $274 for 1998, 1997
and 1996, respectively. As of December 31, 1998, accumulated goodwill
amortization was $1,927.
Debt issuance costs, which originated in 1996, are being amortized over the
ten-year life of the related debt by the straight-line method. Amortization of
debt issuance costs charged to earnings amounted to $467, $461 and $84 for 1998,
1997 and 1996, respectively. As of December 31, 1998, accumulated amortization
was $1,012.
Income Taxes
Deferred taxes are provided for accumulated temporary differences due to basis
differences for assets and liabilities for financial reporting and income tax
purposes. The Company's temporary differences are due to accelerated
depreciation and amortization, allowances for doubtful accounts, expenses not
currently deductible, and income not currently taxable.
II-14
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
1. Significant Accounting Policies (continued)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue from product sales is recognized when the product is shipped and revenue
from services is recognized as the services are performed. Revenue is reduced
for estimated customer returns and allowances.
Dividend Payments
Dividend payments are restricted under the covenants of an indenture dated as of
November 6, 1996 between the Company and United States Trust Company of New York
in connection with the issuance of the $90,000 Senior Subordinated Notes.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassification
Certain 1997 and 1996 amounts have been reclassified to conform to the current
year presentation.
Net Income Per Common Share
Net income per common share is based on the weighted average number of common
shares outstanding, which amount has remained unchanged at 481,971 shares for
1998, 1997 and 1996, respectively. The Company does not have any common stock
equivalents.
II-15
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
1. Significant Accounting Policies (continued)
Foreign Currency Translation
The Company maintains the accounting records and prepares the financial
statements of its foreign subsidiaries in their respective functional
currencies. The accompanying financial statements, which include the effects of
the consolidated results of operations of these companies, are expressed in U.S.
dollar equivalents in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, Foreign Currency Translation. It should not be
construed that the assets and liabilities included at U.S. dollar equivalents
can actually be realized in or extinguished by U.S. dollars at the exchange
rates used in translation. The gains and losses resulting from the changes in
exchange rates from year to year have been reported in other comprehensive
income. The effects on the statements of income of transaction gains and losses
is insignificant for all years presented.
Foreign Currency Forwards
To mitigate the short-term effect of changes in currency exchange rates on the
Company's foreign currency based purchases and its functional currency based
sales, the Company occasionally hedges by entering into foreign exchange and
U.S. dollar forward contracts. A forward contract obligates the Company to
exchange predetermined amounts of specified foreign currencies or U.S. dollars
at specified exchange rates on specified dates or to make an equivalent foreign
currency or U.S. dollar payment equal to the value of such exchange. Discounts
or premiums (the difference between the spot exchange rate and the forward
exchange rate at inception of the contract) are accreted or amortized to other
operating expenses over the contract lives using the straight-line method while
realized and unrealized gains and losses resulting from changes in the spot
exchange rate (included those from open, matured, and terminated contracts), net
of related taxes, are included in the accumulated other comprehensive loss in
shareholder's equity (the deferral accounting method). The related amounts due
to or from counterparties are included in other assets or other liabilities. The
unrecognized gains or losses were immaterial at year end.
Accounting Changes
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in fiscal years beginning after June 15, 1999. The Statement will
require the Company to recognize any derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of the new Statement
will have a significant effect on its earnings or financial position.
II-16
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
2. Recapitalization Transaction
The Company is a wholly-owned subsidiary of IKS Corporation.
On November 6, 1996, IKS Corporation completed a recapitalization (the
"Recapitalization"). Concurrent with the Recapitalization, the Company issued
$90,000 of 11-3/8% Senior Subordinated Notes ("Notes") due 2006 to certain
qualified institutional buyers and other institutional accredited investors. On
February 14, 1997, the Company completed a public offering to exchange all of
the Notes for a like principal amount of new notes that are identical in all
material respects to the Notes except for certain transfer restrictions and
registration rights relating to the Notes.
The Recapitalization involved the following transactions: (i) the existing
Company management investors exchanged their holdings of capital stock issued by
the Company for capital stock of IKS Corporation and the Company became a
wholly-owned subsidiary of IKS Corporation (IKS Corporation recorded
approximately $2,000 of goodwill on its purchase of this minority interest which
was in turn pushed down to the Company); (ii) IKS Corporation amended its
charter to change its corporate name from The Klingelnberg Corporation to IKS
Corporation and to authorize three classes of capital stock, consisting of
preferred stock, voting common stock and non-voting common stock; (iii) the
issued and outstanding capital stock of IKS Corporation was exchanged for a
recapitalization distribution (the "Recapitalization Distribution") which
consisted of (a) approximately $89,400 in cash and (b) junior subordinated
debentures, preferred and common stock with an aggregate value of approximately
$9,400 issued to the previous owners; (iv) existing and new IKS Corporation
management investors purchased junior subordinated debentures, preferred and
common stock for approximately $1,300 in cash, and (v) Citicorp Venture Capital
Ltd. ("CVC") purchased junior subordinated debentures, preferred and common
stock of IKS Corporation for approximately $14,300 in cash.
The gross proceeds to the Company from the sale of the Notes, together with the
aggregate investment of $15,600 made in IKS Corporation by existing and new
management investors and CVC in connection with the Recapitalization, were used
to (i) finance the cash portion of the Recapitalization Distribution (ii) repay
approximately $11,400 in outstanding indebtedness referred to below and (iii)
pay approximately $4,500 of fees and expenses related to the notes issuance. The
amounts required for the Recapitalization Distribution were transferred from the
Company to IKS Corporation via a dividend of $63,500 and the repayment of an
intercompany loan of $10,800.
II-17
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands, except per share amounts)
2. Recapitalization Transaction (continued)
In connection with the Recapitalization, the Company repaid approximately $5,200
of its existing indebtedness and entered into a new $20,000 revolving credit
facility. In addition, a German subsidiary of the Company repaid approximately
$6,200 of existing indebtedness under its term loan and entered into a new DM
7,500 revolving credit facility.
3. Acquisitions
In November, 1998, the Company acquired from Lembo (Internationaal) B. V. ("the
Seller") all of the shares of A.K. van der Wijngaart Beheer B.V. and
subsidiaries ("Diacarb"). Diacarb's business includes the regrinding and
distribution of industrial knives in the Netherlands, Belgian and Luxembourg
markets. Diacarb is also involved in the manufacture of stansformen (molds to
punch holes) for the carton industry. Diacarb is located in Rotterdam, the
Netherlands. The purchase price consisted of 12,000 Dutch guilders in cash
(approximately $6,250), financed from existing lines of credit, 1,088 Dutch
guilders (approximately $567) in assumed debt, and a 5.0% promissory note to the
Seller for 5,000 Dutch guilders (approximately $2,605), subject to post closing
adjustments. The promissory note is payable in installments of 1,000 Dutch
guilders (approximately $521) on January 15, 2000, and 2,000 Dutch guilders
(approximately $1,042) on January 15, 2001 and 2002. The acquisition was
accounted for under the purchase method. Goodwill totaled $4,683 on this
acquisition. The following table sets forth certain unaudited pro forma
financial information for the Company and assumes Diacarb was purchased as of
the beginning of both years 1998 and 1997.
December 31,
1998 1997
-------------------------------
Sales $ 155,651 $ 148,967
Net Income $ 1,832 $ 2,367
Net Income per common share $ 3.80 $ 4.91
In October, 1998, the Company executed an agreement to purchase the shares of
Buland S.A. ("Buland") for 10,000 French Francs (approximately $1,818) in cash
and 2,175 French Francs (approximately $395) in assumed debt, subject to
post-closing adjustments. Headquartered in France, Buland is a reseller and
regrinder of industrial knives for the printing industry and reseller of rotary
and flexible dies, with annual sales of 36,000 French Francs (approximately
$6,545). The acquisition was accounted for under the purchase method and was
financed from borrowings under the Company's existing revolving credit
facilities. Additional consideration is contingent upon Buland achieving certain
annual earnings and is payable in 2002. Goodwill totaled $341 on this
acquisition.
II-18
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
3. Acquisitions (continued)
In June and February, 1998, the Company completed the acquisitions of the assets
of Valiquet, Inc., Des Plaines, IL, the Atlanta, GA division of K.S.W.
Corporation, and Sheridan Saw Works, Sheridan, OR for approximately $1,200 in
cash, $29 in assumed debt, post closing contingent payments of $55 for achieving
certain annualized earnings levels and promissory notes totaling $140 to two of
the sellers, subject to post-closing adjustments. These service center
acquisitions were financed from available cash balances. These operations have
historically generated combined annual sales of approximately $1,700, and were
accounted for under the purchase method. Goodwill totaled approximately $835 on
these acquisitions.
In October and November, 1997, the Company completed acquisitions of the assets
of four strategically located service centers for approximately $1,300 in cash
and a $75 promissory note to one of the sellers, subject to post-closing
adjustments. The acquisitions were financed from available cash balances. In
October, the Company acquired Parker Industrial Tool Company, Nashville, TN;
Stafford Grinding Services, Chattanooga, TN; and B&W Industrial Grinding, Inc.,
Appleton, WI. In November, the Company acquired North Quabbin Saw Shop, Athol,
MA. These operations have historically generated combined annual sales of
approximately $1,400 and were accounted for by the purchase method. Goodwill
totaled approximately $700 on these acquisitions.
In June, 1997, the Company purchased the assets of Cascade/Southern Saw Corp.
("Cascade") for $2,300 in cash, subject to post-closing adjustments. Located in
Milwaukie, OR, Cascade is a wood saw and wood saw machinery distributor with
annual sales of approximately $7,900. The acquisition was accounted for under
the purchase method. Goodwill totaled $1,242 on this acquisition.
In April, 1997, the Company purchased the assets of Rolf Meyer Company ("Rolf
Meyer") for DM 8,200 (approximately $4,700) in cash, post-closing contingent
payments of DM 658 (approximately $400) for achieving certain earning levels of
which DM 405 (approximately $200) is included in accrued liabilities at December
31, 1998, a promissory note to the seller in the amount of DM 4,300
(approximately $2,500) and DM 400 (approximately $200) in assumed debt, subject
to post-closing adjustments. Headquartered in Germany, Rolf Meyer is a producer
and specialist in knives and spare parts for the printing industry, with annual
sales of approximately DM 15,000 (approximately $8,700). The acquisition was
accounted for under the purchase method and was financed from borrowings under
the Company's existing revolving credit facilities. Goodwill totaled $2,500 on
this acquisition. Additional consideration of approximately DM 400 ($200) is
contingent upon Rolf Meyer achieving certain annual earnings levels and is
payable December 31, 2000.
II-19
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
3. Acquisitions (continued)
In April, 1997, the Company purchased the assets of Systi-Matic Company and
affiliated entities ("Systi-Matic") for $6,400 in cash, post-closing contingent
payments of $1,200 for achieving certain annualized earnings levels and $1,100
in assumed debt, subject to post-closing adjustments. Headquartered in Seattle,
WA, Systi-Matic is the largest U.S. producer of carbide edger saws and the
largest independent provider of stock saws for the secondary industry in North
America with annual sales of approximately $18,000. The acquisition was
accounted for under the purchase method and was financed from available cash
balances. Goodwill totaled approximately $4,280 on this acquisition.
The consolidated financial statements include the results of operations
generated by and financial position of the above acquisitions from the dates of
acquisition.
4. Inventories
December 31,
1998 1997
-------------------------------
Finished goods $ 20,373 $ 18,118
Work in process 4,101 4,036
Raw materials and supplies 6,507 7,181
-------------------------------
$ 30,981 $ 29,335
===============================
Inventories include approximately $16,220 in 1998 and $17,187 in 1997 determined
by the LIFO method. If the cost of LIFO inventories had been determined by the
FIFO method for financial reporting, they would have been approximately $3,412
and $3,042 higher than the amounts reported at December 31, 1998 and 1997,
respectively.
5. Property, Plant and Equipment-Net
December 31,
1998 1997
---------------------------------
Land and land improvements $ 6,274 $ 4,119
Buildings and leasehold improvements 16,826 13,385
Machinery and equipment 45,015 42,989
Furniture and fixtures 4,485 2,950
Construction in progress 3,729 217
Motor vehicles 2,498 2,463
---------------------------------
78,827 66,123
Less accumulated depreciation 29,467 28,637
---------------------------------
$49,360 $37,486
=================================
II-20
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
5. Property, Plant and Equipment-Net (continued)
Depreciation expense was $4,987, $4,656 and $4,322, for 1998, 1997 and 1996,
respectively. Depreciation is provided for on the straight-line method over the
following estimated useful lives:
Land improvements: 15 years
Buildings and leasehold improvements: 15 to 40 years
Machinery and equipment: 5 to 10 years
Furniture and fixtures: 10 years
Motor vehicles: 3 to 5 years
6. Notes Payable and Long-Term Debt
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------------------------------
<S> <C> <C>
Notes payable:
Notes payable on demand in German Marks to a German bank,
issued under revolving credit agreements, interest payable
quarterly $ 7,922 $ 1,140
Notes payable on demand in Chinese Yuan Renminbi to Chinese
banks, issued under revolving credit agreements, interest
payable monthly 1,259 2,468
Notes payable on demand in U.S. Dollars to a German bank,
issued under revolving credit agreements, interest payable
quarterly 3,280 2,000
Other 206 75
----------------------------------------
$ 12,667 $ 5,683
========================================
Long-term debt:
11-3/8% Senior Subordinated Notes due 2006 $ 90,000 $ 90,000
Notes payable in German Marks to a German bank 12,830 10,371
Notes payable in Chinese Yuan Renminbi to Chinese banks 2,989 1,777
Capitalized lease obligations in U.S. dollars to a U.S. bank 721 950
Promissory note payable in German Marks to a
former shareholder of the Rolf Meyer Company 787 1,434
Promissory note payable in Dutch Guilders to a
former shareholder of the Diacarb Company 2,682 -
Other 500 -
----------------------------------------
110,509 104,532
Less current portion 2,555 2,218
----------------------------------------
$ 107,954 $ 102,314
========================================
</TABLE>
II-21
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
6. Notes Payable and Long-Term Debt (continued)
Except for the 11-3/8% notes, the carrying amount of the Company's long-term
debt approximates fair value, which is determined using discounted cash flow
analysis based on the Company's incremental borrowing rate for similar types of
financing arrangements. At year-end 1998, the fair value of the 11-3/8% notes
was $92,250. Such amounts are based on recent trade prices through registered
securities brokers.
The 11-3/8% Notes are senior subordinated indebtedness of the Company ranking
pari passu with all other existing and future senior subordinated indebtedness
of the Company.
The notes payable of $12,830 have maturities that extend to 2011 at rates of
2.5% to 6.05%. Outstanding borrowings under the Company's senior credit
facilities are included in long-term debt based on the expectation that these
borrowings will remain outstanding for more than one year. Land and buildings in
Germany with a net book value of $4,664 are pledged as collateral for the German
revolving credit agreements and the German bank notes payable.
The notes payable of $2,989 mature in 2003 at rates of 7.2% to 7.7% and are
non-recourse to the Company. Plant and equipment in China with a net book value
of approximately $1,745 are pledged as collateral for the Chinese revolving
credit agreements and the Chinese bank note payable.
The capitalized lease obligations of $721 are for capital leases on equipment
that have maturities that extend to 2001 at rates of 8.1% to 8.7%. Included in
property, plant and equipment-net is equipment under capital lease of $625.
The promissory note payable to a former shareholder of the Rolf Meyer Company is
due on December 31, 1999 at an assumed rate of 5.0%, and is in connection with
the Rolf Meyer acquisition.
The promissory note payable to a former shareholder of Diacarb is due in
installments of 1,000 Dutch guilders in 2000 and 2,000 Dutch Guilders in 2001
and 2002 at a rate of 5.0% in connection with the Diacarb acquisition.
At December 31, 1998, the Company had revolving credit facilities of $20,000
($15,188 unused), DM 7,500 (all used), DM 8,500 (all used) and DM 8,500 (all
used). Fees for these revolving credit arrangements were $24 in 1998 and $34 in
1997.
The short-term notes payable of $7,922 represent short-term bank borrowings at
rates from 3.2% to 4.0%.
The short-term notes payable of $1,259 represent short-term bank borrowings at a
rate of 5.8% to 7.1%.
The short-term notes payable of $3,280 represent short-term bank borrowings at
rates from 6.4% to 6.6%.
II-22
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
6. Notes Payable and Long-Term Debt (continued)
At December 31, 1998, amounts due as minimum payments under long-term debt were
as follows:
1999 $ 2,555
2000 2,947
2001 2,821
2002 2,691
2003 2,033
Thereafter 97,462
==========
$ 110,509
==========
Cash paid for interest amounted to $11,670, $11,713 and $2,434 in the years
ended December 31, 1998, 1997 and 1996, respectively.
7. Accrued Liabilities
December 31,
1998 1997
--------------------------
Salaries, wages and bonuses $ 2,097 $ 1,428
Profit sharing and 401(k) plans 1,078 1,213
Interest 1,419 1,375
Other employee related accruals 930 698
Other 5,434 4,145
--------------------------
$ 10,958 $ 8,859
==========================
8. Income Taxes
IKS Corporation files a consolidated Federal income tax return that includes the
Company. The current and deferred tax expense 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 for United States income taxes is
recorded to the intercompany account with IKS Corporation.
Summarized in the following tables are the Company's income before income taxes,
its provision for income taxes, the components of the provision for deferred
income taxes and a reconciliation of the U.S. statutory rate to the tax
provision rate.
Income Before Income Taxes Year ended December 31,
1998 1997 1996
------------------ --------------- ----------------
United States $ (705) $ 1,199 $ 7,740
Non-U.S. 3,441 2,348 1,208
------------------ --------------- ----------------
$ 2,736 $ 3,547 $ 8,948
================== =============== ================
II-23
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
<TABLE>
<CAPTION>
8. Income Taxes (continued)
Components of Deferred Tax Assets and Liabilities
December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Current deferred tax assets (liabilities):
Inventories, primarily obsolescence and additional costs
inventoried for tax purposes $ 253 $ 467
Reserve for bad debts (432) 127
Accrued employee benefits 168 251
Other 64 (28)
----------------- -----------------
Total current deferred tax assets 53 817
Noncurrent deferred tax assets (liabilities):
Property, plant, and equipment, primarily differences in
depreciation methods (3,754) (2,083)
Deferred compensation 157 166
Goodwill, difference in amortization methods (327) (434)
Other (18) 112
----------------- -----------------
Total noncurrent deferred tax liabilities (3,942) (2,239)
----------------- -----------------
Net deferred tax liabilities $ (3,889) $ (1,422)
================= =================
</TABLE>
<TABLE>
<CAPTION>
Provision for Income Taxes Year Ended December 31,
--------------- -------------- --------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Current (benefit) provision
Federal $ (562) $ 436 $ 2,340
State and local - 36 296
Foreign 676 328 107
--------------- -------------- --------------
114 800 2,743
Deferred provision (benefit)
Federal 321 (115) 45
State and local 28 (10) 4
Foreign 683 824 132
--------------- -------------- --------------
1,032 699 181
--------------- -------------- --------------
$ 1,146 $ 1,499 $ 2,924
=============== ============== ==============
</TABLE>
II-24
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
8. Income Taxes (continued)
The differences between the provision and the amount computed by applying the
statutory Federal income tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Income before income taxes $ 2,736 $ 3,547 $ 8,948
==============================================
Tax on above amount at 34% $ 930 $ 1,206 $ 3,042
State income tax, net of federal tax benefit 28 36 195
Foreign tax rates different than U.S. statutory rate 134 254 (538)
Foreign losses without tax benefit 56 90 335
Other, net (2) (87) (110)
----------------------------------------------
Provision for income taxes $ 1,146 $ 1,499 $ 2,924
==============================================
</TABLE>
In 1997 and 1996, the Company's German subsidiary utilized net loss
carryforwards to offset current tax payable of approximately $65 and $1,029,
respectively. In 1996 the Company's Canadian subsidiary utilized a net loss
carryforward to offset current tax payable of approximately $106.
Undistributed earnings of foreign subsidiaries which are intended to be
indefinitely reinvested aggregated approximately $6,766 at the end of 1998. In
the event these earnings were to be repatriated, foreign income tax credits and
deductions under existing U.S. federal income tax laws would offset a portion of
any additional U.S. tax liability.
9. Employee Benefit Plans
In 1997, the Company's tax qualified profit sharing plan was merged into the IKS
Corporation 401(k) retirement plan. The combined plan was renamed the
International Knife & Saw, Inc. 401(k) and Profit Sharing Plan. The Company's
Canadian subsidiary also has a profit sharing plan for its employees. Profit
sharing contributions are determined annually by the respective Boards of
Directors. Contributions to the 401 (k) plan are equal to one-half of employee
contributions, up to a maximum of 2% of an employee's annual compensation,
subject to certain statutory limitations.
The expense for profit sharing contributions was $953 in 1998, $1,095 in 1997
and $882 in 1996. The Company's matching contributions to the 401(k) plan
amounted to $368 in 1998, $249 in 1997 and $225 in 1996.
Included in other liabilities are amounts for deferred compensation plans for
former officers of $424 and $450 at December 31, 1998 and 1997, respectively.
The plans provide for a maximum payment of $25 annually to each officer or
beneficiary for a period of ten years commencing at retirement or death.
II-25
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
9. Employee Benefit Plans (continued)
The Company's German subsidiaries have pension plans covering a majority of
their employees who qualify as to age and length of service. Entrance into the
plan is at age 30 with defined benefits payable at age 65. Vesting requirements
vary depending on employment category, contracts and years of service
requirements which range from five to fifteen years. The following table sets
forth the status of the Company's defined pension plan for certain employees in
Germany. Consistent with customary practice in Germany, this plan has not been
funded. Benefit payments are funded from current operations
Change in benefit obligation December 31,
1998 1997
----------------- ----------------
Benefit obligation at beginning of year $ 1,413 $ 1,445
Service cost 14 14
Interest cost 92 93
Actuarial losses 82 106
Loss/(gain) currency exchange rate 112 (200)
Benefits paid (44) (45)
----------------- ---------------
Benefit obligations at end of year $ 1,669 $ 1,413
================= ===============
Funded Status at Year-End December 31,
1998 1997
----------------- ----------------
Projected benefit obligation $ 1,669 $ 1,413
Unrecognized net loss (195) (101)
Unrecognized net obligation (157) (159)
Additional minimum liability 335 246
---------------- ----------------
Accrued pension cost -
included in other liabilities $ 1,652 $ 1,399
================ ================
<TABLE>
<CAPTION>
Components of net periodic benefit costs Year Ended December 31,
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Service cost (benefits earned during the period) $ 14 $ 14 $ 18
Interest cost on projected benefit obligation 92 93 101
Net amortization and deferral 12 13 14
----------------------------------------------
Net periodic benefit cost $ 118 $ 120 $ 133
==============================================
</TABLE>
II-26
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
9. Employee Benefit Plans (continued)
<TABLE>
<CAPTION>
Weighted-average actuarial assumptions Year Ended December 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Discount rate 6.5% 6.5% 7.0%
Rate of increase in future compensation levels 2.5% 2.0% 2.5%
</TABLE>
10. Related Parties
The consolidated financial statements include the following transactions and
balances with companies which had been under common controlling ownership with
the Company prior to the Recapitalization. Such companies are, and have been
since the Recapitalization, controlled by a minority shareholder and board
member of IKS Corporation.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Other payables to affiliated companies $ (62) $ (174) $ (8)
Net interest expense - - 404
Purchased administrative and manufacturing services 712 1,015 1,450
Rental payments to related parties under capital lease - - 259
</TABLE>
In July, 1996, the Company purchased certain land and buildings formerly under
capital lease with related parties for $5,564. The price was based upon
appraisals by independent real estate appraisers. The Company recognized no gain
or loss on this transaction.
11. Operating Leases
Future minimum rentals required under operating leases are as follows:
Year ending December 31 Buildings Other Total
- --------------------------------------------------------------------------------
1999 $ 479 $ 114 $ 593
2000 475 106 581
2001 461 65 526
2002 286 64 350
2003 69 27 96
Rent expense was $566 for 1998, $545 for 1997 and $592 for 1996.
II-27
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands)
12. Organization
The Company operates in one business segment - industrial knives and saws. The
Company manufactures, markets and services primarily industrial knives and saws
internationally, and its customers include distributors, original equipment
manufacturers and customers purchasing replacement parts and services. The
Company has a leading market share in each of the major sectors it serves: Paper
& Packaging; Wood; Metal; and Plastic/Recycling. The Company's operations are
principally in the United States, Germany and Canada, representing 62%, 23% and
8% of 1998 net sales, respectively. The Company plans to continue its
international growth. As a result of the Company's broad product range and
numerous applications, no customer accounts for more than 3% of net sales. The
Company performs periodic credit evaluations of its customers and generally does
not require collateral.
Sales attributable to German and Canadian operations are based on external sales
generated by subsidiaries located in those countries
The following table summarizes the Company's United States, German, Canadian and
other operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States Operations:
Net sales - Customers $ 92,875 $ 88,175 $ 71,315
Long Lived Assets 22,479 19,395 15,439
German Operations:
Net sales - Customers $ 34,762 $ 30,675 $ 27,376
Long Lived Assets 14,457 11,974 8,103
Canadian Operations:
Net sales - Customers $ 12,644 $ 14,639 $ 12,331
Long Lived Assets 1,078 1,288 1,507
Other Operations:
Net sales - Customers $ 9,851 $ 8,776 $ 7,974
Long Lived Assets 11,898 5,344 4,169
Consolidated:
Net sales $ 150,132 $ 142,265 $ 118,996
Long Lived Assets 49,912 38,001 29,218
</TABLE>
II-28
<PAGE>
International Knife & Saw, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(in thousands, except per share data)
13. Operating Results by Quarter (Unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------
Year ended 1998
------------------------------------------------------------
Qtr 1 Qtr 2 Qtr 3 Qtr 4
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales $ 38,703 $ 37,334 $ 35,844 $ 38,251
Gross profit 11,598 11,658 10,602 11,254
Net income 654 661 270 5
Net income per common share 1.36 1.37 .56 .01
------------------------------------------------------------
Year ended 1997
------------------------------------------------------------
Qtr 1 Qtr 2 Qtr 3 Qtr 4
--------------- -------------- -------------- --------------
Sales $ 30,508 $ 37,396 $ 37,172 $ 37,189
Gross profit 9,614 11,080 10,896 11,499
Net income 522 488 297 741
Net income per common share 1.08 1.01 .62 1.54
</TABLE>
II-29
<PAGE>
III-11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
This item is not applicable to the registrant for this filing on Form 10-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the persons
who are members of the Board of Directors or executive officers of the Company.
Directors serve for a term of one year or until their successors are elected and
qualified; officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John E. Halloran 53 President, Chief Executive Officer and
Director
Thomas W. G. Meyer 42 Executive Vice President -- Europe and Asia
William M. Schult 37 Vice President -- Finance, Chief Financial
Officer, Treasurer and Secretary
Richard L. Budke 47 Vice President-- General Manager, West Coast
Operations
William R. Underhill 49 Vice President-- Operations
Paul A. Severt 36 Vice President-- Financial Reporting/Controller
David M. Hofmeister 39 Chief Information Officer
Jeffrey Hansel 43 Vice President-- Sales and Marketing,
North America
W. Rayburn Connell 58 Vice President-- Service and Sales
Director, North America
Diether Klingelnberg 54 Director
James A. Urry 44 Director
Michael A. Delaney 44 Director
Richard J. Puricelli 52 Director
- ----------
</TABLE>
John E. Halloran, President, Chief Executive Officer and Director. Mr.
Halloran has been President and Chief Executive Officer since March 1996 and had
served as Executive Vice President since joining the Company in 1992. Mr.
Halloran served as Executive Vice President of Operations at Simonds Industries
from 1989 to 1992 and as President of Michigan Knife Company from the time Mr.
Halloran founded it in 1974 until it was acquired by Simonds Industries in 1989.
Thomas W. G. Meyer, Executive Vice President -- Europe and Asia. Mr. Meyer
has served as Executive Vice President since he joined the Company in 1993.
Prior thereto, Mr. Meyer worked in the textile industry for ten years, including
service as the head of marketing for Barmag AG from 1988 until 1991 and as a
director of A. Monforts GmbH & Co., from 1991 until 1992.
William M. Schult, Vice President -- Finance, Chief Financial Officer,
Treasurer and Secretary. Mr. Schult joined the Company as Vice President --
Finance in July 1996. Prior to joining the Company, he served as Controller of
IKS Corporation since 1995 and in several capacities at Siemens Corporation from
1987 until 1995.
III-1
<PAGE>
Prior to that, Mr. Schult held various accounting and auditing positions with
the Allen Group, Salomon Brothers and Coopers & Lybrand.
Richard L. Budke, Vice President -- General Manager, West Coast Operations.
Mr. Budke joined the Company in April 1997 when the Company purchased the assets
of the Systi-Matic Company. Mr. Budke held various management positions at
Systi-Matic since 1973 and served as President and Chief Executive Officer from
1984 until the sale of Systi-Matic to the Company.
William R. Underhill, Vice President -- Operations. Mr. Underhill joined the
Company in 1977 as Product Manager. Mr. Underhill served in various capacities,
including purchasing agent and sales manager, from 1977 to 1990, and became Vice
President -- Operations in 1996.
Paul A. Severt, Vice President -- Financial Reporting/Controller. Mr. Severt
joined the Company as Vice President - Financial Reporting/Controller in April
1997. Prior to joining the Company, Mr. Severt held various accounting and
auditing positions with Ernst & Young with which he was employed for 12 years.
David M. Hofmeister - Chief Information Officer. Mr. Hofmeister joined the
company as Chief Information officer in June 1997. From 1984 to 1997, Mr.
Hofmeister worked for E.I.Du Pont de Nemours, holding various management
positions in Du Pont's Consolidation Coal and Remington Arms subsidiaries. Prior
to working with Du Pont, Mr. Hofmeister worked as a Management Science Analyst
for the Gulf Oil Corporation.
Jeffrey Hansel, Vice President -- Sales and Marketing, North America. Mr.
Hansel joined the Company in 1985 as a paper knife market manager. Mr. Hansel
became Vice President -- Sales and Marketing in 1991. Prior to joining the
Company, from 1981 to 1985 Mr. Hansel was President of General Metals
Technologies Corp., a subsidiary of C.B. Manufacturing with which he was
employed from 1979 to 1981 as a sales manager.
W. Rayburn Connell, Vice President, Service and Sales Director, North
America. Mr. Connell joined the Company in 1991 as Vice President -- Service and
Sales Director. From 1990 to 1991, Mr. Connell was the owner of Connell
Distribution and prior to that was the part owner of Austin Saw and Knife, which
the Company acquired in 1991. Between 1974 and 1990, Mr. Connell was the
Company's sales manager.
Diether Klingelnberg, Director. Mr. Klingelnberg served as Chief Executive
Officer of the Company until March 1996. In addition, he served as Chairman of
the Board and Chief Executive Officer of IKS Corporation from its formation
until consummation of the Recapitalization. Mr. Klingelnberg is currently
Managing Director of Klingelnberg Beteiligungs-GmbH and is a Director of Clark
Material Handling Company, Honsel AG, Oerlikon Geartec AG, Eickhoff GmbH and the
Alfred H. Schuette Company.
James A. Urry, Director. Mr. Urry has been with Citibank, N.A. since 1981,
serving as a Vice President since 1986. He has been a Vice President of CVC
since 1989. He is a Director of AmeriSource Health Corporation, CLARK Material
Handling Company, CORT Business Services Corporation, Hancor Holding
Corporation, Airxcel, Inc., Palomar Technologies Corporation, York International
Corporation, and The Brunner Mond Group.
Michael A. Delaney, Director. Mr. Delaney has been a Vice President of CVC
since 1989. From 1986 through 1989, he was Vice President of Citicorp Mergers
and Acquisitions. Mr. Delaney is a Director of Aetna Industries, Inc.,
AmeriSource Health Corporation, CLARK Material Handling Company, CORT Business
Services Corporation, Delco Remy International, Inc., Allied Digital
Technologies, Inc., Great Lakes Dock and Dredge Corporation, GVC Holdings, JAC
Holdings, Palomar Technologies Corporation, SC Processing, Inc., MSX
International and Triumph Holdings, Inc.
Richard J.Puricelli, Director. Mr. Puricelli has been associated with JAC
Products since 1995. He became a Director in 1995 and Chairman in 1997. As
Chairman, he is responsible for the company's operations that produce
approximately $250 million in annual sales and employ approximately 1,500 people
in Europe and North America. JAC Products is the leading supplier of roof racks
and related accessories to automobile OEMs. Mr. Puricelli is also Chairman and a
Director of FabriSteel Products, Inc.
III-2
<PAGE>
Director Compensation and Arrangements
With the exception of Mr. Puricelli, who receives $4,000 per quarter, other
directors of the Company do not currently receive compensation for their
services as directors. Members of the Board of Directors are elected pursuant to
a Securities Purchase and Holders Agreement (the "Stockholders' Agreement")
entered into in connection with the Recapitalization among IKS, IKS Corporation
and its stockholders. Pursuant to the Stockholders' Agreement, the Board of
Directors of the Company is composed at all times of five directors as follows:
John E. Halloran (as long as he continues to serve as President of the Company);
one individual designated by Diether Klingelnberg, two individuals designated by
CVC; and one independent director who shall be designated by CVC subject to the
right of holders of the majority of the outstanding shares of Holdings Class A
Stock to veto the election of any such independent director.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning the
compensation received for services rendered in 1998 by (i) the Company's Chief
Executive Officer and (ii) the four most highly compensated executive officers
of the Company (other than the individual who served as the Company's Chief
Executive Officer) in office on December 31, 1998
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
--------------------------------------------------------------
All Other
Salary Bonus Other Compensation
Name and Principal Position Year ($) ($) ($) ($)
- ---------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
John E. Halloran.................. 1998 220,000 70,000 26,268 (2) 11,661 (3)
President and Chief Executive 1997 200,000 85,000 29,728 (2) 11,661 (3)
Officer 1996 200,000 102,000 (1) -- 213,711 (4)
Thomas W.G. Meyer................. 1998 184,600 165,430 -- --
Executive Vice President -- 1997 173,100 103,860 -- --
Europe and Asia 1996 185,923 123,100 (1) -- --
Richard L. Budke (5) ............. 1998 145,000 30,000 -- 11,231 (6)
Vice President-- General 1997 104,353 34,300 -- 4,842 (7)
Manager, West Coast Operations 1996 -- -- -- --
William M. Schult................. 1998 135,000 38,750 -- 11,036 (8)
Vice President-- Finance, Chief 1997 127,000 45,000 -- 11,302 (9)
Financial Officer, Treasurer and 1996 120,000 30,000 (1) 14,971 (10) 33,356 (11)
Secretary
William R. Underhill.............. 1998 120,000 31,150 -- 10,972 (12)
Vice President-- Operations 1997 111,000 36,200 -- 10,567 (13)
1996 101,000 24,521 (1) -- 10,224 (14)
</TABLE>
(1) Includes a supplemental bonus paid to Messrs, Halloran, Meyer, Schult
and Underhill, paid in 1997.
(2) Paid by IKS Corporation. Represents additional compensation sufficient
to permit Mr. Halloran to pay interest payments to IKS Corporation on
a loan made in the amount of income taxes incurred by Mr. Halloran in
connection with the securities received by him as a part of the
Recapitalization Distribution.
III-3
<PAGE>
(3) Includes $3,200 in Company 401(k) contributions, $8,000 in Company
Profit Sharing Plan contributions and $461 in group term life
insurance premiums.
(4) Includes $200,000 paid in connection with the Recapitalization, $3,000
in Company 401(k) contributions, $8,250 in Company Profit Sharing Plan
contributions and $461 in group term life insurance premiums, and
$2,000 as a director's fee, which was paid by IKS Corporation.
(5) Effective April 9, 1997, Mr. Budke was named Vice President - General
Manager, West Coast Operations.
(6) Includes $2,900 in Company 401(k) contributions, $8,000 in Company
Profit Sharing Plan contributions and $331 in group term life
insurance premiums.
(7) Includes $4,775 in Company Profit Sharing Plan contributions and $67
in group term life insurance premiums.
(8) Includes $2,930 in Company 401(k) contributions, $8,000 in Company
Profit Sharing Plan contributions and $106 in group term life
insurance premiums.
(9) Includes $3,200 in Company 401(k) contributions, $8,000 in Company
Profit Sharing Plan contributions and $102 in group term life
insurance premiums.
(10) Represents reimbursement of relocation expenses.
(11) Includes $25,000 paid in connection with the Recapitalization, $8,250
in Company Profit Sharing Plan contributions and $106 in group term
life insurance premiums.
(12) Includes $2,728 in Company 401(k) contributions, $8,000 in Company
Profit Sharing Plan contributions and $244 in group term life
insurance premiums.
(13) Includes $2,995 in Company 401(k) contributions, $7,360 in Company
Profit Sharing Plan contributions and $212 in group term life
insurance premiums.
(14) Includes $2,647 in Company 401(k) contributions, $7,400 in Company
Profit Sharing Plan contributions and $177 in group term life
insurance premiums.
III-4
<PAGE>
Employment Arrangements and Deferred Compensation Agreements
Thomas Meyer was hired by IKS Klingelnberg GmbH as its Chief Executive
Officer pursuant to an Employment Agreement effective January 1, 1993 which,
following an extension on December 17, 1998, expires on December 31, 2003. As
compensation, Mr. Meyer receives a predetermined annual salary (DM 325,000 in
1998) and receives certain fringe benefits including a bonus, an automobile and
insurance coverage. Following any termination of Mr. Meyer's employment, Mr.
Meyer will be subject to a non-competition covenant for up to two years, in
exchange for payment in each year of an amount equal to one-half of Mr. Meyer's
most recently agreed upon annual compensation.
The Company entered into deferred compensation and supplemental retirement
agreements with Edward J. Brent, the Company's former CFO, dated November 23,
1981. The agreements provide for a supplemental retirement benefit payable at
age 65 equal to $250,000 payable in monthly installments over a period of ten
years with any remaining payments to become immediately due and payable upon the
death of the employee. Mr. Brent becomes fully vested and may take early
retirement without a reduction in benefits at age 62. If the employee dies while
employed by the Company, his designated beneficiary will be entitled to a death
benefit of $25,000 per year for ten years. In lieu of the benefits described
above the Company may at its sole discretion accelerate the payment of benefits
to an employee or the employee's beneficiary, if applicable. All benefits under
the agreements are forfeited if it is determined that (i) the employee engaged
in activity adversely affecting the interests of the Company, or (ii) the
employee rendered services to any competitor of the Company.
401(k) and Profit Sharing Plan
In 1997, the Company's tax qualified profit sharing plan was merged into the
IKS Corporation 401(k) retirement plan. The combined plan was renamed the
International Knife & Saw, Inc. 401(k) and Profit Sharing Plan. All of the
Company's domestic non-unionized employees are eligible to participate after
completing one year of service and attaining age 20 1/2. Subject to certain
statutory limitations, employees may contribute up to 15 percent of their
compensation to the plan on a pre-tax basis. The Company may make discretionary
matching contributions equal to a percentage of the employees' pre-tax
contributions. However, in determining the amount of matching contributions,
only employee pre-tax contributions up to four percent of compensation are taken
into account. Employees are fully vested in their benefits under the plan after
two years of service.
In addition to discretionary matching contributions on employees' pre-tax
contributions, the Company may also make profit sharing contributions. These
contributions are allocated to the accounts of the eligible employees in the
same ratio that each eligible employee's compensation for the year bears to the
total compensation of all eligible employees for the year. For allocation
purposes, the compensation of any employee in excess of $160,000 is disregarded.
Employees are fully vested in their benefits under the plan after five years of
service. An employee may not receive a distribution of his benefits under the
plan until following his termination of employment.
Compensation Committee Interlocks and Insider Participation
Each of the five current members of the Company's Board of Directors also
serve on the compensation committee. See "Item 13. Certain Relationships and
Related Transactions" for disclosure with respect to certain relationships of
the some of the members of the compensation committee and the Company.
In the event that Messrs. Urry and Delaney are unwilling or unable to serve,
or otherwise cease to serve, CVC shall be entitled to select their replacement
on the Board of Directors. In addition, the Stockholders' Agreement provides
that Diether Klingelnberg or his designated representative shall serve as a
director.
III-5
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All of the outstanding capital stock of the Company is currently owned by
IKS Corporation. The following table sets forth certain information with respect
to the beneficial ownership of the Corp. Preferred Stock and Corp. Common Stock
by (i) each person or entity who owns five percent or more thereof, (ii) each
director of the Company who is a stockholder, (iii) the Chief Executive Officer
of the Company and the other executive officers named in the "Summary
Compensation Table" above who are stockholders, and (iv) the directors and
executive officers of the Company as a group. Unless otherwise specified, all
shares are directly held.
<TABLE>
<CAPTION>
Number and Percent of Shares
----------------------------------------------------------------------
Holdings Holdings Holdings Class A Holdings Class B
Series A Preferred Stock Series B Preferred Stock Stock(1) Stock(2)
------------------------ ------------------------ ----------------- ------------------
Name of Beneficial Owner Number Percent Number Percent Percent Percent Number Percent
- -------------------------- --------- --------- -------- --------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Citicorp Venture Capital Ltd 8,241 68.7% -- -- 31,453 32.8% 11,234 76.5%
399 Park Avenue
New York, New York 10043
Arndt Klingelnberg......... -- -- -- -- 17,000 17.8% -- --
IKS Corporation
1299 Cox Avenue
Erlanger, KY 41018
Diether Klingelnberg....... -- -- -- -- 17,000 17.8% -- --
IKS Corporation
1299 Cox Avenue
Erlanger, KY 41018
John E. Halloran........... 600 5.0% 600 66.1% 10,556 11.0% -- --
IKS Corporation
1299 Cox Avenue
Erlanger, KY 41018
Thomas W.G. Meyer.......... 240 2.0% -- -- 4,222 4.4% -- --
William M. Schult.......... 48 0.4% 48 5.3% 956 1.0% -- --
W. Rayburn Connell......... 48 0.4% 48 5.3% 800 0.8% -- --
William R. Underhill....... 24 0.2% 24 2.6% 600 0.6% -- --
James A. Urry (3).......... 58 0.5% -- -- 221 0.2% 79 0.5%
Michael Delaney (3)........ 58 0.5% -- -- 221 0.2% 79 0.5%
Richard J. Puricelli...... 41 0.3% -- -- 200 0.2% -- --
All directors and executive
officers as a group
(13 persons)(3)............ 1,194 9.9% 797 87.8% 6,342 37.9% 157 1.1%
</TABLE>
----------
(1) Does not include shares of Corp. Class A Stock issuable upon conversion
of Corp. Class B Stock. See "--- Corp. Common Stock" .
(2) Does not include shares of Corp. Class B Stock issuable upon conversion
of Corp. Class A Stock. See "---Corp. Common Stock".
(3) Does not include shares beneficially held by CVC, which may be deemed
beneficially owned by Messrs. Delaney and Urry. Messrs. Delaney and
Urry disclaim beneficial ownership of shares held by CVC.
III-6
<PAGE>
Corp. Common Stock
The Certificate of Incorporation of IKS Corporation provides that IKS
Corporation may issue 400,000 shares of Corp. Common Stock, divided into two
classes consisting of 200,000 shares of Corp. Class A Stock and 200,000 shares
of Corp. Class B Stock. The holders of Corp. Class A Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
stockholders. Except as required by law, the holders of Corp. Class B Stock have
no voting rights. Under the Certificate of Incorporation of IKS Corporation, a
holder of either class of Corp. Common Stock may convert any or all of his
shares into an equal number of shares of the other class of Corp. Common Stock;
provided that in the case of a conversion from Corp. Class B Stock, which is
nonvoting, into Corp. Class A Stock, which is voting, the holder of shares to be
converted would be permitted under applicable law to hold the total number of
shares of Corp. Class A Stock which would be held after giving effect to the
conversion.
Stockholders' Agreement
In connection with the Recapitalization, the stockholders of IKS Corporation
entered into the Stockholders' Agreement containing certain agreements among
such stockholders with respect to the capital stock and corporate governance of
IKS Corporation and the Company.
The Stockholders' Agreement contains certain provisions which, with certain
exceptions, restrict the ability of the stockholders from transferring any Corp.
Common Stock, Corp. Preferred Stock or Corp. Debentures except pursuant to the
terms of the Stockholders' Agreement. If holders of more than 50% of the Corp.
Common Stock approve the sale of the Company, each stockholder has agreed to
consent to such sale and, if such sale includes the sale of stock, each
stockholder has agreed to sell all of such stockholder's Corp. Common Stock on
the terms and conditions approved by holders of a majority of the Corp. Common
Stock then outstanding. In the event IKS Corporation proposes to issue and sell
(other than in a public offering pursuant to a registration statement) any
shares of Corp. Common Stock or any securities containing options or rights to
acquire any shares of Corp. Common Stock or any securities convertible into
Corp. Common Stock to CVC or its affiliates, IKS Corporation must first offer to
each of the other shareholders a pro rata portion of such shares. Such
preemptive rights are not applicable to the issuance of shares of Corp. Common
Stock upon the conversion of shares of one class of Corp. Common Stock into
shares of the other class.
Pursuant to the Stockholders' Agreement, the Board of Directors of the
Company is composed at all times of five directors as follows: John E. Halloran
(as long as he continues to serve as President of the Company); one individual
designated by Diether Klingelnberg, two individuals designated by CVC; and one
independent director who shall be designated by CVC subject to the right of
holders of the majority of the outstanding shares of Corp. Class A Stock to veto
the election of any such independent director.
The Stockholders' Agreement also provides for certain additional
restrictions on transfer of shares acquired by members of management pursuant to
certain employee stock purchase plans adopted by IKS Corporation in 1997
("Incentive Shares"), including the right of IKS Corporation to repurchase
Incentive Shares held by a member of management (a "Participant") upon
termination of such Participant's employment prior to 2001, at a formula price,
and the grant of a right of first refusal in favor of IKS Corporation in the
event a Participant elects to transfer such Incentive Shares of Corp. Common
Stock.
Registration Rights Agreement
In connection with their entry into the Stockholders' Agreement, IKS
Corporation, CVC and certain other stockholders of IKS Corporation entered into
a Registration Rights Agreement (the "Corp. Registration Rights Agreement").
Pursuant to the Corp. Registration Rights Agreement, upon the written request of
CVC, IKS Corporation has agreed to prepare and file a registration statement
with the Commission concerning the distribution of all or part of the shares
held by CVC and use its best efforts to cause such registration statement to
become effective. If at any time IKS Corporation files a registration statement
for the Corp. Common Stock pursuant to a request by CVC or otherwise (other than
a registration statement on Form S-8, Form S-4 or any similar form, a
III-7
<PAGE>
registration statement filed in connection with a share exchange or an offering
solely to IKS Corporation' employees or existing stockholders, or a registration
statement registering a unit offering), IKS Corporation will use its best
efforts to allow the other parties to the Corp. Registration Rights Agreement to
have their shares of Corp. Common Stock (or a portion of their shares under
certain circumstances) included in such offering of Corp. Common Stock if the
registration form proposed to be used may be used to register such shares.
Registration expenses of the selling stockholders (other than underwriting fees,
brokerage fees and transfer taxes applicable to the shares sold by such
stockholders or the fees and expenses of any accountants or other
representatives retained by a selling stockholder) are to be paid by IKS
Corporation.
Employee Stock Purchase Plans
In 1997, IKS Corporation adopted a Restricted Stock Plan, pursuant to which
Participants were offered the opportunity to purchase Corp. Class A Stock. The
Participants were given the opportunity to acquire an aggregate of up to 10% of
the Corp. Class A Stock outstanding on a fully-diluted basis.
Also in 1997, IKS Corporation adopted an Equity Investment Plan, pursuant to
which Participants were offered the opportunity to purchase Corp. Class A Stock,
Series A 12% Cumulative Compounding Preferred Stock, par value $.01 per share,
and Series B 12% Cumulative Compounding Preferred Stock, par value $.01 per
share. The Participants were given the opportunity to acquire an aggregate of up
to 1,020 shares of Corp' Class A Stock, 122.4 shares of Series A Preferred Stock
and 122.4 shares of Series B Preferred Stock.
Upon the Participants' purchase of securities under the Restricted Stock
Plan or the Equity Investment Plan (the "Plans"), such Participants became
subject to the terms and conditions of the Stockholders' Agreement. See
"--Stockholders' Agreement." In addition to the restrictions set forth above in
the discussion of the Stockholders Agreement, the Stockholders' Agreement also
provides the following restrictions with respect to the Participants: (i) the
Incentive Shares acquired by a Participant will be subject to repurchase by IKS
Corporation or its designee if such Participant's employment with the Company is
terminated within five years after acquiring such securities at formula prices
which vary based upon the time and circumstance of such termination, (ii) IKS
Corporation has a right of first refusal through such date on all securities
acquired by a Participant pursuant to a Plan, and (iii) if holders of a majority
of Corp. Class A Stock approve a sale of IKS Corporation, Participants will
consent to such sale.
Other
In connection with the Recapitalization, Arndt Klingelnberg, Diether
Klingelnberg and CVC entered into an agreement pursuant to which their ownership
percentages of the Corp. Preferred Stock and the Corp. Debentures may be
adjusted. Upon the occurrence of certain events, their respective ownership
percentages of Corp. Preferred Stock and Corp. Debentures will be adjusted so
that they will be pro rata with their respective ownership percentages of Corp.
Common Stock.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Recapitalization, IKS Corporation entered into a
letter agreement with Mr. Halloran pursuant to which IKS Corporation loaned to
Mr. Halloran an amount equal to the income taxes which were incurred by him in
respect of the securities received by him as a part of the Recapitalization
Distribution. The loan is secured by a pledge of the securities and the recourse
to the Company for repayment of the loan is limited to the securities. The loan
bears interest at the "applicable federal rate" under the Internal Revenue Code
of 1986, as amended, and the Company makes payments to Mr. Halloran in amounts
sufficient to permit him to pay such interest payments.
In accordance with certain provisions contained in the documentation
governing the Recapitalization, the amount of the Recapitalization Distribution
was adjusted upwards by approximately $2.8 million in March, 1997, and such
amount was paid in cash by the Company to the recipients of the Recapitalization
Distribution.
III-8
<PAGE>
IV-5
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) List of Financial Statements.
- Financial Data Schedule
The following Consolidated Financial Statements of the Company and the
Report of Independent Auditors set forth on pages II-9 through II-29
and II-8, respectively, are incorporated by reference into this item 14
of Form 10-K by item 8 hereof:
- Report of Independent Auditors
- Consolidated Balance Sheets as of December 31, 1998 and 1997.
- Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996.
- Consolidated Statements of Changes in Shareholder's Equity
(Deficit) for the years ended December 31, 1998,
1997 and 1996.
- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.
- Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedule.
Schedule II - Valuation and Qualifying Accounts and Reserves is
attached hereto at page IV-5 and is incorporated by reference into this
Item 14 of Form 10-K. No other financial statement schedules have been
filed herewith since they are either not required, are not applicable,
or the required information is shown in the consolidated financial
statements or related notes.
(a)(3) Exhibits.
Exhibit
No. Description
- --------- ----------------------------------------------------------------------
3.1 Restated Certificate of Incorporation, as amended, of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-4, Registration No.
333-17305)
4.1 Indenture dated as of November 6, 1996 between the Company and United
States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-4, Registration No. 333-17305)
4.2 Registration Rights Agreement dated as of November 6, 1996 among the
Company, Schroder Wertheim & Co. Incorporated and Smith Barney Inc.
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
4.3 Form of 113/8% Senior Subordinated Notes due 2006 (included in Exhibit
4.1)
10.1 Purchase Agreement dated October 31, 1996 among the Company, Schroder
Wertheim & Co. Incorporated and Smith Barney Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-4, Registration No. 333-17305)
10.2 Letter Agreement dated October 8, 1996 between Deutsche Bank and the
Company (incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.3 Letter Agreement dated October 8, 1996 between Deutsche Bank and IKS
Klingelnberg GmbH (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.4 Agreement and Plan of Recapitalization dated September 17, 1996 among
Citicorp Venture Capital Ltd., IKS Corporation"), the stockholders of
IKS Corporation and certain stockholders of the Company (incorporated
by reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-4, Registration No. 333-17305)
10.5 Commercial Lease Contract dated March 1, 1992 between Howard & Howard
Real Estate Partnership and IKS Service, Inc., as amended
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.6 Lease dated June 5, 1996 between Century Development Co. and the
Company (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4, Registration No.
<PAGE>
333-17305)
10.7 Lease dated July 21, 1995 between 1st American Management Co., Inc.
and the Company (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.8 Lease Agreement dated April 17, 1991 between Tate Engineering, Inc.
and IKS Eastern Services, Inc., as amended (incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on Form S-4,
Registration No. 333-17305)
10.9 Offer to Lease dated October 25, 1995 between Sigma Enterprises Ltd.
and IKS Canadian Knife & Saw Ltd. (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-4,
Registration No. 333-17305)
10.10Industrial Multiple Tenancy Lease dated June 14, 1995 between Geary
Investments Limited "in Trust" and IKS Canadian Knife & Saw Ltd.
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.11Lease dated March 12, 1992 between Gestion W. & L. Choiniere Inc. and
IKS Canadian Knife & Saw Ltd., as amended (incorporated by reference
to Exhibit 10.11 to the Company's Registration Statement on Form S-4,
Registration No. 333-17305)
10.12Joint Venture Company Contract dated September 24, 1995 between IKS
Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery
General Corporation (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.13Joint Venture Company Contract dated September 24, 1995 between IKS
Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery
General Corporation (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.14Letter Agreement dated September 23, 1997 between Deutsche Bank and
IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q, for the quarterly period
ended September 30, 1997, Registration No. 333-17305)
21.1 Subsidiaries of the Company
27 Financial Data Schedule
(b) Reports on Form 8-K
A report on form 8-K dated November 25, 1998, and an amendment thereto on
Form 8-K/A, were filed regarding the Company's acquisition of Diacarb from Lembo
Internationaal B.V.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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:____________________________________
John E. Halloran
President and Chief Executive Officer
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 1999.
Signature Title
- -------------------------- ------------------------------------------
/s/ John E. Halloran President, Chief Executive
- -------------------------- Officer and Director (Principal Executive
John E. Halloran Officer)
/s/ William M. Schult Vice President-Finance, Chief Financial
- -------------------------- Officer, Treasurer and Secretary (Principal
William M. Schult Financial and Accounting Officer)
/s/ Diether Klingelnberg Director
- --------------------------
Diether Klingelnberg
/s/ James A. Urry Director
- -------------------------
James A. Urry
IV-3
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The registrant has not sent the following to security holders: (i) any
annual report to security holders covering the registrant's last fiscal year; or
(ii) any proxy statements, forms of proxy or other proxy soliciting material
wither respect to any annual or other meeting of security holders.
IV-4
<PAGE>
SCHEDULE II
INTERNATIONAL KNIFE & SAW, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. C
------
COL. B ADDITIONS COL. E
------ --------- COL. D -------
COL. A BALANCE AT CHARGED TO ------ BALANCE
- ------ BEGINNING COSTS AND OTHER DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED 1998
Allowance for doubtful accounts.... $ 1,480 $ 231 $ 261(b) $ 164(c) $ 1,780
28(a)
Allowance for inventory obsolescence 2,381 768 170(b) 50(a) 2,788
481(c)
YEAR ENDED 1997
Allowance for doubtful accounts.... 1,500 297 116(b) 189(c) 1,480
244(a)
Allowance for inventory obsolescence 2,327 539 40(b) 185(a) 2,381
340(c)
YEAR ENDED 1996
Allowance for doubtful accounts.... 1,105 612 6(a) 298(c) 1,500
120(b) 45(a)
Allowance for inventory obsolescence 2,833 572 127(a) 2,327
951(c)
</TABLE>
(a) Represents foreign currency translation adjustments during the year.
(b) Consists of reserves of subsidiaries purchased during the year.
(c) Represents amounts charged against the reserves during the year.
IV-5
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
-------- ----------------------------------------------------------------------
3.1 Restated Certificate of Incorporation, as amended, of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-4, Registration No.
333-17305)
4.1 Indenture dated as of November 6, 1996 between the Company and United
States Trust Company of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-4, Registration No. 333-17305)
4.2 Registration Rights Agreement dated as of November 6, 1996 among the
Company, Schroder Wertheim & Co. Incorporated and Smith Barney Inc.
(incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
4.3 Form of 113/8% Senior Subordinated Notes due 2006 (included in Exhibit
4.1)
10.1 Purchase Agreement dated October 31, 1996 among the Company, Schroder
Wertheim & Co. Incorporated and Smith Barney Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Registration Statement on
Form S-4, Registration No. 333-17305)
10.2 Letter Agreement dated October 8, 1996 between Deutsche Bank and the
Company (incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.3 Letter Agreement dated October 8, 1996 between Deutsche Bank and IKS
Klingelnberg GmbH (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.4 Agreement and Plan of Recapitalization dated September 17, 1996 among
Citicorp Venture Capital Ltd., IKS Corporation"), the stockholders of
IKS Corporation and certain stockholders of the Company (incorporated
by reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-4, Registration No. 333-17305)
10.5 Commercial Lease Contract dated March 1, 1992 between Howard & Howard
Real Estate Partnership and IKS Service, Inc., as amended
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.6 Lease dated June 5, 1996 between Century Development Co. and the
Company (incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.7 Lease dated July 21, 1995 between 1st American Management Co., Inc.
and the Company (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.8 Lease Agreement dated April 17, 1991 between Tate Engineering, Inc.
and IKS Eastern Services, Inc., as amended (incorporated by reference
to Exhibit 10.8 to the Company's Registration Statement on Form S-4,
Registration No. 333-17305)
10.9 Offer to Lease dated October 25, 1995 between Sigma Enterprises Ltd.
and IKS Canadian Knife & Saw Ltd. (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-4,
Registration No. 333-17305)
10.10Industrial Multiple Tenancy Lease dated June 14, 1995 between Geary
Investments Limited "in Trust" and IKS Canadian Knife & Saw Ltd.
(incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-4, Registration No. 333-17305)
10.11Lease dated March 12, 1992 between Gestion W. & L. Choiniere Inc. and
IKS Canadian Knife & Saw Ltd., as amended (incorporated by reference
to Exhibit 10.11 to the Company's Registration Statement on Form S-4,
Registration No. 333-17305)
10.12Joint Venture Company Contract dated September 24, 1995 between IKS
Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery
General Corporation (incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.13Joint Venture Company Contract dated September 24, 1995 between IKS
Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery
General Corporation (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-4, Registration No.
333-17305)
10.14Letter Agreement dated September 23, 1997 between Deutsche Bank and
IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q, for the quarterly period
ended September 30, 1997, Registration No. 333-17305)
21.1 Subsidiaries of the Company
27 Financial Data Schedule
Subsidiaries
Name Jurisdiction
---- ------------
Hannaco Knives & Saws, Inc. Delaware
IKS Canadian Knife & Saw Ltd. Canada
IKS Klingelnberg GmbH Germany
IKS Klingelnberg Asia Pte. Ltd. Singapore
IKS Knives & Saws (M) Sdn. Bhd. Malaysia
IKS Klingelnberg Far East GmbH Germany
Shanghai IKS Lida Mechanical Blade Co. Ltd. China
Shanghai IKS Mechanical Blade Co. Ltd. China
IKS Messerfabrik Geringswalde GmbH Germany
Rolf Meyer GmbH Germany
A.K. van der Wijngaart Beheer B.V. and subsidiaries the Netherlands
Buland S.A. France
IKS Mexican Holdings S.A. de C.V. Mexico
International Knife and Saw de Mexico S.A. de C.V. Mexico
International Knife and Saw Trading Corporation U.S. Virgin Islands
P.T. Bevenmas Jaya Indonesia
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,032,000
<SECURITIES> 0
<RECEIVABLES> 27,375,000
<ALLOWANCES> 1,780,000
<INVENTORY> 30,981,000
<CURRENT-ASSETS> 61,572,000
<PP&E> 78,827,000
<DEPRECIATION> (29,467,000)
<TOTAL-ASSETS> 134,726,000
<CURRENT-LIABILITIES> 35,477,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> (18,098,000)
<TOTAL-LIABILITY-AND-EQUITY> 134,726,000
<SALES> 150,132,000
<TOTAL-REVENUES> 150,132,000
<CGS> 105,020,000
<TOTAL-COSTS> 105,020,000
<OTHER-EXPENSES> 30,299,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,006,000
<INCOME-PRETAX> 2,736,000
<INCOME-TAX> 1,146,000
<INCOME-CONTINUING> 1,590,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,590,000
<EPS-PRIMARY> 3.30
<EPS-DILUTED> 3.30
</TABLE>
