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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: March 31, 1998
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 333-41939-01
KII HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3954446
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)
1430 BROADWAY, 13TH FLOOR
NEW YORK, NEW YORK 10018 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 391-1392
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
As of January 1, 1999, the number of shares outstanding of the registrant's
Common Stock, no par value, was 10,000 shares. There is no trading market for
the Common Stock. Accordingly, the aggregate market value of the Common Stock
held by non-affiliates of the registrant is not determinable.
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ITEM 1: FINANCIAL STATEMENTS
KII HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $960,000 $1,152,200
Account receivables, net 5,932,400 5,446,700
Inventories 13,370,900 12,817,100
Prepaid and other assets 420,900 916,700
Deferred income taxes 531,800 531,800
----------- -----------
Total current assets 21,216,000 20,864,500
Property, plant and equipment, net 14,785,000 14,458,900
Deferred financing costs, net 958,300 983,200
Other assets 1,112,200 1,059,100
----------- -----------
Total assets $38,071,500 $37,365,700
=========== ===========
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term obligations $ 137,200 $ 139,700
Accounts payable 2,008,100 1,638,400
Customer deposits 223,800 116,700
Accrued liabilities 2,056,500 2,190,800
----------- -----------
Total current liabilities 4,425,600 4,085,600
Long-term obligations, less current portion 25,609,500 25,624,800
Deferred employee benefits 1,439,500 1,405,700
Unfunded pension benefits 298,300 298,300
Deferred income taxes 1,746,200 1,693,400
----------- -----------
Total liabilities 33,519,100 33,107,800
Equity Put Rights on common stock 1,793,500 1,078,100
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares authorized, 8,010 issued
and outstanding 3,131,900 3,131,900
Series A Preferred stock, $10,000 stated value, 400 shares
authorized, 84 shares issued and outstanding 840,000 840,000
Series B Preferred stock, $10,000 stated value, 75 shares
authorized, none issued and outstanding - -
Undesignated Preferred stock, $10,000 stated value, 25
shares authorized, none issued and outstanding - -
Accumulated deficit (1,213,000) (792,100)
----------- -----------
Total shareholders' equity 2,758,900 3,179,800
----------- -----------
Total liabilities and shareholders' equity $38,071,500 $37,365,700
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
2
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KII HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1998 1997
---- ----
(Predecessor)
<S> <C> <C>
Sales $8,271,100 $ 6,441,600
Cost of sales 5,876,400 4,647,700
---------- -----------
Gross profit 2,394,700 1,793,900
Selling, general and administrative 1,913,000 888,700
---------- -----------
Income from operations 481,700 905,200
---------- -----------
Other income (expense):
Interest expense (610,800) (181,600)
Other income (expense) (58,400) (10,900)
---------- -----------
Total other expense (669,200) (192,500)
---------- -----------
Income (loss) before provision for income taxes (187,500) 712,700
Provision (benefit) for income taxes 211,100 285,100
---------- -----------
Net income (loss) (398,600) 427,600
Preferred stock dividends (22,300) -
---------- -----------
Income (loss) applicable to common shareholders $ (420,900) $ 427,600
=========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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KII HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1997
---- ----
(Predecessor)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (398,600) $ 427,600
Reconciliation to net cash provided by (used in)
operating activities:
Depreciation and amortization 448,400 433,500
Deferred income taxes 52,800 81,300
Stock compensation 715,400 -
Other (2,600) (1,900)
Changes in assets and liabilities:
Accounts receivable (485,700) (459,100)
Inventories (553,800) (771,200)
Prepaid and other assets 495,800 (88,900)
Other assets (53,100) (35,400)
Accounts payable 369,700 191,300
Accrued and other liabilities (122,700) 236,600
Customer deposits 107,100 100
--------- ----------
Net cash provided by operating activities 572,700 13,900
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to fixed assets (771,600) (478,600)
Proceeds from sale of fixed assets 24,500 33,500
Net cash used in acquisitions - -
--------- ----------
Net cash used in investing activities (747,100) (445,100)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit - 350,000
Repayment of debt (15,200) (14,000)
Other (2,600) -
--------- ----------
Net cash provided by (used in) financing activities (17,800) 336,000
--------- ----------
Net decrease in cash and cash equivalents (192,200) (95,200)
Cash and cash equivalents, beginning of period 1,152,200 406,000
--------- ----------
Cash and cash equivalents, end of period $ 960,000 $ 310,800
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 513,976 $ 183,100
========== ==========
Income taxes, net $ - $ 55,300
========== ==========
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited financial statements
4
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KII HOLDING CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Predecessor
- -----------
Kleinert Industries, Inc. (predecessor) ("Kleinert") was a wholly owned
subsidiary of Kleinert Industrie Holding A.G., a Swiss company (the "Parent"),
and was organized under the laws of the State of California on July 1, 1988,
commencing operations on September 1, 1988, and which provided management
services for its wholly owned subsidiaries - Paragon Precision Products ("PPP"),
Bandy Machining International ("BMI"), Scanning Electron Analysis Laboratories,
Inc. ("SEAL"), and General Inspection Laboratories, Inc. ("GIL").
PPP specializes in the manufacture of precision aerospace components. BMI
manufactures precision hinges, door panels and hinged assemblies for both
aerospace and industrial applications. SEAL specializes in materials analysis
and problem-solving for government and industry. GIL provides a complete array
of non-destructive testing services for inspecting critical parts and
manufactured components.
Acquisition And Successor
- -------------------------
On July 1, 1997, KII Holding Corp. (successor), a Delaware company ("KII
Holding") incorporated on July 1, 1997, through a wholly owned subsidiary (KII
Acquisition Corp., a Delaware corporation), acquired all of the issued and
outstanding capital stock of Kleinert and Subsidiaries (predecessor company and
currently known as Stellex Aerospace and Subsidiaries) from Kleinert Industrie
Holding A.G. (the "Seller"). The acquisition has been accounted for using the
purchase method of accounting, and, accordingly, the net purchase price of
approximately $26.5 million (including the assumption of $2.65 million of
mortgage indebtedness and the issuance to the Seller of a note for $1.75
million) has been allocated to the assets purchased and the liabilities assumed
based upon the fair values at the date of acquisition. There was no excess
purchase price over the fair values on the net assets acquired in connection
with the acquisition. The acquisition was financed in part from new borrowings
totaling $19.3 million and the issuance of common and preferred stock totaling
$4.75 million. KII Holding is owned by Stellex Industries, Inc., a Delaware
corporation, which owns 80.1% of the issued and outstanding common stock of KII
Holding, with certain members of Stellex Aerospace's management holding the
remainder of its outstanding common stock. KII Holding is a holding company
whose operations are conducted through its operating subsidiaries. References to
the "Company" include both KII Holding and its predecessor, Kleinert.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements dated prior to the
acquisition of Kleinert and Subsidiaries on July 1, 1997, include the accounts
of Kleinert and its wholly owned subsidiaries (the "Predecessor"). Financial
statements dated subsequent to the acquisition include the accounts of KII
Holding (the "Successor") and its wholly owned subsidiaries, KII Acquisition
Corp., Stellex Aerospace and Subsidiaries (PPP, BMI, SEAL and GIL). Intercompany
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation, which were of a normal and
recurring nature, have been included. The results of operations for any interim
period are not necessarily indicative of the results for the year. These
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
5
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3. RECENT ACCOUNTING STANDARDS
Effective January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be classified, as required. The Company had no
items of other comprehensive income or loss for the three month period ended
March 31, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The new rules will be effective
for the Company's 1998 annual financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company's 1998 annual
financial statements.
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Raw materials $ 1,302,700 $ 1,212,500
Work-in-process 6,970,200 6,250,300
Finished goods 5,098,000 5,354,300
----------- -----------
Total $13,370,900 $12,817,100
=========== ===========
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Demand note payable to Stellex Industries, Inc. $ 20,943,000 $ 20,943,000
7.785% Mortgage notes payable 2,608,800 2,624,000
Sellers Notes Payable 1,750,000 1,750,000
Obligations under capital leases 444,900 447,500
------------ ------------
25,746,700 25,764,500
Less current portion 137,200 139,700
------------ ------------
Total $ 25,609,500 $ 25,624,800
============ ============
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in lawsuits that arise in the normal
course of business. The Company actively and vigorously defends all lawsuits.
Management believes that there are no lawsuits that will have a material affect
on the Company's financial position.
6
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ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997:
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------------------
1998 1997
---- ----
(SUCCESSOR) (PREDECESSOR)
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 71.0 72.2
----- -----
Gross margin 29.0 27.8
Selling, general and administrative 23.2 13.7
----- -----
Operating income 5.8 14.1
Other expense (income):
Interest expense 7.4 2.8
Other 0.7 0.2
----- -----
Income (loss) before income taxes (2.3) 11.1
Provision for income taxes 2.5 4.6
----- -----
Net income (loss) (4.8)% 6.5%
===== =====
</TABLE>
Net sales
Net sales for the quarter ended March 31, 1998 were $8.3 million which
represents an increase of 28.4% over the sales of $6.4 million for the three
months ended March 31, 1997. The sales increase is primarily attributable to
strong demand in the commercial aviation market for new aircraft production,
primarily at Boeing, increases in manufacturing requirements for military
aircraft.
Gross margins
Gross margin for the quarter ended March 31, 1998 was 29.0%, which increased
from 27.8% in the first quarter of 1997. This increase resulted primarily from
increased production volumes which allowed for production efficiencies and fixed
cost utilization.
Selling, general and administrative
Selling, general and administrative expenses for the quarter ended March 31,
1998 were $1.9 million which represented an increase of $1.0 million over the
selling, general and administrative expenses of $0.9 million during the first
quarter of 1997. This increase was due primarily to incremental non-cash charges
of $715,400 relating to the valuation of management ownership puts plus
increased in compensation expense resulting from additional managerial hires.
Interest Expense
Interest expense for the quarter ended March 31, 1998 was $610,800 which
represented a $429,200 increase in expense over the comparable quarter in 1997.
This increase was due primarily to the acquisition financing relating to the
acquisition of Kleinert on July 1, 1997.
Liquidity and capital resources
KII Holding Corp. generated cash flows from operations for the three months
ended March 31, 1998, in the amount of $572,700 compared to cash generated in
the amount of $13,900 for the comparable period in 1997. This increase in cash
flows resulted primarily from improved management of operating assets and
liabilities.
The Company was a net user of cash flows from investing activities for the three
months ended March 31, 1998, totaling $747,100 compared to $445,100 million in
the comparable period in 1997. The increase in cash used in investing
7
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activities primarily reflects increased purchases of property, plant and
equipment.
Cash used in financing activities for the three months ended March 31, 1998
primarily consisted of approximately $17,800 in payments of bank and
intercompany loans. During the three months ended March 31, 1997, cash provided
by financing activities of $336,000 primarily resulting from borrowings under
the predecessor line of credit offset by payments of bank debt. The change in
the cash flows from financing activities primarily reflects the timing of
working capital needs and the changes in the capital structure of the Company
which resulted subsequent to the Kleinert Acquisition.
Liquidity demands for the near term will consist of normal levels of capital
expenditure requirements sufficient to accommodate growth in backlog, working
capital needs and debt service funding.
Debt service requirements for 1999 will include the satisfaction of the seller
note totaling $1.8 million resulting from the Kleinert Acquisition coupled with
approximately $2.1 million of cash interest expense.
Management believes that current levels of operating cash flow and availability
under its parent company's revolving credit facility will provide adequate
liquidity to satisfy its near term demands.
THE YEAR 2000 ISSUE
The Year 2000 problem concerns the inability of information systems to recognize
properly and process date-sensitive information beyond January 1, 2000. Each of
the Company's operating subsidiaries face unique issues in their identification
and resolution of problems related to the Year 2000.
State of readiness: In November 1997, the Company initiated an assessment of the
impact of the Year 2000 issue on its internal operations and began the
development of a plan to bring all of its computer systems into compliance
before the end of 1998. This focus has been on all systems potentially impacted
by the Year 2000 issue, including information technology ("IT") systems and
non-IT systems. At the present time management is in the process of finalizing a
new system installation at Bandy which is year 2000 compliant, and has completed
its review of Year 2000 readiness of their other internal IT systems at Paragon,
SEAL, GIL and the corporate offices. The Company is in the process of completing
its assessment of the impact of Year 2000 on its non-IT systems, products and
significant vendors and customers. The initial assessment indicates that the
Year 2000 should not significantly affect these areas.
Costs to address Year 2000 issues: To date costs to implement and the timeframe
contemplated by management to be Year 2000 compliant are based on management's
best estimates. Cumulative costs to date have been insignificant. Estimated
costs to complete the process are not expected to have a material impact on the
Company's future financial results.
Risks associated with Year 2000 issue: The Company believes there is low risk of
any internal critical system, embedded system, or other critical asset not being
Year 2000-ready by the end of 1999. The company continues to assess its risk
exposure attributable to external factors, suppliers and customers. With respect
to outside parties, those parties, who have been contacted, have indicated that
their hardware, software and related non-IT systems are currently or will be
Year 2000 complaint within the 1999 calendar year. Evaluations of these issues
is continuing and there can be no assurance that additional issues, not
presently known to the Company, will be discovered which could present a
material risk of disruption to the Company's operations. Such disruptions could
result in delays in the delivery or sale of products. Contingency plans for
suppliers, customers and mission critical systems impacted by Year 2000 issues
are currently under development and are expected to be completed in the first
quarter of 1999.
RECENT ACCOUNTING STANDARDS
Effective January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be classified, as required. The Company had no
items of other comprehensive income or loss for the three month period ended
March 31, 1998.
8
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In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
company for making internal operating decisions. The new rules will be effective
for the Company's 1998 annual financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company's 1998 annual
financial statements.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Investors are cautioned that
any forward-looking statements, including statements regarding the intent,
belief, or current expectations of the Company or its management, are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors including, but not limited to (i)
general economic conditions in the markets in which the Company operates, (ii)
cancellation of specific aircraft programs due to defense spending or general
budgetary constraints or poor customer demand, (iii) success in hiring and
retaining key management and technical personnel.
PART II - OTHER INFORMATION
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K: None
9
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused the Report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, as of February 3, 1999.
KII HOLDING CORP.
By: /s/ William L. Remley
---------------------
William L. Remley,
Vice Chairman, Treasurer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed by the following persons in the capacities
and as of dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard L. Kramer Chairman of the Board of Directors February 3, 1999
- ------------------------ Secretary and Director of KII Holding Corp
Richard L. Kramer
/s/ William L. Remley Vice Chairman, Treasurer and Director of February 3, 1999
- ------------------------ KII Holding Corp.
William L. Remley
/s/ Bradley C. Call President of KII Holding Corp. February 3, 1999
- ------------------------
Bradley C. Call
/s/ Julius E. Hodge Chief Financial Officer of KII Holding February 3, 1999
- ------------------------ Corp.
Julius E. Hodge
</TABLE>
10
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 960
<SECURITIES> 0
<RECEIVABLES> 6,035
<ALLOWANCES> 103
<INVENTORY> 13,371
<CURRENT-ASSETS> 21,216
<PP&E> 16,018
<DEPRECIATION> 1,233
<TOTAL-ASSETS> 38,072
<CURRENT-LIABILITIES> 4,426
<BONDS> 0
0
840
<COMMON> 3,192
<OTHER-SE> (1,213)
<TOTAL-LIABILITY-AND-EQUITY> 38,072
<SALES> 8,271
<TOTAL-REVENUES> 8,271
<CGS> 5,876
<TOTAL-COSTS> 7,789
<OTHER-EXPENSES> 58
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 611
<INCOME-PRETAX> (188)
<INCOME-TAX> 211
<INCOME-CONTINUING> (399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (399)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
