<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
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 333-62759
SIMONDS INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Delaware 05-0484518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 Intervale Road, Fitchburg, MA 01420
(Address of registrant's principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 343-3731
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 (ss.229.405) of this chapter) 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].
Aggregate market value of the voting and non-voting common equity held by
non-affiliated area of the registrant: 0
Number of shares outstanding of the registrant's voting and non-voting common
stock, as of March 15, 1999: 68,435.10 and 7,897.45, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS.
RECENT DEVELOPMENTS
In July 1998, Simonds Industries Inc. ("Simonds" or the "Company")
issued $100 million of 10-1/4% Senior Subordinated Notes due 2008 (the "Notes").
Proceeds from the Notes were primarily used for the repayment of indebtedness,
the acquisition of treasury stock, and the buyout of all outstanding stock
options and warrants. The Company concurrently entered into a new Senior Credit
Facility with a commercial lender that provides $30 million availability.
Borrowings under the Senior Credit Facility are available for permitted
acquisitions and working capital, including letters of credit. The Senior Credit
Facility is secured by first priority liens on all tangible and intangible
personal property and real property assets of the Company and its subsidiaries.
All of the foregoing transactions are herein referred to collectively as the
"Recapitalization." For additional information with respect to this
Recapitalization, see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 13. Certain Relationships and
Related Transactions.
GENERAL
Simonds is a leading global manufacturer and marketer of high quality
industrial cutting tools. With facilities in North America and Europe, the
Company sells its products into three end user markets: metal (51% of 1998 net
sales), wood (42%), and paper (7%). Management believes the Company holds a
number one, two or three share position in each of the markets it serves. See
Note 10 to the Consolidated Financial Statements included in Item 8 for
financial information with respect to the Company's industry segments and
foreign and domestic operations and export sales.
The Company manufactures saw blades, files, knives and steel rule that,
when mounted on industrial machinery, cut, shape, bend and perforate metal, wood
and paper. In addition, the Company manufactures and distributes machinery,
including a complete line of filing room equipment used primarily in saw mills.
The Company's more than 25,000 products are used in a wide variety of industrial
applications. The products are consumable and require replacement many times per
year. More than 85% of the Company's net sales are derived from sales of
replacement products for use in the aftermarket.
PRODUCTS AND MARKET
Simonds produces an array of world-class industrial cutting tools for a
wide variety of end user markets.
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Metal Cutting Products
The Company's metal cutting products primarily include metal band saw
blades and files for use in industrial/commercial applications. In addition, the
Company manufactures and markets other products for similar applications.
BAND SAW BLADES. Management believes that Simonds is the second largest
manufacturer of metal band saw blades both globally and in North America.
Management believes the Company markets the world's most technologically
advanced and complete metal band saw blade product line with three broad
varieties distributed for portable and stationary band saws. The three varieties
include bi-metal, carbide tip and carbon blades sold under brand names including
EPIC(R), Si-Clone(R), Bundle Band(R), Si-Namic(R) and XL. These products are
used on a variety of OEM vertical and horizontal machines which are generally
used in cut off, profile/contour and friction cutting applications. In cut-off
applications, the Company's products cut steel and non-ferrous bars from long to
shorter lengths which are ultimately used in finished steel products. This type
of cutting is most often found in steel mills, steel warehouses and
manufacturing plants. Profile/contour cutting involves the Company's narrower
width blades, usually one-half inch or less, which are used to saw arcs or
curves in a wide variety of materials ranging from sheet metal to tool steel,
plastics and wood. Friction cutting is a method of removing seams and other size
overages created by metal casting using a silicon carbon steel bandsaw blade,
running at extremely high speeds.
The Company's metal band products have a large number of industrial
applications. The largest consumers of these products include the automotive,
construction, home appliance and aerospace industries. Other important end user
markets, particularly in the United States, include specialty manufacturers,
maintenance shops, tool and die shops, machine shops, metal fabricators,
aluminum foundries and steel service centers. Purchasing criteria vary by end
user market but generally center around performance, durability and speed,
resulting in effective cost per cut. Management believes the Company provides
the highest quality products resulting in the most effective cost per cut.
FILE PRODUCTS. Management believes that Simonds is the second largest
manufacturer of industrial file products in North America and the third largest
worldwide. The Company's files are precision hand tools made from forged,
hardened steel, and are generally used to debur and shape metals and wood. These
files are also used to sharpen many types of cutting blades. In general, the
Company sells its file products under various brand names, including Red
Tang(R), Black Maxi-Sharp(R), Ralston and SI. The Company believes the Simond's
name itself is widely recognized by industrial/commercial users as a leader in
the manufacture of high quality files.
The Company's files are sold into two primary end user markets:
industrial and consumer. Industrial end users include machinists, millwrights,
welders, gunsmiths, plumbers, electricians, tool and die makers, watchmakers,
automobile body repair and manufacturing as well as many non-ferrous end user
applications such as filing copper, brass and aluminum. The consumer end user
market, a growing area for the Company, primarily consists of do-it-yourself
users. The Company manufactures a rapidly expanding line of files which are sold
to retail chains and specialty suppliers under private label brand names. In
addition, there are several niche commercial markets, such as the farrier and
formica markets, that are also important to the Company. Purchasing criteria
vary by
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end user market but generally center around product availability, design,
performance, durability, and price.
Wood Cutting Products
The Company believes it is the North American leader in the manufacture
of wood cutting products. The Company offers a broad array of wood cutting
tools, including bandsaw blades, wood cutting knives, bits and shanks for
inserted tooth saws, and large diameter circular saws. The Company's products
are generally used to cut and shape logs into dimensional lumber and chip lumber
for the pulp and paper industry. In addition, the Company manufactures and sells
a complete line of filing room equipment used primarily in saw mills.
The Company markets its cutting and sawing tools and associated
products to the primary wood industry, including saw mills, pulp mills, wood
pallet producers and plywood, wafer board, and particle board plants. Purchasing
criteria vary by end user market but generally center around performance,
durability, and effective costs per cut.
Paper Products
The Company is a leading producer of precision steel rules used
primarily in the die making and packaging industries. Manufactured from hardened
and beveled steel, rule products are used to fold, cut and perforate paper,
cardboard and other packaging materials in addition to stamping and bending
various types and grades of sheet metal. The Company's paper products include
flat, rotary and perforated steel rule. Rule products purchasing criteria vary
by end user but generally center around performance, durability and cost.
MARKETING, SALES AND DISTRIBUTION
The Company's products are marketed and sold worldwide through an
extensive distributor base serviced by its subsidiaries located in the United
States, Canada, Germany, Spain and the United Kingdom. More than 85% of the
Company's sales are through its extensive independent distributor base. Direct
end user shipments and agent channels are also employed by the Company as
dictated by private label programs, specific geographic markets, industry
practice and competition. The Company employs separate independent distributors
for its metal, wood and paper products in North America and internationally. The
Company's marketing and sales functions are divided geographically between North
America and the rest of the world.
The Company's distribution effort is comprised of three major
components: (i) independent distributors, (ii) the Company's field sales force,
and (iii) the Company's customer service representatives.
The Company's sales and distribution network encompasses approximately
3,800 metal products, 1,300 wood products and 200 paper products distributors in
North America and 1,300 metal products, 150 wood products and 200 paper products
distributors internationally. These distributors include mill supply houses, saw
shops, catalog houses, OEMs, welding suppliers and
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other manufacturers. The Company offers extensive training, service, and
technical support to its distributors.
The Company's independent distributors are supported by 33 metal
product and 32 wood product representatives in North America and 21 and two,
respectively, internationally. The Company's field sales professionals provide
technical service, in-house formal training and on-going field training to both
distributors and end users.
The Company's 23 customer service representatives in North America and
eight internationally are a critical element of the Company's distribution
network and service leadership. By responding to and processing many orders from
different points and providing tailored, real-time service, this group provides
a user-friendly interface with the network of distributors and end users. Each
distributor and field sales professional is assigned a customer service
representative who is trained in service techniques and product knowledge.
Steel rule products are marketed through the direct sales force of the
Company's subsidiary, W. Notting Limited ("Notting"), independent specialized
distributors and Meyersco Limited, an independent representative agency. In
addition to this effort, the Company maintains a team of customer service
representatives to market the rule products to smaller accounts.
The Company distributes private label products directly to retailers
and industrial products marketers through a dedicated private label sales
manager, supported by the Company's customer service organization.
The Company distributes certain industrial products through its wholly
owned subsidiary, Strongridge Limited, ("Strongridge") located in Brampton,
Ontario, Canada. Since its acquisition in 1996, Strongridge has been operating
as a separate division with a separate identity in the industrial market place.
The primary focus of Strongridge has been to sell metal products to the small
and mid-size industrial and contractor distributors. Weld centers and warehouse
locations in Ontario, Canada, Texas, Ohio, California, North Carolina and
Georgia provide local service support to these distributors.
RAW MATERIALS
The primary raw material for the Company's products is specialty steel.
The Company does not believe it is substantially dependent on any single
supplier. However, Theis Precision Steel Corporation provides approximately 50%
of the Company's domestic metal bandsaw steels. The Company's agreements with
its suppliers generally are for a period of one year, with prices, in some
instances, subject to adjustment.
In order to take advantage of volume price discounts, the Company
pursues a "primary" sourcing strategy through which most of the Company's strip
steel is purchased. Designated "primary" sources of steel inventory are
supported by identified secondary sources of raw materials. Each production
facility is responsible for coordinating and executing the materials for their
respective inventory needs. A purchasing manager at each facility oversees these
purchases.
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EMPLOYEES
At January 2, 1999, the Company had 918 full-time employees. Of such
employees, 713 were located in the United States, 48 were located in Canada, 89
were located in Germany, 10 were located in Spain and 58 were located in the
United Kingdom. The Company considers its relations with these employees to be
good.
The Fitchburg and Newcomerstown facilities employ members of the United
Steel Workers of America ("USWA") Union. Their contracts with the USWA expire in
2000 and 2001, respectively. The Company considers its relations with the unions
to be good.
COMPETITION
The cutting tool market is highly fragmented with numerous
participants. The Company is a leader in the global cutting tools market and is
consistently among the top three competitors in metal cutting saw blade, file,
wood cutting product and rule product market. Competition is principally on the
basis of price, service, delivery, quality and technical expertise. The
Company's competitors vary in each of the market sectors it serves. There is no
one company which competes with the Company in all three of the market sectors
served by the Company and there is no one company which is dominant in any of
such market sectors. The Company believes that its reputation over its long
history for quality products, extensive sales and service network and its
in-depth product knowledge provide it with a competitive advantage in all of the
market sectors it services.
ENVIRONMENTAL 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 environment 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 1992, the Company's property in Ashburnham, Massachusetts, was
identified as having groundwater contamination. The Company has been indemnified
from such liability by prior owners and there is currently $2.7 million held in
escrow to cover such liability. Based on current estimates, management believes
that the amounts held in escrow will be sufficient to cover these environmental
liabilities, although there can be no assurance that such amounts will be
sufficient. In addition, environmental issues were previously identified at the
Company's Fitchburg, Massachusetts, and
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Newcomerstown, Ohio, properties which have since been remediated. However, the
state of Ohio has not yet issued its certification to that effect with respect
to the Newcomerstown site. The prior owner has agreed to indemnify the Company
for any post-closure care expenses at the Newcomerstown site.
ITEM 2. PROPERTIES.
The following table provides information on the Company's facilities
and the products produced at these locations.
<TABLE>
<CAPTION>
PRODUCT OWNED/ SIZE
LOCATION GROUP PRODUCT TYPES LEASED (SQ. FT)
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FITCHBURG, MA Metal * Weld Edged Bandsaw Blades Owned 401,000
* Carbide Tipped Bandsaw
Blades
* Carbon Bandsaw Blades
Wood * Bits & Shanks
* Red Streak(R) Bandsaw Blade
Paper * Perforating
* Flat
* Rotary
BIG RAPIDS, MI Wood * Circular Saws Owned 127,500
* Knives
* Inserted Tooth Saws
NEWCOMERSTOWN, OH Metal * Files Owned 208,000
SPRINGFIELD, OR Wood * Wide Bandsaw Blades Owned 28,400
PORTLAND, OR Wood * Filing Room Equipment Owned 40,000
RIVERSIDE, CA Paper * Perforating Leased 19,200
TOTTENHAM, UK Paper * Flat Owned 30,000
* Perforating
BARCELONA, SPAIN Paper * Rule Leased 4,040
SPANGENBERG, GERMANY Metal * Carbon Bandsaw Blades Owned 57,000
* Bi-Metal Bandsaw Blades
* Hacksaw Blades
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to a lawsuit that was litigated in China involving
a Chinese joint venture established by the Company's predecessor. Management
believes the lawsuit to be without merit. In addition, the Company is a party to
other lawsuits arising in the normal course of business. In the opinion of
management, the final resolutions of these lawsuits are not expected to
materially affect the financial condition or results of operations of the
Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's common
stock. The Company's voting common stock is held by approximately 40 holders and
its non-voting common stock is held by approximately 2 holders.
The Company has not paid any dividends on its capital stock since its
inception. The Company currently intends to retain future earnings, if any, for
use in the operation and expansion of its business. The Company does not
anticipate paying any cash dividends in the foreseeable future. Both the
Indenture pursuant to which the Notes were issued (the "Indenture") and the
Senior Credit Facility restrict the ability of the Company and certain of its
subsidiaries to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated operating and balance sheet data for and as
of the years ended December 28, 1996, December 27, 1997 and January 2, 1999 are
derived from the Company's audited consolidated financial statements included
elsewhere herein. The selected consolidated operating and balance sheet data as
of and for the year ended December 31, 1994, the five months ended May 26, 1995,
and the seven months ended December 30, 1995 are derived from the Predecessor's
or the Company's audited consolidated financial statements, as applicable. The
following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and the Notes thereto (see Item 8.
Financial Statements and Supplementary Data) and the information contained in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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<TABLE>
<CAPTION>
(In Thousands)
Predecessor Company
--------------------- ------------------------------------------------
Year 5 Months 7 Months Year Year Year
Ended Ended Ended Ended Ended Ended
1994 5/26/95 12/30/95 1996 1997 1998
------- --------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales $95,284 $42,212 $58,932 $98,661 $114,182 $126,296
Cost of goods sold 68,537 30,102 41,353 69,828 78,798 86,750
-------- --------- ------- ------- -------- --------
Gross profit 26,747 12,110 17,579 28,833 35,384 39,546
Selling, general and administrative expense 17,028 7,418 10,176 17,135 21,149 24,230
Special compensation expense --- 7,920 --- --- --- 4,541
------- --------- ------- ------- -------- --------
Operating income (loss) 9,719 (3,228) 7,403 11,698 14,235 10,775
Interest expense 1,623 650 2,880 4,399 4,963 7,900
Other expense (income) net (432) (276) (208) 245 520 554
------- --------- ------- ------- -------- --------
Income (loss) before income taxes 8,528 (3,602) 4,731 7,054 8,752 2,321
Income taxes 3,491 (1,387) 1,856 3,071 3,751 955
------- --------- ------- ------- -------- --------
Net income (loss) before
extraordinary item $5,037 $ (2,215) $ 2,875 $3,983 $ 5,001 $ 1,366
Extraordinary item-Write-off of deferred
financing cost related to refinanced
indebtedness, net of tax benefit of $374 -- -- -- -- -- (529)
------- -------- ------- ------- -------- --------
Net income (loss) $ 5,037 $ (2,215) $ 2,875 $ 3,983 $ 5,001 $837
======= ======== ======= ======= ======== ========
OTHER DATA:
EBITDA from operations(1) $12,964 $6,109 $ 8,673 $14,026 $ 17,299 $ 19,187
Depreciation and amortization 3,307 1,498 1,500 2,712 3,459 5,176
Capital expenditures 2,377 745 1,895 3,638 3,708 4,348
Ratio of income to fixed charges(2) 5.7x -- 2.6x 2.5x 2.7x 1.3x
BALANCE SHEET DATA:
Working capital $17,753 $16,033 $21,786 $22,209 $ 21,651 $35,796
Total assets 56,931 62,413 77,728 82,620 95,343 118,239
Total debt 16,278 14,899 46,809 46,175 51,692 104,010
Shareholders' equity (deficit) 24,986 24,608 13,185 17,198 21,615 (12,680)
</TABLE>
(1) EBITDA is defined as operating income plus depreciation, amortization
(other than amortization of debt discount and deferred financing costs)
and special compensation expense. The Company believes that EBITDA
provides additional information for determining its ability to meet
debt service requirements. EBITDA does not represent and should not be
considered as an alternative to net income or cash flow from operations
as determined by generally accepted accounting principles, and EBITDA
does not necessarily indicate whether cash flow will be sufficient to
meet cash requirements.
(2) For purposes of calculating this ratio, "income" consists of income
before provision for income taxes and fixed charges. "Fixed charges"
consists of interest expense and the estimated interest portion of
rental payments on operating leases. Such income was insufficient to
cover fixed charges by approximately $2,100 for the five months ended
May 26, 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(Dollars in Thousands)
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto, as well as the selected
financial information, all appearing elsewhere herein.
GENERAL
Simonds has been in continuous operation selling cutting tools for over
166 years. Since 1995, the Company has completed four acquisitions, including
Strongridge in October 1996, the bit and shank product line of Pacific Hoe
Company in January 1997, Armstrong Manufacturing
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Company ("Armstrong") in August 1997, and Notting on May 5, 1998. The Company's
results of operations for the periods 1996-1998 reflect the impact of all of the
above mentioned acquisitions. In particular, the Company benefited from three
months in 1996 and a full year in 1997 of operations of Strongridge and five
months of operations of Armstrong in 1997 and a full year of 1998, and eight
months of Notting operations in 1998.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------
Year Ended December
------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 70.8 69.0 68.7
----- ----- -----
Gross profit 29.2 31.0 31.3
Selling, general and administrative expense 17.4 18.5 22.8
----- ----- -----
Operating income 11.8 12.5 8.5
Interest expense 4.5 4.3 6.3
Other expense, net 0.2 0.5 0.4
----- ----- -----
Income before income taxes 7.1 7.7 1.8
Income taxes 3.1 3.3 0.7
----- ----- -----
Net income 4.0 4.4 1.1
Extraordinary item-
Write-off of deferred financing cost related to
refinanced indebtedness, net of tax benefit
of $374 0.0 0.0 (0.4)
----- ----- -----
Net Income 4.0% 4.4% 0.7%
===== ===== =====
</TABLE>
Year Ended January 2, 1999 Compared To Year Ended December 27, 1997
Net Sales: Net sales for the year ended January 2, 1999 were $126,296,
or a 10.6% increase from 1997 net sales of $114,182. The increase in net sales
was primarily attributable to the inclusion of Notting and Armstrong. U.S.
operations were up 2.7%, which was mostly offset by lower sales from Canadian
operations due in large part to a significantly weaker Canadian dollar in 1998.
Gross Profit Margin: The cost of sales increased by $7,952 as a result
of higher sales volume. Gross profit margin improved .3% to 31.3% in 1998
primarily as a result of favorable raw material prices for Red Streak(R) bands,
carbide tips, and the majority of the Company's knife steel along with higher
production levels without significant increases in fixed expenses.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses as a percent of net sales were 22.8% for 1998 and 18.5%
in 1997. The higher level of expenses in 1998 as compared to 1997 was primarily
due to the addition of Armstrong and Notting in 1998 and a one time compensation
charge in July 1998 of $4,541 from the repurchase of options relating to the
Recapitalization.
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Operating Income: As a result of the foregoing, operating income
decreased $3,460 in 1998 from the prior year.
Interest Expense: Interest expense was higher in 1998 due to the
Recapitalization of the Company in July. The Recapitalization constituted
retiring most of the Company's debt and replacing it with $100,000 of notes
bearing an annual interest rate of 10.25%.
Income Taxes: The Company's effective tax rate decreased to 41.2% for
1998 from 42.9% in 1997. The effective tax rates differed from the statutory
U.S. rate primarily due to state income tax provisions and nondeductible
amortization.
Extraordinary Item: As part of the debt retirement in 1998, deferred
financing costs of $903 were written off with a related tax benefit of $374,
which resulted in an extraordinary loss of $529.
Net Income: As a result of the aforementioned factors, net income
decreased 83.3% to $837 for 1998 from $5,001 for 1997.
Year Ended December 27, 1997 Compared To Year Ended December 28, 1996
Net Sales: Net sales increased 15.7% to $114,182 for 1997 from $98,661
for 1996. Of this increase, $3,457 resulted from the contribution of five months
of Armstrong and $4,647 from a full year of results of Strongridge in 1997 as
compared to three months in 1996. In addition, the Company benefited from the
acquisition of the bit and shank business from Pacific Hoe Corporation. The
remaining increase in net sales was due to increased demand from the wood and
metal markets in the United States and Canada, which was reflected in increased
sales of levelers and tensioners, Red Streak(R) and waferized knives as well as
increased sales of metal band saws and files.
Gross Profit Margin: Gross profit as a percentage of net sales
increased to 31.0% in 1997 compared to 29.2% in 1996. This increase was
primarily due to lower costs of raw materials, other manufacturing efficiencies
and the addition of higher gross profit margin products at Armstrong.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased as a percent of net sales to 18.5% in 1997
from 17.4% in 1996. This is partly due to additional bonus accruals,
commissions, and marketing incentive plans resulting from the Company exceeding
incentive targets. In addition, the increase resulted from the inclusion of
Strongridge and Armstrong, which have higher percentages of selling, general and
administrative expenses to net sales than the Company.
Operating Income: As a result of the aforementioned factors, operating
income increased 21.7% to $14,235 or 12.5% of net sales in 1997 from $11,698 or
11.9% in 1996.
Interest Expense: Interest expense increased $4,963 in 1997 from $4,399
in 1996 as a result of borrowings to finance acquisitions.
Income Taxes: The Company's effective tax rate decreased to 42.9% in
1997 from 43.5% in 1996. The income tax rates principally differed from the
statutory U.S. rate of 34% as a result of
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state income tax provisions, nondeductible amortization expense (for tax
purposes), the change in tax valuation reserves and the effect of foreign income
tax on foreign source income.
Net Income: As a result of the foregoing, net income increased 25.6% to
$5,001 in 1997 from $3,983 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund working
capital needs, meet required debt payments, and to complete planned maintenance
and manufacturing improvements.
During 1996, 1997 and 1998, net cash provided by operations was $6,665,
$13,046 and $9,113, respectively. During 1996, 1997 and 1998, net cash used in
investing activities was $4,788, $17,304 and $9,747, respectively, consisting
primarily of capital expenditures and acquisitions. In 1997, approximately
$13,700 was used for the acquisitions of Armstrong and the bit and shank product
line of Pacific Hoe Company. In 1998, roughly $5,500 was used to acquire
Notting, a manufacturer of rule products. During 1996, 1997 and 1998, net cash
provided (used) by financing activities was ($2,526), $4,299 and $8,978,
respectively.
The Company's Senior Credit Facility provides a $30,000 line of credit
to meet acquisition and expansion needs as well as seasonal working capital and
general corporate requirements. This credit line is undrawn as of January 2,
1999. Borrowings under the Senior Credit Facility bear interest at a fluctuating
rate based on, at the Company's option, either the lender's alternate base rate,
as defined or LIBOR plus the applicable margin. A commitment fee calculated
based upon the unused portion of the revolving credit facility is payable
quarterly in arrears.
The Company believes that future cash flows from operations, together
with the borrowings available under the Senior Credit Facility will provide the
Company with sufficient liquidity and financial resources to finance its growth
and satisfy its working capital requirements for the foreseeable future. The
Company may not be able to generate sufficient cash flows from operations to pay
the entire principal amount of the Notes when due in 2008. In such event, the
Company would be required to refinance the Notes. However, there can be no
assurance that the Company will be able to obtain financing on acceptable terms.
SEASONALITY
Historically, the Company's business has not been subject to
seasonality in any material respect. The Company's third quarter, which includes
July through September, is typically lower due to customers' and plant vacation
shutdowns.
INFLATION
Certain of the Company's expenses, such as wages and benefits,
occupancy costs and equipment repair and replacement, are subject to normal
inflationary pressures. Although the Company to date has been able to offset
inflationary cost increases through operating efficiencies,
- 13 -
<PAGE> 14
there can be no assurance that the Company will be able to offset any future
inflationary cost increases through similar efficiencies.
TRANSITION TO THE EURO
Although the Euro was successfully introduced on January 1, 1999, the
legacy currencies of those countries participating will continue to be used as
legal tender through January 1, 2002. Thereafter, the legacy currencies will be
cancelled and Euro bills and coins will be used in the 11 participating
countries.
Transition to the Euro creates a number of issues for the Company.
Business issues that must be addressed include product pricing policies and
ensuring the continuity of business and financial contracts. Finance and
accounting issues include the conversion of accounting systems, statutory
records, tax books and payroll systems to the Euro, as well as conversion of
bank accounts and other treasury and cash management activities.
The Company continues to address these transition issues and does not
expect the transition to the Euro to have a material effect on the results of
operations or financial condition of the Company.
YEAR 2000
The Company has a formal Year 2000 Compliance Plan which it began to
implement in 1996 to ensure that its hardware, operating systems and software
will function properly with respect to dates in the year 2000 and thereafter.
The Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company has initiated formal communications
with all of its significant suppliers and large customers to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 issues. In the event that any
of the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business or operations could
be adversely affected. The Company is in the process of preparing appropriate
contingency plans in the event that a significant internal or external exposure
is identified.
FORWARD LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
Statements contained in this Form 10-K that are not historical facts
are forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results for fiscal 1999 and beyond to
differ materially from
- 14 -
<PAGE> 15
those expressed in any forward-looking statements made by or on behalf of the
Company. Such statements contain a number of risks and uncertainties including,
but not limited to, the Company's substantial leverage, the restrictions imposed
by the terms of its indebtedness, the subordination provisions of the Notes and
the related guarantees, the risks of international operations, the Company's
dependence on specialty steels, its reliance on limited sources of supply and
certain industries, its acquisition strategy and environmental matters. The
Company cannot assure that it will be able to anticipate or respond timely to
changes which could adversely affect its operating results in one or more fiscal
quarters. Results of operations in any past period should not be considered
indicative of results to be expected in future periods.
The above risks and uncertainties inherent in the Company's business
are set forth in detail below. However, this section does not discuss all
possible risks and uncertainties to which the Company is subject, nor can it be
assumed necessarily that there are no other risks and uncertainties which may be
more significant to the Company.
SUBSTANTIAL LEVERAGE
As of January 2, 1999, the Company had $104,010 of consolidated
indebtedness and consolidated stockholders' deficit of $12,680.
The Company's indebtedness has several important consequences
including, but not limited to, the following: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to debt service
requirements on its indebtedness and will not be available for other purposes;
(ii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, refinancing other
indebtedness or general corporate purposes may be impaired; (iii) the Company's
leverage may increase its vulnerability to economic downturns and limit its
ability to withstand competitive pressures; and (iv) the Company's ability to
capitalize on significant business opportunities may be limited.
The Company's ability to make payments with respect to the Notes and to
satisfy its other debt obligations will depend on its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the Company's
control. The Company believes, based on current circumstances, that the
Company's cash flow, together with available borrowings under the Senior Credit
Facility, will be sufficient to permit the Company to meet its operating
expenses and to service its debt requirements as they become due. Significant
assumptions underlie this belief, including, among other things, that the
Company will succeed in implementing its business strategy and there will be no
material adverse developments in the business, liquidity or capital requirements
of the Company. If the Company is unable to service its indebtedness, it will be
forced to adopt an alternative strategy that may include actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. There can be
no assurance that any of these strategies could be effected on satisfactory
terms, if at all.
- 15 -
<PAGE> 16
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture restricts the ability of the Company and certain of its
subsidiaries to, among other things, incur additional indebtedness, pay
dividends or make certain other restricted payments or investments, consummate
certain asset sales, enter into certain transactions with affiliates, incur
liens, or merge or consolidate with any other person or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of their assets.
In addition, the Senior Credit Facility contains other and more restrictive
covenants. The Senior Credit Facility requires the Company to maintain specified
financial ratios and satisfy certain financial tests. The Company's ability to
meet such financial ratios and tests may be affected by events beyond its
control, and there can be no assurance that the Company will meet such tests. A
breach of any of these covenants could result in an event of default under the
Senior Credit Facility. In an event of default under the Senior Credit Facility,
the lenders thereunder could elect to declare all amounts borrowed, together
with accrued interest, to be immediately due and payable and the lenders under
the Senior Credit Facility could terminate all commitments thereunder. If such
indebtedness were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay such indebtedness and the Notes.
SUBORDINATION OF NOTES AND GUARANTEES
The payment of principal of and interest on, and any premium or other
amounts owing in respect of, the Notes is subordinated to the prior payment in
full of all existing and future Senior Debt of the Company, including all
amounts owing or guaranteed under the Senior Credit Facility. The Guarantees of
the Notes by certain subsidiaries are similarly subordinated to Guarantor Senior
Debt. Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company or a Guarantor,
assets of the Company or such Guarantor will be available to pay obligations on
the Notes or Guarantees only after all Senior Debt of the Company or Guarantor
Senior Debt of such Guarantor, as applicable, has been paid in full, and there
can be no assurance that there will be sufficient assets to pay amounts due on
any or all of the Notes. In addition, neither the Company nor any Guarantor may
pay principal, premium, interest or other amounts on account of the Notes or any
Guarantee in the event of a payment default (or, with respect to a non-payment
default on Designated Senior Debt (as defined), for a specified period) in
respect of Senior Debt. As of January 2, 1999, the Company and the Guarantors
had $100,000 of Senior Debt and Guarantor Senior Debt outstanding. In addition,
the Notes are effectively subordinated in right of payment to all liabilities,
including indebtedness, of subsidiaries of the Company which are not Guarantors.
As of January 2, 1999, such subsidiaries had approximately $23,100 of total
liabilities, including approximately $4,000 of indebtedness.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company operates manufacturing, sales and service facilities in
Germany, the United Kingdom, Spain and Canada. In 1998, sales of its products in
foreign countries accounted for approximately 34% of the Company's net sales. As
a result, the Company is subject to risks associated with operation in foreign
countries, including fluctuations in currency exchange rates, imposition of
limitations on conversion of foreign currencies into dollars or remittance of
dividends and other payments by foreign subsidiaries, imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries, hyperinflation in certain foreign countries
- 16 -
<PAGE> 17
and imposition or increase of investment, subjection to certain foreign labor
laws and other restrictions by foreign governments. Fluctuations in currency
exchange rates have had an impact on the Company's operations in the past, and
historically the Company has hedged some of its foreign currency risks. No
assurance can be given that the risks associated with operating in foreign
countries will not have a material adverse effect on the Company in the future.
DEPENDENCE ON SPECIALTY STEELS; RELIANCE ON LIMITED SOURCES OF SUPPLY
The principal raw material used by the Company is specialty steels. The
Company relies on limited sources for its supply of specialty steels. The loss
of any such source, or any major disruption in such source's business or failure
by it to meet the Company's needs on a timely basis could cause shortages in the
Company's supply of specialty steels that could have a material adverse effect
on the Company's business and financial condition.
The steel industry is highly cyclical in nature and steel prices are
influenced by numerous factors beyond the control of the Company, including
general economic conditions, labor costs, molybdenum and chrome costs,
competition, import duties, tariffs and currency exchange rates. If the Company
is unable to pass some or all of future steel price increases to its customers,
the Company could be materially and adversely affected.
RELIANCE ON METAL PROCESSING AND WOOD INDUSTRIES
Demand for the Company's metal and wood products generally follows
movements in the metal processing and primary wood industries. The metal
processing and primary wood industries are both cyclical in nature and are
affected by global and national economic conditions. A material change in either
industry or general economic conditions could have a material adverse effect on
the Company's business and financial condition.
ACQUISITION STRATEGY
The Company has pursued and intends to continue to pursue acquisitions
as an important component of its strategy. No assurance can be given that in the
future other suitable acquisition candidates can be acquired on acceptable terms
or that future acquisitions, if completed, will be successful. Future
acquisitions by the Company could result in the incurrence of additional debt
and contingent liabilities which could materially adversely affect the Company's
business, operating results and financial condition. The success of any
completed acquisition will depend on the Company's ability to integrate
effectively the acquired business into the Company's. The process of integrating
acquired businesses may involve numerous risks, including difficulties in the
assimilation of operations and products, the diversion of management's attention
from other business concerns and the potential loss of key employees of the
acquired businesses.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state, local and
foreign laws and regulations relating to the storage, handling, generation,
treatment, emission, release, discharge and disposal of certain substances and
waste materials. While the Company believes that it is currently
- 17 -
<PAGE> 18
in material compliance with those laws and regulations, there can be no
assurance that the Company will not incur significant costs to remediate
violations thereof or to comply with changes in existing laws and regulations
(or the enforcement thereof). Such costs could have a material adverse effect on
the Company's business, financial condition or results of operations.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined in the
Indenture), each holder of Notes will have the right to require the Company to
repurchase all or a portion of such holder's Notes at a price in cash equal to
101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. However, the Company's ability to
repurchase the Notes upon a Change of Control may be limited by the terms of
then existing contractual obligations of the Company and its subsidiaries. In
addition, the occurrence of a Change of Control will constitute an Event of
Default under the Senior Credit Facility. The Senior Credit Facility will
prohibit the purchase of the Notes unless and until such time as the
indebtedness under the Senior Credit Facility is paid in full. There can be no
assurance that the Company will have the financial resources to repay amounts
due under the Senior Credit Facility, or to repurchase or redeem the Notes. If
the Company fails to repurchase all of the Notes tendered for purchase upon the
occurrence of a Change of Control, such failure will constitute an Event of
Default under the Indenture.
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under the applicable provisions of the federal bankruptcy law or
comparable provisions of state fraudulent transfer law, if the Company or any
Guarantor, at the time it issues the Notes or incurs a Guarantee, as the case
may be, (a)(i) was or is insolvent or rendered insolvent by reason of such
issuance or incurrence, as the case may be, (ii) was or is engaged in a business
or transaction for which the assets remaining with the Company or such
Guarantor, as the case may be, constituted unreasonably small capital or (iii)
intended or intends to incur, or believed or believes that it would incur, debt
beyond its ability to pay such debts as they mature and (b) received or receives
less than reasonably equivalent value or fair consideration, the obligations of
the Company under the Notes or such Guarantor under its Guarantee, as the case
may be, could be avoided or claims in respect of the Notes or such Guarantee, as
the case may be, could be subordinated to all other debts of the Company or such
Guarantor, as the case may be. Among other things, a legal challenge of the
Notes or a Guarantee, as the case may be, on fraudulent conveyance grounds may
focus on the benefits, if any, realized by the Company or such Guarantor, as the
case may be, as a result of the issuance of the Notes or the incurrence of a
Guarantee, as the case may be. To the extent that the Notes or any Guarantee was
a fraudulent conveyance or held unenforceable for any other reason, the holders
of the Notes would cease to have any claim in respect of the Company, in the
case of the Notes, or in respect of a Guarantor whose Guarantee was avoided or
held unenforceable. In such event, the claims of the holders of the Notes would
be subject to the prior payment of all liabilities of the Company, in the case
of the Notes, or the Guarantor whose Guarantee was avoided. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any avoided
portion of the Notes or a Guarantee.
- 18 -
<PAGE> 19
Each Guarantor has agreed, jointly and severally with the other
Guarantors, to contribute to the obligation of any Guarantor under a Guarantee
of the Notes. Further, the Guarantee of each Guarantor provides that it is
limited to an amount that would not render the Guarantor thereunder insolvent.
The Company believes that it and the Guarantors received equivalent value at the
time the indebtedness was incurred under the Notes and the Guarantees. In
addition, the Company believes that neither it nor any of the Guarantors was or
will be insolvent or was or will be engaged in a business or transaction for
which its remaining assets constitute unreasonably small capital and that
neither it nor any of the Guarantors intended or will intend to incur debts
beyond its ability to pay such debts as they mature. Since each of the
components of the question of whether the Notes or a Guarantee is a fraudulent
conveyance is inherently fact based and fact specific, there can be no assurance
that a court passing on such questions would agree with the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in foreign currency
exchange rates, as the Company entered into foreign forward exchange contracts
effective for fiscal year 1999. The Company did not enter into these contracts
for trading purposes. They were entered into to manage and reduce the impact of
changes in foreign currency exchange rates although a portion of these contracts
does not qualify for hedge accounting. Accordingly, the contracts will be marked
to market at the end of each accounting period with a resulting gain or loss.
(See Note 12 to the Consolidated Financial Statements.)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in this
Report (see Part IV, Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 19 -
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information with respect to the
directors and 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>
Ross B. George 66 President, Chief Executive Officer and Director
Joseph L. Sylvia 53 Executive Vice President, Chief Financial Officer and Director
Robert Deedrick 56 Vice President - Manufacturing
Roland Richard 57 Vice President - Sales and Marketing, Wood Products
James Palmer 57 Vice President - Sales and Marketing, Metal Products
Harry Rogers 57 Vice President - International and Rule Products
Peter Hopper 48 Vice President - Product Development
Ron Owens 54 Senior Vice President - Manufacturing
Habib Y. Gorgi 42 Director
Bernard Y. Buonanno 32 Director
</TABLE>
Ross George: Mr. George has been President, Chief Operating Officer and
member of the Board of Directors since 1988 and was made Chief Executive Officer
in 1995. Mr. George previously served as acting President and Vice President of
Operations at Simonds Cutting Tools - Division of Household Manufacturing. Mr.
George joined Simonds in 1983. From 1980 to 1983, he was Vice President and
General Manager of the New England Carbide division of Wallace Murray Corp.
Prior to 1980 he held various positions at Johnson & Johnson and Texas
Instruments.
Joseph Sylvia: Mr. Sylvia has been Chief Financial Officer since 1988
and is a member of the Board of Directors of Simonds. He was promoted to
Executive Vice President in 1995. Mr. Sylvia formerly held the position of
Division Controller of Simonds Cutting Tools - Division of Household
Manufacturing. He joined Simonds in 1970 as Senior Programmer Analyst and held
various management positions in Information Services from 1972 to 1982. From
1982 to 1987, Mr. Sylvia was Director of Finance and Information Services.
Robert Deedrick: Mr. Deedrick has been Vice President of Manufacturing
since 1991. He managed the Fitchburg plant from 1984 to 1991 and the
Newcomerstown operations form 1981 to
- 20 -
<PAGE> 21
1984. Mr. Deedrick joined Simonds in 1973 as an Engineer, progressing through
Production and Inventory Control and Production Management positions.
Roland Richard: Mr. Richard has been Vice President of Sales and
Marketing - Wood Products since 1991. He previously held the position of
Director of Corporate Development from 1989 to 1991 and was Corporate Sales
Manager of the acquired Michigan Knife Company from 1987 to 1989. Mr. Richard
originally joined Simonds in 1961, progressing through sales, sales management,
product management, and became a Strategic Business Unit Manager in 1980.
James Palmer: Mr. Palmer has been Vice President of Sales and Marketing
for Metal Products since 1995. He was Vice President of Sales of Milford
Products for 10 years. Mr. Palmer joined Milford Products in 1982. Prior to
1982, Mr. Palmer held various sales and management positions with a variety of
companies in the machine tool and cutting tool industries over a period of
approximately 16 years.
Harry Rogers: Mr. Rogers has been Vice President of International and
Rule Products since 1990. He previously held the position of General Sales
Manager. Since joining Simonds in 1971 as a salesman, he has held key positions
in sales and marketing management.
Peter Hopper: Mr. Hopper has been Vice President of Product Development
since 1996. He has held positions of increasing responsibility with Crucible
Specialty Metals from 1976 to 1983. He held research, metallurgy and quality
control positions with Milford Products Corporation from 1983 to 1991. From 1991
to 1996 he served in various product development and design positions with
Milwaukee Electric Tool Corporation.
Ron Owens: Mr. Owens joined Simonds in 1998 as Vice President of
Business Development and was promoted to Senior Vice President of Manufacturing
in November of 1998. In 1990 Mr. Owens formed "SAWELL, INC.", a manufacturing
business that produced jigsaw and recip blades for their own brands, as well as
private label product for all major brands. Black and Decker purchased "SAWELL,
INC." in late 1994 and Mr. Owens was President of the subsidiary until October
1996. Mr. Owens was Vice President of Operations at Allen Industrial from 1965
to 1978; Executive Vice President of Mid State Industrial from 1978 to 1982; and
owned a sales rep agency in Tampa, Florida prior to starting "SAWELL, INC."
Habib Gorgi: Mr. Gorgi has been a member of the Board of Directors
since 1995. Since 1995, Mr. Gorgi has been President of each of (i) Fleet
Ventures Resources, Inc., (ii) Fleet Growth Resources II, Inc., a general
partner of Fleet Equity Partners VI, L.P., and (iii) Silverado III, Corp., the
general partner of Silverado III, L.P., the general partner of Chisholm Partners
III, L.P. Mr. Gorgi is also managing general partner of Kennedy Plaza Partners.
Since 1986, Mr. Gorgi has held various management positions with Fleet Equity
Partners and its affiliates. Prior to 1986, he had worked in the Mergers,
Acquisitions and Leveraged Buyouts Group of BankAmerica. Mr. Gorgi serves on the
Board of Directors of several Fleet Equity Partners' portfolio companies.
Bernard Buonanno: Mr. Buonanno has been a member of the Board of
Directors since 1995. Since 1998, Mr. Buonanno has been Senior Vice President of
each of (i) Fleet Venture Resources, Inc., (ii) Fleet Growth Resources, Inc., a
general partner of Fleet Equity Partners VI, L.P., and (iii)
- 21 -
<PAGE> 22
Silverado III, Corp., the general partner of Silverado III, L.P., the general
partner of Chisholm Partners III, L.P. Mr. Buonanno is also general partner of
Kennedy Plaza Partners. Mr. Buonanno has held various positions with Fleet
Equity Partners and its affiliates since 1993. Prior to joining Fleet Equity
Partners in 1993, Mr. Buonanno worked in the Mergers and Acquisitions Department
of Prudential-Bache Capital Funding. Mr. Buonanno serves on the Board of
Directors of several Fleet Equity Partners' portfolio companies.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in 1998 and
1997 by the Company's Chief Executive Officer and each of the four most highly
compensated executive officers whose remuneration exceeded $100,000 (the "Named
Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG
TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- -------------------------
SECURITIES
UNDER ALL
-LYING OTHER
OPTIONS/ COMPEN-
YEAR SALARY BONUS OTHER(1) SARS SATION(2)
---- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ross George 1998 $272,580 -- $28,774 351.13 $753,256
Chief Executive Officer, President 1997 $262,080 $262,080 $20,895 -- $ 17,102
Joseph Sylvia 1998 $185,820 -- $30,026 222.45 $493,120
Executive Vice President, CFO 1997 $178,605 $142,884 $16,958 -- $ 11,324
Robert Deedrick 1998 $130,598 -- $14,841 $133,118
Vice President - 1997 $126,200 $ 75,720 $ 8,206 $ 8,683
Manufacturing
James Palmer 1998 $129,260 $ 1,759 $12,809 $347,834
Vice President - Sales, Metal Products 1997 $120,935 $ 47,013 $ 7,553 $ 8,829
Roland Richard 1998 $121,518 $ 13,853 $12,809 $132,863
Vice President - Sales & Marketing, 1997 $116,844 $ 70,106 $ 7,617 $ 8,667
Wood Products
</TABLE>
(1) Consists of amounts reimbursed during the year for the payment of taxes
relating to company vehicles, tax preparation and club memberships.
(2) Consists of the Company's contributions to (1) the 401(k) Plan in 1997
(Messrs. George and Sylvia, $4,750; Mr. Deedrick, $3,786; Mr. Palmer,
$3,628; and Mr. Richard, $3,505) and 1998 ($5,000 each for all
executives listed above); (2) the Profit Sharing Plan in 1997 (Messrs.
George and Sylvia, $4,800; Mr. Deedrick, $3,786; Mr. Palmer, $3,628;
and Mr. Richard, $3,505) and 1998 ($4,800 each for all executives
listed above); (3) group insurance payments in 1997 (Mr. George,
$7,552; Mr. Sylvia, $1,774; Mr. Deedrick, $1,111; Mr. Palmer, $1,573;
and Mr. Richard, $1,657) and 1998 (Mr. George, $23,583; Mr. Sylvia,
$3,399; Mr. Deedrick, $3,339; Mr. Palmer, $2,945; and Mr. Richard,
$3,084);and (4) buyout of options in 1998 (Mr. George $719,873; Mr.
Sylvia $479,921; Mr. Deedrick $119,979; Mr. Palmer $335,089; and Mr.
Richard $119,979).
- 22 -
<PAGE> 23
Options
The following table sets forth certain information relating to option
grants in the year ended January 2, 1999 to the individuals named in the Summary
Compensation Table above.
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
------------------------------------------------------------------------------
Number of
Securities % of Total
Underlying Options/SARs Exercise
Options/SARs Granted to or Base Grant Date
granted Employees in Price Expiration Present
Name (1)(2) Fiscal Year ($/Sh) Date Value (3)
- --------------------------------- ------------ ------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Ross George 351.13 61.2% 458.52 7/7/2008 $109.37
Joseph Sylvia 222.45 38.8% 458.52 7/7/2008 $109.37
Robert Deedrick -- -- -- -- --
James Palmer -- -- -- -- --
Roland Richard -- -- -- -- --
</TABLE>
(1) None of the options granted were options with tandem SARs and no
free-standing SARs were granted.
(2) All options granted to the named executives were granted on July 7,
1998. 218.09 shares are immediately vested for both Mr. George and Mr. Sylvia.
On January 1, 1999 the remaining 133.04 and 4.36 became exercisable for Mr.
George and Mr. Sylvia, respectively.
(3) Based on the Black-Scholes option pricing model. The use of this model
should not be construed as an endorsement of its accuracy at valuing options.
The actual value, if any, an executive may realize will depend on the excess of
the stock price over the exercise price on the date the option is exercised, so
there is no assurance the actual value realized will be at or near the value
estimated by the Black-Scholes model. The estimated values under that model are
based on the following assumptions:
Stock price $458.52
Exercise price $458.52
Expected option term 5 years
Stock price volatility 0
Dividend yield 0
Risk-free interest rate 5.45%
The following table sets forth certain information with respect to
unexercised options to purchase the Company's Common Stock granted to the
individuals named in the Summary Compensation Table above. No options were
exercised in 1998 by such individuals.
- 23 -
<PAGE> 24
FY - END OPTION VALUES
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END OPTIONS AT FY-END (1)
--------------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ross George 218.09 133.04 $1,919.19 $1,170.75
Joseph Sylvia 218.09 4.36 $1,919.19 $ 38.37
Robert Deedrick -- -- -- --
James Palmer -- -- -- --
Roland Richard -- -- -- --
</TABLE>
(1) Based on the difference between the fair market value of the securities
underlying the options and the exercise or base price of the options at fiscal
year-end.
Employment Contracts
Messrs. George and Sylvia each entered into employment agreements with
the Company which expire May 26, 2000, subject to extension. The employment
agreements provide for base salaries and bonuses as determined by the Board of
Directors. In addition, the agreements provide that in the event of termination
of employment by the Company for any reason other than cause, the officer is
entitled to receive all salary and bonuses earned through the termination date
plus the remaining base salary through the expiration of the agreement.
Messrs. Deedrick, Palmer and Richard have also entered into employment
agreements with the Company which provide for one year's notice of termination
from the Company, and 90 days notice of termination from the employee, except in
the case of cause, in which event the agreement is terminable on 30 days notice
from the Company. The agreements provide that the officers' base salary and
bonuses will be determined by the Board. Each of these agreements contains a
covenant not to compete for two years after termination of employment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock (i) by each person known to
the Company to own more than 5% of the Company's Common Stock and (ii) by each
director of the Company, each of the executive officers of the Company listed
under "Management" and the directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
Shares Beneficially Owned (1)
-----------------------------
Number of Shares % of Class
----------------- ----------
<S> <C> <C>
Fleet Venture Resources, Inc. (2) 22,073.18 31.0
Fleet Equity Partners VI, L.P. (2) 9,459.93 13.3
Chisholm Partners III, L.P. (2) 7,998.35 11.2
Kennedy Plaza Partners 460.25 *
The Private Market Fund, L.P. 8,723.72 12.3
Ross George 6,348.69 8.9
Joseph Sylvia 4,039.08 5.7
Robert Deedrick 436.19 *
Roland Richard 1,090.46 1.5
James Palmer 381.66 *
Harry Rogers 1,090.46 1.5
Peter Hopper 163.57 *
</TABLE>
- 24 -
<PAGE> 25
<TABLE>
<S> <C> <C>
F.A. DeVilling 218.09 *
Ron Owens --- ---
Habib Gorgi 39,991.71 56.2
Bernard Buonanno 39,991.71 56.2
All directors and executive officers as a group,
including the above named persons 53,759.91 75.5
</TABLE>
*Less than 1%
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of, a security or the sole or shared power
to dispose, or direct the disposition of, a security, and includes options
and warrants exercisable within 60 days.
(2) Fleet Venture Resources, Inc. ("FVR"), Fleet Equity Partners VI, L.P.
("FEP"), Chisholm Partners III ("Chisholm") and Kennedy Plaza Partners
("Kennedy") are affiliated entities. As a result, they may be deemed to have
shared voting and investment power of the shares held by each of the other
entities. FVR and FEP are also affiliates of Fleet Financial Group, Inc.
("FFG"). As a result, FFG may be deemed to have shared voting and investment
power of the shares held by such entities. Mr. Gorgi is President of FVR and
of the corporate general partners of FEP and Chisholm, and a general partner
of Kennedy. As a result, he may be deemed to have shared voting and
investment power of the shares held by such entities. Mr. Buonanno is Senior
Vice President of FVR and of the corporate general partners of FEP and
Chisholm, and a general partner of Kennedy. As a result, he may be deemed to
have shared voting and investment power of the shares held by such entities.
Messrs. Gorgi and Buonanno disclaim beneficial ownership for all shares held
directly by these entities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to the Recapitalization (i) the Company repurchased certain of
its outstanding equity securities for an aggregate purchase price of $58.3
million (or $458.52 per share of Common Stock and equivalents) (the
"Recapitalization Consideration"), (ii) the Company issued new shares of voting
and non-voting Common Stock to certain existing stockholders and new investors
with aggregate proceeds to the Company of $18.8 million (or $458.52 per share)
(the "New Shares"), (iii) the Company issued certain warrants and options to
certain existing stockholders and new investors, and (iv) certain of the
Company's existing stockholders retained voting Common Stock with an aggregate
value (based on per share value of $458.52) of approximately $16.2 million (the
"Retained Shares").
Fleet (i) received approximately $39.0 million of the Recapitalization
Consideration, (ii) purchased approximately $7.8 million of the New Shares and
(iii) retained approximately $9.6 million of the Retained Shares. In addition,
Fleet received (a) warrants to purchase 2,180.93 shares of Common stock at a
price of $458.52 per share and (b) warrants to purchase 1,357.73 shares of
Common Stock at a price of $458.52 per share which will be exercisable in full
upon the occurrence of a sale of the Company or an initial public offering of
its stock ("Liquidity Events") if Fleet does not earn a specified return on its
cash investment in the Company.
Management of the Company (i) received approximately $16.0 million of
the Recapitalization Consideration, (ii) purchased approximately $0.3 million of
the New Shares and (iii) retained approximately $6.4 million of the Retained
Shares. Messrs. George, Sylvia, Deedrick and Richard (or members of their
respective families) received approximately $6.7 million, $3.1 million, $0.9
million and $1.2 million, respectively, of such Recapitalization Consideration.
Mr. Palmer purchased approximately $0.2 million of such New Shares, and Messrs.
George, Sylvia, Deedrick and Richard retained approximately $3.8 million, $2.1
million, $0.2 million and $0.5 million, respectively, of such Retained Shares.
In addition, Messrs. George and Sylvia were granted options to purchase 351.13
and 222.45 shares, respectively, of Common Stock at a price of $458.52 per
share.
- 25 -
<PAGE> 26
First Union Investors, Inc., an affiliate of First Union Capital
Partners, one of the initial purchasers of the Notes, and First Union National
Bank, the principal lender under the Senior Credit Facility, acquired 3,373.75
voting and 7,530.90 non-voting New Shares for approximately $5 million and also
received warrants to purchase 391.57 shares of Common Stock at a price of
$458.52 per share which will be exercisable in full upon the occurrence of
certain Liquidity Events if the holder does not earn a specified return on its
cash investment in the Company. The Private Market Fund, L.P. received warrants
to purchase 313.26 shares of Common Stock at a price of $458.52 per share which
will be exercisable in full upon the occurrence of certain Liquidity Events if
the holder does not earn a specified return on its cash investment in the
Company.
- 26 -
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The consolidated balance sheets as of January 2, 1999 and December 27,
1997 and the related consolidated statements of operations,
shareholders' equity (deficit), cash flows and financial statement
schedule for each of the three years in the period ended January 2,
1999 are filed as part of this report:
(1) Financial Statements
- 27 -
<PAGE> 28
SIMONDS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS DECEMBER 27, JANUARY 2,
1997 1999
------------ ----------
<S> <C> <C>
CURRENTS ASSETS:
Cash $1,255 $9,298
Accounts receivable, net of reserves of $806 and $992 in 1997 and 16,185 16,250
1998, respectively
Inventories (Note 3) 22,576 27,226
Other current assets 3,160 3,208
Refundable income taxes 101 1,157
------- --------
Total current assets 43,277 57,139
PROPERTY, PLANT AND EQUIPMENT:
Land 2,324 2,332
Buildings and improvements 10,557 12,118
Machinery and equipment 21,735 27,009
Construction-in-progress 348 1,296
------- --------
34,964 42,755
Less- Accumulated depreciation 5,308 8,370
------- --------
Net property, plant and equipment 29,656 34,385
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,026 and $1,581 in 1997
and 1998, respectively 20,613 21,765
Deferred financing costs, net of accumulated amortization of
$909 and $252 in 1997 and 1998, respectively 880 4,389
Other 917 561
------- --------
Total other assets 22,410 26,715
------- --------
Total assets $95,343 $118,239
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Overdraft facilities $249 $149
Revolving credit loans and notes payable 1,481 1,613
Current portion of long-term debt 4,925 35
Accounts payable 4,797 6,783
Accrued payroll and employee benefits 4,827 3,953
Accrued interest 704 5,011
Other accrued liabilities 1,987 1,351
Currently deferred income taxes 2,656 2,448
------- --------
Total current liabilities 21,626 21,343
LONG-TERM DEBT, net of current portion (Note 5) 45,286 102,362
DEFERRED INCOME TAXES 4,321 4,939
OTHER NONCURRENT LIABILITIES (Note 4) 2,495 2,275
COMMITMENTS AND CONTINGENCIES (Note 6) - -
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value-
Authorized - 200,000 shares
Issued and outstanding - 148,371 and 76,333 in 1997 and 1998,
respectively 1 1
Capital in excess of par value 10,553 (24,405)
Retained earnings 11,859 12,696
Accumulated other comprehensive loss (798) (907)
Treasury stock, at cost (65)
------- --------
Total shareholders' equity (deficit) 21,615 (12,680)
------- --------
Total liabilities and shareholders' equity $95,343 $118,239
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
- 28 -
<PAGE> 29
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In Thousands)
======================================
Year Ended December
--------------------------------------
1996 1997 1998
---------- ---------- ----------
(52 Weeks) (52 Weeks) (53 Weeks)
<S> <C> <C> <C>
Net sales $98,661 $114,182 $126,296
Cost of goods sold 69,828 78,798 86,750
------- -------- --------
Gross profit 28,833 35,384 39,546
Selling, general and administrative expense 17,135 21,149 28,771
------- -------- --------
Operating income 11,698 14,235 10,775
Interest expense 4,399 4,963 7,900
Other expense, net 245 520 554
------- -------- --------
Income before income taxes 7,054 8,752 2,321
Income taxes 3,071 3,751 955
------- -------- --------
Income before extraordinary item 3,983 5,001 1,366
Extraordinary item-
Write-off of deferred financing cost related to
refinanced indebtedness, net of tax benefit
of $374 -- -- (529)
------- -------- --------
Net Income $ 3,983 $ 5,001 $ 837
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 29 -
<PAGE> 30
<TABLE>
<CAPTION>
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
-----------------------------------------
FISCAL YEAR
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, JANUARY 2,
1996 1997 1999
=========================================
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 3,983 $ 5,001 $ 837
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,712 3,459 5,176
Gain on asset sales (11) (16) (48)
Provision for deferred
income taxes 1,322 258 249
Changes in assets & liabilities, net
of acquisitions:
Accounts receivable (350) (927) 2,692
Inventories 686 2,902 (952)
Income tax refunds receivable -- 40 (1,056)
Other current and noncurrent assets (818) 602 326
Accounts payable 168 (346) 355
Accrued expenses (979) 2,297 1,527
Other non-current liabilities (48) (224) 7
-------------------------------------
Net cash provided by operating
activities 6,665 13,046 9,113
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 35 107 72
Purchases of equipment (3,638) (3,708) (4,348)
Acquisition of Strongridge Limited (1,185) -- --
Acquisition of Pacific Hoe Company assets -- (5,578) --
Acquisition of Armstrong Manufacturing,
net of cash acquired of $875 -- (8,125) --
Acquisition of W. Notting Ltd.,
net of cash acquired of $51 -- -- (5,471)
-------------------------------------
Net cash (used in) investing activities (4,788) (17,304) (9,747)
-------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in overdrafts 319 (539) (100)
Net (uses) proceeds under revolving credit (197) (1,445) 3,789
Proceeds from issuance of long-
term debt-net of issuance costs -- 7,700 98,063
Principal payments of long-term debt (2,530) (1,312) (57,751)
Issuance of common stock -- 33 18,833
Stock redemption -- -- (53,791)
Purchase of treasury stock -- -- (65)
Other (118) (138) --
-------------------------------------
Net cash provided by (used in) financing
activities (2,526) 4,299 8,978
-------------------------------------
EFFECT OF EXCHANGE RATE ON CASH 360 (41) (301)
-------------------------------------
NET (DECREASE) INCREASE IN CASH (289) -- 8,043
CASH AT BEGINNING OF PERIOD 1,544 1,255 1,255
-------------------------------------
CASH AT END OF PERIOD $ 1,255 $ 1,255 $ 9,298
=====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 30 -
<PAGE> 31
SIMONDS INDUSTRIES INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 28,1996, DECEMBER 27,1997, AND JANUARY 2,1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL OTHER TOTAL
COMMON COMMON IN EXCESS RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS' COMPREHENSIVE
SHARES STOCK OF PAR EARNINGS LOSS STOCK EQUITY (DEFICIT) INCOME
-------- ------ --------- -------- ------------- -------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 148,037 $ 1 $ 10,520 $ 2,875 $(211) $ 0 $ 13,185 --
Net Income -- -- -- 3,983 -- -- 3,983 $3,983
Foreign Currency
Translation Adjustment -- -- -- -- 30 -- 30 30
-------- --- -------- ------- ----- ---- -------- ------
Balance at December 28, 1996 148,037 1 10,520 6,858 (181) 0 17,198 $4,013
======
Exercise of stock options 334 -- 33 -- -- -- 33 --
Net Income -- -- -- 5,001 -- -- 5,001 $5,001
Foreign Currency
Translation Adjustment -- -- -- -- (617) -- (617) (617)
-------- --- -------- ------- ----- ---- -------- ------
Balance at December 27, 1997 148,371 1 10,553 11,859 (798) 0 21,615 $4,384
======
Issuance of Common Stock 41,073 1 18,832 -- -- -- 18,833 --
Net Income -- -- -- 837 -- -- 837 $ 837
Foreign Currency
Translation Adjustment -- -- -- -- (109) -- (109) (109)
Stock Redemption (112,777) (1) (53,790) -- -- -- (53,791) --
Acquisition of Treasury Stock (334) -- -- -- -- (65) (65) --
-------- --- -------- ------- ----- ---- -------- ------
Balance at January 2, 1999 76,333 $ 1 $(24,405) $12,696 $(907) $(65) $(12,680) $ 728
======== === ======== ======= ===== ==== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 31 -
<PAGE> 32
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective June 11, 1998, SI Holding Corporation changed its name to
Simonds Industries Inc., and merged with its wholly owned operating
subsidiary, Simonds Industries Inc. (Simonds or the Company), a
Delaware corporation which manufactures and is a worldwide distributor
of industrial cutting tools. The primary products manufactured by
Simonds include metal band and wood saws, industrial knives and rules,
files and band saw equipment. Simonds' principal manufacturing
operations are located in Fitchburg, Massachusetts; Newcomerstown,
Ohio; Big Rapids, Michigan; Portland and Springfield, Oregon and
Spangenberg, Germany. Simonds also has sales subsidiaries in the United
Kingdom, Canada, and Spain.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Simonds Industries Inc. and its subsidiaries. All
material intercompany transactions and balances have been
eliminated in consolidation.
(b) Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable and accounts
payable approximate fair value because of their short-term
nature. At January 2, 1999, the fair value of long-term
indebtedness was approximately $2,500,000 higher than the
amount on the Company's consolidated balance sheet based on
market quotations. (See Note 5.)
(c) 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 reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those
estimates.
(d) Fiscal Year
The Company's fiscal year ends on the Saturday closest to
December 31. As a result, the years ended December 28, 1996,
December 27, 1997, and January 2, 1999 include 52, 52, and 53
weeks, respectively.
(e) Inventories
Approximately 62% and 55% of inventories at December 27, 1997
and January 2, 1999, respectively, are valued at the lower of
cost (last-in, first-out (LIFO) method) or market. All other
inventories are valued at the lower of cost (first-in,
first-out (FIFO) method) or market. Inventory costs include
labor and manufacturing overhead. Obsolete, damaged and excess
inventories are carried at net realizable value, with
consideration given to obsolescence risks for excess stock.
Writedowns are charged to expense in the period in which the
conditions giving rise to writedowns are first recognized. The
Company did
- 32 -
<PAGE> 33
not incur material writedowns in any of the periods presented
in the accompanying consolidated financial statements
(f) Property, Plant and Equipment
Depreciation is computed using the straight-line method based
on the following estimated useful lives:
ESTIMATED USEFUL
LIVES
Buildings and improvements 20-40 years
Machinery and equipment 3-12 years
Furniture and fixtures 8 years
Maintenance and repairs are expensed as incurred. Depreciation
expense was approximately $2,000,000, $2,400,000 and
$3,100,000 for the years ended December 28, 1996, December 27,
1997, and January 2, 1999, respectively.
(g) Goodwill
Goodwill represents the cost in excess of fair value of the
net assets of companies acquired in purchase transactions.
Goodwill is being amortized on a straight-line method over 40
years. Amortization charged to operations amounted to
$335,000, $489,000, and $561,000 for years ended December 28,
1996, December 27, 1997, and January 2, 1999, respectively. At
each balance sheet date, the Company evaluates the
realizability of goodwill based on expectations of
non-discounted cash flows and operating income for each
subsidiary having a material goodwill balance. Based on its
most recent analysis, the Company believes that no material
impairment of goodwill exists at January 2, 1999.
(h) Foreign Currency Translation
The assets and liabilities of the Company's foreign
subsidiaries are translated at year-end rates of exchange, and
statement of operations accounts are translated at weighted
average rates of exchange. The resulting translation
adjustments are excluded from net income and are accumulated
as a separate component of shareholders' equity. Foreign
currency transaction gains and losses are included in income
or expense in the period in which the transaction occurs.
Foreign currency transaction losses included in the
determination of results for the periods ended December 28,
1996, December 27, 1997 and January 2, 1999 were approximately
$222,000, $537,000, and $682,000, respectively.
(i) Sales Recognition
The Company recognizes sales upon the shipment of its products
net of applicable provisions for discounts and allowances.
Estimated future warranty obligations related to certain
products are provided by charges to operations in the period
in which the
- 33 -
<PAGE> 34
related revenue is recognized. The Company did not incur
material warranty costs in any of the periods presented in the
accompanying financial statements.
(j) Income Taxes
The Company accounts for its income taxes under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. SFAS No. 109 utilizes the
liability method, and deferred taxes are determined based on
the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities at
currently enacted tax laws and rates.
(k) Comprehensive Income
Effective January 1, 1998 the Company adopted the provisions
of SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for the reporting and display of
comprehensive income and its components in the financial
statements. Comprehensive income includes all non-owner
related changes in a company's equity including, among other
things, foreign currency translation adjustments and
unrealized gains and losses on marketable securities
classified as available-for-sale. Because cumulative
translation adjustments are considered a component of
permanently invested unremitted earnings of subsidiaries
outside of the United States, no taxes are provided on such
amounts.
(l) Recent Accounting Pronouncements
In March 1998, The American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires computer software
costs associated with internal use software to be expensed as
incurred until certain capitalization criteria are met. The
adoption of SOP 98-1 did not have a material impact on the
Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, Reporting on the
Costs of Start-up Activities. SOP 98-5 requires all costs
associated with pre-opening, pre-operating and organization
activities to be expensed as incurred. The Company will adopt
SOP 98-5 beginning January 3, 1999. The Company does not
believe that adoption of SOP 98-5 will have a material impact
on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying
hedge allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and
requires that a company must formally document, designate
- 34 -
<PAGE> 35
and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantially
modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998). The Company does not expect
that the adoption of this statement will have a material
impact on the Company's financial position or results of
operations.
(2) ORGANIZATION AND ACQUISITIONS
On October 1, 1996, the Company's wholly owned Canadian subsidiary
acquired 100% of the outstanding stock of Strongridge, Ltd. (a Canadian
company) for approximately $1,185,000. The acquisition has been
accounted for as a purchase, with the purchase price in excess of the
fair value of net assets acquired, $932,000, being amortized on a
straight-line basis over 40 years. Results of operations of
Strongridge, Ltd. are included in the accompanying consolidated
financial statements subsequent to October 1, 1996.
On January 27, 1997, the Company purchased certain assets, mainly
inventory and equipment, for $5,578,000 from Pacific Hoe. Purchase
price in excess of fair value of assets acquired, $3,831,000, is being
amortized on a straight-line basis over 40 years.
On August 1, 1997, the Company acquired 100% of the outstanding stock
of Armstrong Manufacturing Company ("Armstrong," an Oregon corporation)
for $9,000,000, which includes cash acquired of $875,000. The
acquisition has been accounted for as a purchase, with the purchase
price in excess of the fair value of net assets acquired, $3,601,000,
being amortized on a straight-line basis over 40 years. Results of
operations of Armstrong are included in the accompanying consolidated
financial statements subsequent to August 1, 1997.
On May 8, 1998, the Company acquired 100% of the outstanding stock of
W. Notting Limited ("Notting") for approximately $6,718,000, of which
$5,471,000 was paid in cash with additional financing from the
Company's revolving credit facility; the balance was in the form of a
term Promissory Note to the sellers bearing interest at 8.5% and
repayable April 30, 1999. The acquisition was accounted for as a
purchase and the purchase price has been allocated based on the fair
market value of the underlying assets and liabilities. The purchase
allocation is preliminary and subject to adjustment. Management's plans
for reorganizing certain activities at Notting were not finalized as of
January 2, 1999. The Company expects to finalize their plans by May 8,
1999 and, accordingly, expects that additional liabilities will be
recorded as adjustments to the final purchase price. Goodwill totaled
$1,993,000 on this acquisition and will be amortized on a straight-line
basis over 40 years. The consolidated financial statements include the
results of operations of Notting subsequent to the date of acquisition.
Proforma results for 1997 and 1998 have not been reported because they
would not be materially different from the financial statements
presented.
In July 1998, the Company issued $100 million of 10-1/4% Senior
Subordinated Notes due 2008 (the "Notes")(see Note 5). Proceeds from
the Notes were primarily used for the repayment of indebtedness, the
acquisition of treasury stock, and the buyout of all outstanding stock
options and warrants. The buyout of stock options resulted in a pre-tax
compensation charge of
- 35 -
<PAGE> 36
approximately $4,500,000 recorded in July 1998, included in selling,
general and administrative expense. The Company concurrently entered
into a new Senior Credit Facility with a commercial lender that
provides $30 million availability (see Note 5). All of the foregoing
transactions are herein referred to collectively as the
"Recapitalization."
Pursuant to the Recapitalization (i) the Company repurchased certain of
its outstanding equity securities for an aggregate purchase price of
$58.3 million (or $458.52 per share of Common Stock and equivalents)
(ii) the Company issued new shares of voting and non-voting Common
Stock to certain existing stockholders and new investors with aggregate
proceeds to the Company of $18.8 million (or $458.52 per share), (iii)
the Company issued certain warrants and options to certain existing
stockholders and new investors, and (iv) certain of the Company's
existing stockholders retained voting Common Stock with an aggregate
value (based on per share value of $458.52) of approximately $16.2
million.
(3) INVENTORIES
Inventories at December 27, 1997 and January 2, 1999 were as follows
(in thousands):
1997 1998
Raw materials $ 4,176 $ 5,323
Work-in-process 6,740 7,341
Finished goods 11,660 14,562
------- -------
Total inventories $22,576 $27,226
======= =======
U.S. inventories of $14,190,000 and $15,153,000 at December 27, 1997 and
January 2, 1999, respectively, were valued using the LIFO method. The
replacement cost of these inventories would have been higher by
approximately $704,000 and $527,000 in 1997 and 1998, respectively.
(4) RETIREMENT PLANS
The Company has a combined defined-contribution profit sharing and 401(k)
retirement plan covering all domestic salaried and certain hourly
employees. Contributions to the profit sharing plan are determined by the
Board of Directors. The profit sharing cost of this plan was
approximately $390,000, $399,000 and $436,000 for the fiscal years ended
December 28, 1996, December 27, 1997 and January 2, 1999, respectively.
In the 401(k) portion of the plan, the Company matches at a rate of 50%
on the first 6% of an employee's salary contribution. Company 401(k)
matching contributions amounted to approximately $283,000, $302,000 and
$337,000 for the fiscal years ended December 28, 1996, December 27, 1997
and January 2, 1999, respectively.
Notting also had a defined contribution 401(k) retirement plan in effect
during 1998. In this Plan the Company matches 100% for the first 4% of an
employee's salary contribution. The Company's 401(k) matching
contributions amounted to approximately $20,000 for the year ended
January 2, 1999.
Certain of the Company's hourly employees participate in a
union-sponsored, multiemployer defined-benefit retirement plan. The cost
of this plan was approximately $378,000, $392,000 and $418,000 for the
fiscal years ended December 28, 1996, December 27, 1997 and January 2,
1999, respectively. Contributions are based on wages earned and are paid
monthly to the pension
- 36 -
<PAGE> 37
administrator.
All other domestic hourly employees are covered by a defined-contribution
plan. Contributions are based on a union contract as a percentage of
wages earned and are paid annually. The cost of this plan was
approximately $140,000, $151,000 and $154,000 for the fiscal years ended
December 28, 1996, December 27, 1997 and January 2, 1999, respectively.
In connection with the acquisition of Armstrong, the Company acquired a
defined benefit plan to cover all employees of Armstrong. The defined
benefit plan was frozen as of December 27, 1997. The fair value of plan
assets exceeded the projected benefit obligation for services rendered as
of December 27, 1997. The plan was effectively terminated on April 30,
1998. On January 28, 1999 the plan received a favorable determination
from the Internal Revenue Service (IRS) and Pension Benefit Guarantee
Corporation (PBGC). All Participants of this plan were eligible to
participate in the Company's 401(k) retirement plan, effective January 1,
1998 and based on eligibility, as defined.
In addition to the defined benefit plan, employees of Armstrong are also
covered under a profit sharing plan. The plan merged with the Company's
401(k) retirement plan effective January 1, 1998. Contributions to the
Armstrong profit sharing plan are determined by the Board of Directors.
The profit sharing cost of this plan was approximately $260,000 in 1997.
Certain foreign employees are covered under defined-contribution plans.
Total costs for these plans amounted to approximately $136,000, $148,000
and $120,000 for the fiscal years ended December 28, 1996, December 27,
1997 and January 2, 1999, respectively.
Certain employees of one of Simonds' subsidiaries, Wespa
Metallsagenfabrik Simonds Industries Gmbh ("Wespa"), are covered by an
unfunded pension plan. In addition, certain employees of Notting are also
covered by a defined benefit plan.
The amount of accrued pension liability is included in the accompanying
consolidated balance sheets in other noncurrent liabilities. The
following table sets forth the funded status and the amount recognized
for the defined benefit plans of the foreign subsidiaries Wespa and
Notting, which was acquired May 5, 1998, in the Company's accompanying
consolidated balance sheets at December 28, 1996, December 27, 1997, and
January 2, 1999:
<TABLE>
<CAPTION>
PENSION
-------
BENEFITS
--------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $1,837,787 $1,569,744 $1,356,705
Obligations from an acquisition -- -- 1,823,976
Service Cost 22,513 17,953 70,564
Interest Cost 102,508 87,755 166,124
Actuarial loss -- -- 582,450
Effect of the change in foreign currency
exchange rates (308,817) (240,451) 87,452
Benefits paid (84,247) (78,296) (77,943)
---------- ---------- ----------
Benefit obligation at end of year 1,569,744 1,356,705 4,009,328
---------- ---------- ----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year -- -- --
Plan Assets from an acquisition -- -- 1,827,760
Actual return on plan assets -- -- 55,275
Plan participants' contribution -- -- 10,725
</TABLE>
- 37 -
<PAGE> 38
<TABLE>
<S> <C> <C> <C>
Effect of the change in foreign currency
exchange rates -- -- 16,490
---------- ---------- ----------
Fair value of plan assets at end of year -- -- 1,910,250
---------- ---------- ----------
Funded Status 1,569,744 1,356,705 2,099,078
Unrecognized net actuarial gain (loss) 165,307 193,472 (395,196)
---------- ---------- ----------
Accrued pension liability 1,735,051 1,550,177 1,703,882
========== ========== ==========
</TABLE>
The following table breaks out the components of net expense for the
years ending December 28, 1996, December 27, 1997 and January 2, 1999:
<TABLE>
<CAPTION>
PENSION
-------
BENEFITS
--------
1996 1997 1998
--------- --------- ---------
COMPONENTS OF NET PERIODIC PENSION EXPENSE
<S> <C> <C> <C>
Service Cost $ 22,513 $ 17,953 $ 70,564
Interest Cost 102,508 87,755 166,124
Expected return on plan assets -- -- (84,810)
Amortization of prior service cost -- -- (4,756)
Members contributions (479) (3,699) (10,725)
--------- --------- ---------
Net periodic benefit cost 124,542 102,009 136,397
========= ========= =========
</TABLE>
The primary assumptions used in determining related obligations of the
plans are shown below:
<TABLE>
<CAPTION>
PENSION
-------
BENEFITS
--------
1996 1997 1998
---- ---- --------
<S> <C> <C> <C>
Weighted-average assumptions
Discount rate 7.0% 6.5% 5.0-6.5%
Expected return on plan assets -- -- 6.5%
Rate of compensation increase 7.0% 6.5% 4.0-6.5%
</TABLE>
(5) DEBT
Debt consists of the following at December 27, 1997 and January 2, 1999 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Line of credit facility for German Subsidiary with First Union $ -- $ 2,362
National Bank up to approximately $3,300 interest payable
quarterly at FIBOR (3.0% at January 2, 1999) plus 1.25%
terminating on October 1, 2003.
Line of credit facilities for Notting with Banco Sabadell and -- 62
Banco Popular of Spain up to approximately $91, bearing interest
at rates from 6.35% to 10%, terminating on April 1 and May 17,
1999, respectively.
</TABLE>
- 38 -
<PAGE> 39
<TABLE>
<S> <C> <C>
Three term loans payable by Notting, payable to National -- 390
Westminster Bank on various dates between June 7, 1999 and August
1, 2000, bearing interest at varying rates.
Notes payable to Notting shareholders, issued May 8, 1998, -- 1,196
interest payable semi-annually at 8.5%, maturing April 30, 1999,
secured by a guarantee of the Company.
Senior Subordinated Notes issued July 8, 1998, and maturing July -- 100,000
1, 2008, interest payable semi-annually at 10.25%.
Revolving credit facility with Heller Financial, Inc. up to 12,945 --
$20,000, interest payable at either prime rate (8.5% at December
27, 1997) plus 1% or the LIBOR rate (5.97% at December 27, 1997)
plus 2.5%.
Term note payable to Heller Financial Inc., interest payable at 33,375 --
either prime rate (8.5% at December 27, 1997) plus 1% or the
LIBOR rate (5.97% at December 27, 1997) plus 2.5%, quarterly
principal and interest payments due through June 30, 2003 in
varying amounts.
Term loan payable to First National Bank of Boston by German 761 --
subsidiary, interest at FIBOR (3.7% at December 27, 1997) plus
2.5%, quarterly payments of $85 plus interest due through
December 31, 1999.
Subordinated note payable to Massachusetts Capital Resource 3,130 --
Company, interest at 12% and principal payments of $413
payable quarterly beginning on September 30, 2000 continuing
through June 30, 2002.
Line of credit facility for German Subsidiary with First National 1,481 --
Bank of Boston up to approximately $3,100, interest payable on
demand by the bank at FIBOR plus 1.5%.
------- --------
51,692 104,010
Less - current maturities 6,406 1,648
------- --------
$45,286 $102,362
======= ========
</TABLE>
In July 1998, the Company issued $100,000,000 of Senior Subordinated
Notes. The Notes are due in 2008, but may be redeemed on or after July 1,
2003 at specified premium prices. Proceeds from the Notes were primarily
used for the repayment of approximately $53.1 million of indebtedness,
the acquisition of treasury stock, and the buyout of all outstanding
stock options and warrants.
- 39 -
<PAGE> 40
The repayment of the indebtedness relating to the revolving credit
facility loan, term notes payable, line of credit facility for German
subsidiary, term loan payable by German subsidiary, and subordinated
notes payable resulted in an extraordinary charge of approximately
$500,000, net of tax benefit, recorded in July 1998 to write off
unamortized debt discount and deferred financing costs.
Financing costs relating to the issuance of the Notes was $4,190,000 and
is being amortized over the term of the debt.
The indenture governing the Notes restricts, among other things, the
incurrence of additional indebtedness, the payment of dividends and the
making of certain other restricted payments, mergers, consolidations and
sale of assets (all as defined in the Indenture).
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Notes will have the right to require the Company to
repurchase all or a portion of such holder's Notes at a price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of repurchase. However, the
Company's ability to repurchase the Notes upon a Change of Control may be
limited by the terms of then existing contractual obligations of the
Company and its subsidiaries. In addition, the occurrence of a Change of
Control will constitute an event of default under the Senior Credit
Facility. The Senior Credit Facility will prohibit the purchase of the
Notes unless and until such time as the indebtedness under the Senior
Credit Facility is paid in full. There can be no assurance that the
Company will have the financial resources to repay amounts due under the
Senior Credit Facility, or to repurchase or redeem the Notes. If the
Company fails to repurchase all of the Notes tendered for purchase upon
the occurrence of a Change of Control, such failure will constitute an
Event of Default under the Indenture.
The Company concurrently entered into a new Senior Credit Facility with a
commercial lender, that provides $30,000,000 availability, undrawn as of
January 2, 1999. Borrowings under the Senior Credit Facility are
available for permitted acquisitions and working capital, including
letters of credit.
The Senior Credit Facility is secured by first priority liens on all
tangible and intangible personal property and real property assets of the
Company and its subsidiaries.
The Senior Credit Facility expires in 2003, unless extended. The interest
rate per annum applicable to the Senior Credit Facility is, at the
Company's option, either LIBOR or the greater of the prime rate or the
overnight federal funds rate plus 0.50%, in each case plus 0.125% to
2.375% depending on the Company's financial leverage (the "Applicable
Margin"). The Company is required to pay certain fees in connection with
the Senior Credit Facility, including a commitment fee of 0.50% initially
and thereafter at a per annum rate equal to the Applicable Margin on the
unutilized portion of the facility.
As part of the Senior Credit Facility the Company is required to comply
with certain covenants. At January 2, 1999 the Company was required to
maintain a fixed charge coverage ratio of greater or equal to 1.0 to 1.0,
a net leverage ratio less than or equal to 5.5 to 1.0, and an interest
coverage ratio of greater than or equal to 1.5 to 1.0. At January 2, 1999
the Company was in compliance with all covenents.
- 40 -
<PAGE> 41
The following is a summary of maturities of all of the Company's
debt obligations due after January 2, 1999 (in thousands):
FISCAL YEAR AMOUNT
1999 $ 1,648
2000 --
2001 --
2002 --
2003 2,362
Thereafter 100,000
--------
$104,010
========
(6) COMMITMENTS AND CONTINGENCIES
(a) Commitments under Operating Leases
Certain of the Company's operations are conducted from facilities
rented under operating leases that expire over the next 10 years.
The Company also has operating leases covering certain office
equipment. Substantially all leases provide for the Company to pay
operating expenses in addition to basic rent. Rent expense was
approximately $676,000, $710,000, and $916,000 for the fiscal
years ended December 28, 1996, December 27, 1997, and January 2,
1999, respectively.
Future minimum annual rentals on noncancelable leases in effect at
January 2, 1999, which have initial or remaining terms of more
than one year, are as follows:
FISCAL YEAR AMOUNT
1999 $ 366,000
2000 240,000
2001 149,000
2002 118,000
2003 63,000
Thereafter 149,000
----------
$1,085,000
==========
(b) Litigation
The Company is party to a lawsuit that was litigated in China
involving a Chinese joint venture, established by the Company's
predecessor. Company management believes the lawsuit to be without
merit. In addition, the Company is a party to other lawsuits that
arose in the normal course of business. In the opinion of
management, the final resolutions of these lawsuits are not
expected to materially affect the financial condition or results
of operations of the Company.
In 1992, the Company's property in Ashburnham, Massachusetts, was
identified as having groundwater contamination. The Company has
been indemnified from such liability by prior owners and there is
currently $2.7 million held in escrow to cover such liability.
Based on current estimates, management believes that the amounts
held in escrow will be sufficient to
- 41 -
<PAGE> 42
cover these environmental liabilities, although there can be no
assurance that such amounts will be sufficient.
(c) Employment Contracts
The Company has employment and non-competition agreements with two
key officers. The employment agreements provide for an employment
term through May 26, 2000. Should employment be terminated by the
Company for any reason other than cause (as defined in the
employment agreement), the officers shall be entitled to receive
all salary and bonuses earned through the termination date, plus
the remaining base salary for the period, through the expiration
of the agreement. In addition, other key management have also
entered into employment agreements with the Company which provide
for one year's notice of termination from the Company, and 90 days
notice of termination from the employee, except in the case of
cause, in which event the agreement is terminable on 30 days
notice from the Company. The agreements provide that the officers'
base salary and bonuses will be determined by the Board. Each of
these agreements contains a covenant not to compete for two years
after termination of employment.
(7) INCOME TAXES
Components of income before income taxes are as follows (in thousands):
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, JANUARY 2,
1996 1997 1999
Domestic $5,254 $6,441 $ 852
Foreign 1,800 2,311 1,469
------ ------ ------
Total $7,054 $8,752 $2,321
====== ====== ======
The provision for income taxes consists of the following components for
the periods ended (in thousands):
YEAR ENDED
DECEMBER 28, 1996
-----------------
CURRENT DEFERRED TOTAL
Domestic-
Federal $ 889 $ 876 $1,765
State 129 273 402
Foreign 731 173 904
------ ------ ------
Total $1,749 $1,322 $3,071
====== ====== ======
- 42 -
<PAGE> 43
YEAR ENDED
DECEMBER 27, 1997
-----------------
CURRENT DEFERRED TOTAL
Domestic-
Federal $2,153 $ 57 $2,210
State 487 18 505
Foreign 853 183 1,036
------ ------ ------
Total $3,493 $ 258 $3,751
====== ====== ======
YEAR ENDED
JANUARY 2, 1999
---------------
CURRENT DEFERRED TOTAL
Domestic-
Federal $ 154 $ 186 $ 340
State 80 14 94
Foreign 472 49 521
------ ------ ------
Total $ 706 $ 249 $ 955
====== ====== ======
An income tax rate reconciliation of the difference between actual and
statutory effective tax rates is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
Provision for income
taxes at the federal
statutory rate $2,398 $2,976 $789
State taxes, net of
federal
tax effect 445 552 62
Goodwill amortization not
deductible
for tax purposes 156 166 141
Foreign taxes 70 89 6
Other, net 2 (32) (43)
------ ------- -----
Recorded provision $3,071 $3,751 $955
====== ====== ====
</TABLE>
Deferred taxes are recorded based on the differences between the
financial statement and tax bases of assets and liabilities. The tax
effect of the temporary differences that give rise to a significant
portion of deferred tax liabilities is as follows at December 27, 1997
and January 2, 1999 (in thousands):
- 43 -
<PAGE> 44
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Tax assets-
Reserves and accruals not yet deductible for tax
purposes $(1,383) $(1,541)
------- -------
Tax liabilities-
Property-basis differences 4,523 4,958
Inventory-basis differences 2,671 2,744
Other current assets-basis differences 863 865
Other 303 361
------- -------
Total tax liabilities 8,360 8,928
------- -------
Net tax liabilities $ 6,977 $ 7,387
======= =======
</TABLE>
Net deferred tax liabilities are included in the accompanying consolidated
balance sheets in deferred income taxes and currently deferred income taxes.
(8) STOCK OPTION PLANS
On July 25, 1995, the Board of Directors of the Company approved the
Stock Incentive Plan (the Plan) for key executives, management and
employees. The Company has reserved 9,568 shares of the Company's common
stock for issuance under the Plan. All stock options were exercised in
July 1998 in conjunction with the issuance of the Notes. The buyout of
stock options resulted in a pretax compensation charge of approximately
$4,500,000 recorded in July 1998.
In July 1998, the Company adopted the Amended and Restated 1998 Stock
Incentive Plan pursuant to which key employees (including officers who
are also directors of the Company) will be eligible for discretionary
awards of stock options at the discretion of the Board of Directors. The
terms and prices of options will be at the discretion of the Board. Key
officers were granted options in July 1998 to purchase 351.13 and 222.45
shares, respectively, of Common Stock at a price of $458.52 per share.
Stock option activity for the period December 30, 1995 through January 2,
1999 is summarized below:
<TABLE>
<CAPTION>
TOTAL SHARES WEIGHTED WEIGHTED
AVERAGE AVERAGE FAIR
EXERCISE PRICE VALUE OF
OPTIONS GRANTED
<S> <C> <C> <C>
Outstanding, December 30, 1995 36,904.19 $333.34
Granted 200.00 100.00 $ 56.84
---------- -------
Outstanding, December 28, 1996 37,104.19 $332.08
Granted 500.00 113.28 $ 59.06
Canceled (366.00) 100.00
Exercised (334.00) 100.00
---------- -------
</TABLE>
- 44 -
<PAGE> 45
<TABLE>
<S> <C> <C> <C>
Outstanding, December 27, 1997 36,904.19 $333.52
Canceled (200.00) 100.00
Purchased (36,704.19) 334.79
Granted 573.58 458.52 $109.37
---------- -------
Outstanding, January 2, 1999 573.58 $458.52
========== =======
Options exercisable 436.18 $458.52
========== =======
</TABLE>
The Company has elected to account for its stock-based compensation plans
under APB Opinion 25. No accounting recognition is given to stock options
with exercise prices equal to fair market value on the grant date until
the options are exercised, at which time the proceeds are credited to the
shareholders' equity accounts. For options with an exercise price less
than fair market value on the grant date, the amount that the fair market
value exceeds the exercise price is charged to compensation expense over
the period the options vest. Had compensation cost for these plans been
determined consistent with SFAS No. 123, the Company's net income would
not have been materially different from amounts reported.
The weighted average grant date fair value of options granted was $56.84,
$59.06 and $109.37 in 1996, 1997 and 1998, respectively. The fair value
of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions used:
<TABLE>
<CAPTION>
1996 & 1997 1998
---------------------------------
<S> <C> <C>
Risk-free interest rate 6.62% 5.45%
Expected life 10 years 5 years
Expected volatility 0% 0%
Expected dividend yield 0% 0%
</TABLE>
In addition, in July 1998 the Company issued warrants to certain
non-employee shareholders to purchase an aggregate of 4,377.81 share of
common stock at a price of $458.52 per share. Warrants for 2,180.93
shares are exercisable immediately. Warrants for 2,196.88 shares are
exercisable only if the Company is either sold or closes an initial
public offering of its common stock, and the warrant holders do not
receive certain minimum returns on their investment in the Company's
common stock.
(9) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments for interest and income taxes and certain noncash
transactions were as follows for the following periods (in thousands):
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 28, DECEMBER 27, JANUARY 2,
1996 1997 1999
<S> <C> <C> <C>
Interest paid $3,914 $4,429 $3,393
Income taxes paid 1,876 2,733 2,499
Liabilities assumed in acquisitions 2,830 7,879 5,273
</TABLE>
- 45 -
<PAGE> 46
(10) OPERATING AND GEOGRAPHIC SEGMENT INFORMATION AND CONCENTRATION OF CREDIT
RISK
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting operating segments of
business enterprise. The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their operating segments in financial statements. Operating segments are
components of an enterprise which are evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company's chief operating decision maker is the President,
Chief Executive Officer of the Company. The Company has identified its
reportable operating business segment as industrial cutting tools and related
machinery, based on how the business is strategically managed.
The Company's cutting tool business segment consists of metal (51% of 1998 net
sales), wood (42%), and paper (7%) cutting products. The cutting tool business
segment is managed as a single strategic unit which derives its revenues
primarily from sales to privately owned distributors throughout the world.
No single customer accounts for 10% or more of consolidated net sales. Foreign
net sales are attributed based on the location of the Company's subsidiary
responsible for the sale. The following information by geographic area is
presented for 1996, 1997 and 1998.
For the year ended December 28, 1996 (in thousands):
Transfers Income
Net Sales to between Before
Unaffiliated Geographic Income Long-Lived
Customers Areas Taxes Assets
------------ ---------- -------- -------
Geographic areas:
Domestic Operations $65,824 $ 11,133 $ 9,483 $20,197
Canadian Operations 10,520 206 625 677
German Operations 14,444 472 1,115 4,351
UK Operations 7,873 -- 475 432
------- -------- -------- -------
98,661 11,811 11,698 25,657
Unallocated -- (11,811) (258) --
Interest Expense -- -- (4,399) --
Interest Income -- -- 13 --
------- -------- -------- -------
Consolidated Totals $98,661 $ -- $ 7,054 $25,657
======= ======== ======== =======
For the year ended December 27, 1997 (in thousands):
- 46 -
<PAGE> 47
<TABLE>
<CAPTION>
Transfers Income
Net Sales to between Before
Unaffiliated Geographic Income Long-Lived
Customers Areas Taxes Assets
------------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Geographic areas:
Domestic Operations $ 75,903 $ 13,954 $ 11,538 $24,680
Canadian Operations 17,172 74 1,151 624
German Operations 13,831 474 1,155 4,037
UK Operations 7,276 83 391 315
-------- -------- -------- -------
114,182 14,585 14,235 29,656
Unallocated -- (14,585) (544) --
Interest Expense -- -- (4,963) --
Interest Income -- -- 24 --
-------- -------- -------- -------
Consolidated Totals $114,182 $ -- $ 8,752 $29,656
======== ======== ======== =======
</TABLE>
For the year ended January 2, 1999 (in thousands):
<TABLE>
<CAPTION>
Transfers Income
Net Sales to between Before
Unaffiliated Geographic Income Long-Lived
Customers Areas Taxes Assets
------------ ---------- -------- ----------
<S> <C> <C> <C> <C>
Geographic areas:
Domestic Operations $ 85,089 $ 14,858 $ 9,324 $27,435
Canadian Operations 16,038 325 304 629
German Operations 14,789 320 763 3,960
UK Operations 10,380 640 384 2,361
-------- -------- -------- -------
126,296 16,143 10,775 34,385
Unallocated -- (16,143) (554) --
Interest Expense -- -- (8,039) --
Interest Income -- -- 139 --
-------- -------- -------- -------
Consolidated Totals $126,296 $ -- $ 2,321 $34,385
======== ======== ======== =======
</TABLE>
(11) SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS, AND
NON-GUARANTORS
The Company's wholly-owned domestic subsidiaries guarantee, on a senior
subordinated basis, the Notes, jointly and severally. The guarantor subsidiaries
data below includes combining financial statements of Armstrong, which was
acquired in August 1997, and Simonds Holding Company. The non-guarantor
subsidiaries' data below includes combining financial statements of Wespa
(German Operations), Simonds Industries Ltd. and Simonds UK Holding Ltd. (UK
Operations), and Simonds Industries Inc. (Canadian Operations). Separate
financial statements of the guarantor subsidiaries have not been presented
because management believes that such financial statements are not material to
investors. In addition, the Senior Credit Facility is guaranteed on a full and
unconditional basis by all guarantors. The following data summarizes the
consolidating results of the Company on the equity method of accounting for the
following periods presented:
- 47 -
<PAGE> 48
SIMONDS INDUSTRIES INC.
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
As of December 27, 1997
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENTS ASSETS:
Cash ................................... $ 25 $ 188 $ 1,042 -- $ 1,255
Accounts receivable .................... 8,896 872 6,417 -- 16,185
Intercompany accounts receivable ....... 20,929 285 -- (21,214) --
Inventories:
Raw Materials......................... 3,099 310 767 -- 4,176
Work in progress ..................... 5,527 421 792 -- 6,740
Finished goods ....................... 5,564 576 5,825 (305) 11,660
Other current assets ................... 2,416 326 519 -- 3,261
-------- ------- ------- -------- -------
Total current assets ............... 46,456 2,978 15,362 (21,519) 43,277
-------- ------- ------- -------- -------
Net property, plant and equipment .......... 22,098 2,582 4,976 -- 29,656
OTHER ASSETS:
Investment in subsidiaries ............. 35,736 7,894 -- (43,630) --
Intercompany loan receivable ........... -- 17,050 -- (17,050) --
Other assets ........................... 17,130 4,367 913 -- 22,410
-------- ------- ------- -------- -------
Total assets ....................... $121,420 $34,871 $21,251 $(82,199) $95,343
======== ======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES ........................ $ 36,202 $ 888 $ 5,751 $(21,215) $21,626
LONG-TERM DEBT, net of current
Portion ................................ 44,863 -- 423 -- 45,286
INTERDIVISION LONG-TERM
DEBT ................................... 15,145 -- 1,906 (17,051) --
OTHER NONCURRENT
LIABILITIES ............................ 3,595 638 2,583 -- 6,816
SHAREHOLDERS' EQUITY ....................... 21,615 33,345 10,588 (43,933) 21,615
-------- ------- ------- -------- -------
Total liabilities and shareholders'
equity ............................... $121,420 $34,871 $21,251 $(82,199) $95,343
======== ======= ======= ======== =======
</TABLE>
SIMONDS INDUSTRIES INC.
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
As of January 2, 1999
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENTS ASSETS:
Cash ............................................. $ 8,602 $ 209 $ 487 -- $ 9,298
Accounts receivable .............................. 7,705 714 7,831 -- 16,250
Intercompany accounts receivable ................. 2,015 626 383 (3,024) --
Inventories:
Raw Materials .................................. 2,930 372 2,021 -- 5,323
Work in progress ............................... 5,614 289 1,438 -- 7,341
Finished goods ................................. 5,316 758 8,835 (347) 14,562
Other current assets ............................. 3,464 78 823 -- 4,365
-------- ------- ------- -------- ---------
Total current assets ......................... 35,646 3,046 21,818 (3,371) 57,139
-------- ------- ------- -------- ---------
Net property, plant and equipment .................... 23,896 2,527 7,962 -- 34,385
OTHER ASSETS:
Investment in subsidiaries ....................... 40,817 7,555 -- (48,372) --
Intercompany loan receivable ..................... -- 23,163 -- (23,163) --
Other assets ..................................... 19,903 4,108 2,704 -- 26,715
-------- ------- ------- -------- ---------
Total assets ................................. $120,262 $40,399 $32,484 $(74,906) $ 118,239
======== ======= ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES .................................. $ 14,301 $ 464 $ 9,600 $ (3,022) $ 21,343
LONG-TERM DEBT, net of current
portion .......................................... 100,000 -- 2,362 -- 102,362
INTERDIVISION LONG-TERM
DEBT ............................................. 15,145 -- 8,018 (23,163) --
OTHER NONCURRENT
LIABILITIES ...................................... 3,496 638 3,080 -- 7,214
SHAREHOLDERS' EQUITY (DEFICIT) ....................... (12,680) 39,297 9,424 (48,721) (12,680)
-------- ------- ------- -------- ---------
Total liabilities and shareholders'
equity (deficit) ............................... $120,262 $40,399 $32,484 $(74,906) $ 118,239
======== ======= ======= ======== =========
</TABLE>
- 48 -
<PAGE> 49
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Twelve Months ended December 28, 1996
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 76,957 -- $ 33,515 ($11,811) $98,661
Cost of goods sold 55,224 -- 26,318 (11,714) 69,828
-------- ------- -------- -------- -------
Gross profit 21,733 -- 7,197 (97) 28,833
Selling, general and administrative
expense 12,176 -- 4,959 -- 17,135
-------- ------- -------- -------- -------
Operating income 9,557 -- 2,238 (97) 11,698
Other expenses (income):
Interest expense 5,410 -- 474 (1,485) 4,399
Interest income -- (1,412) (73) 1,485 --
Other, net 237 35 (27) -- 245
Equity in earnings of subsidiaries (1,735) (960) -- 2,695 --
-------- ------- -------- -------- -------
Income before income taxes 5,645 2,337 1,864 (2,792) 7,054
Provision for income taxes 1,662 505 904 -- 3,071
-------- ------- -------- -------- -------
Net income $ 3,983 $ 1,832 $ 960 ($ 2,792) $ 3,983
======== ======= ======== ======== =======
</TABLE>
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Twelve Months ended December 27, 1997
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 86,060 $ 3,797 $ 38,910 ($14,585) $114,182
Cost of goods sold 60,635 2,401 30,298 (14,536) 78,798
-------- ------- -------- -------- --------
Gross profit 25,425 1,396 8,612 (49) 35,384
Selling, general and administrative 14,329 938 5,882 -- 21,149
expense
-------- ------- -------- -------- --------
Operating income 11,096 458 2,730 (49) 14,235
Other expenses (income):
Interest expense 6,140 205 739 (2,121) 4,963
Interest income -- (1,826) (295) 2,121 --
Other, net 362 139 19 -- 520
Equity in earnings of subsidiaries (2,402) (1,231) -- 3,633 --
-------- ------- -------- -------- --------
Income before income taxes 6,996 3,171 2,267 (3,682) 8,752
Provision for income taxes 1,995 720 1,036 -- 3,751
-------- ------- -------- -------- --------
Net income $ 5,001 $ 2,451 $ 1,231 ($ 3,682) $ 5,001
======== ======= ======== ======== ========
</TABLE>
- 49 -
<PAGE> 50
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Twelve Months ended January 2, 1999
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ 88,388 $ 9,532 $ 43,662 ($15,286) $ 126,296
Cost of goods sold 61,223 6,361 34,410 (15,244) 86,750
-------- ------- -------- -------- ---------
Gross profit 27,165 3,171 9,252 (42) 39,546
Selling, general and administrative
expense 18,667 2,504 7,600 -- 28,771
-------- ------- -------- -------- ---------
Operating income 8,498 667 1,652 (42) 10,775
Other expenses (income):
Interest expense 9,184 470 1,084 (2,699) 8,039
Interest income (120) (2,426) (292) 2,699 (139)
Other, net 636 126 (208) -- 554
Equity in earnings of subsidiaries (2,176) (657) -- 2,833 --
-------- ------- -------- -------- ---------
Income before income taxes 974 3,154 1,068 (2,875) 2,321
Provision (benefit) for income taxes (392) 936 411 -- 955
-------- ------- -------- -------- ---------
Income before
extraordinary item 1,366 2,218 657 (2,875) 1,366
Extraordinary item-
Write-off of deferred financing cost related
to refinanced indebtedness, net of tax
benefit of $374 (529) -- -- -- (529)
-------- ------- -------- -------- ---------
Net income $ 837 $ 2,218 $ 657 ($ 2,875) $ 837
======== ======= ======== ======== =========
</TABLE>
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Twelve Months ended December 28, 1996
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash (used in) provided by operating
activities: $ 2,227 $ 1,204 ($1,540) $ 4,774 $ 6,665
Cash flows from investing activities:
Proceeds from asset sales 20 -- 15 -- 35
Purchase of equipment (3,168) -- (470) -- (3,638)
Acquisitions (1,185) (1,185) (1,185) 2,370 (1,185)
------- ------- ------- ------- -------
Net cash (used in) investing
activities (4,333) (1,185) (1,640) 2,370 (4,788)
Cash flows from financing activities:
Change in overdraft 266 -- 53 -- 319
Net proceeds from revolving credit
facility -- -- (197) -- (197)
Proceeds from issuance of long-term
debt-net of issuance cost
Principal payments of long-term debt 865 -- 611 (4,006) (2,530)
Intercompany loans -- (2,125) 2,125 -- --
Issuance of common stock -- 3,100 37 (3,137) --
Purchase of treasury stock -- -- -- -- --
Stock Redemption -- -- -- -- --
Dividends (paid) received 992 (992) -- -- --
Other (118) -- -- -- (118)
------- ------- ------- ------- -------
Net cash (used in)/provided by
financing activities 2,005 (17) 2,629 (7,143) (2,526)
Effect of Foreign Exchange -- -- 361 (1) 360
------- ------- ------- ------- -------
Increase (decrease) in cash (101) 2 (190) -- (289)
Cash at beginning of the period 799 1 744 -- 1,544
------- ------- ------- ------- -------
Cash at end of the period $ 698 $ 3 $ 554 -- $ 1,255
======= ======= ======= ======= =======
</TABLE>
- 50 -
<PAGE> 51
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Twelve Months ended December 27, 1997
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities: $ 7,385 $ 1,644 $ 3,342 $ 675 $ 13,046
Cash flows from investing activities:
Proceeds from asset sales 65 37 4 1 107
Purchase of equipment (3,074) (18) (616) -- (3,708)
Acquisitions (13,703) (8,125) -- 8,125 (13,703)
-------- ------- ------- ------- --------
Net cash (used in) investing
activities (16,712) (8,106) (612) 8,126 (17,304)
Cash flows from financing activities:
Change in overdraft (488) -- (51) -- (539)
Net proceeds from revolving credit facility -- (536) (909) -- (1,445)
Proceeds from issuance of long-term debt-
net of issuance cost 7,700 -- -- -- 7,700
Principal payments of long-term debt (722) -- (733) 143 (1,312)
Intercompany loans -- 452 (452) -- --
Issuance of common stock 33 9,000 (1) (8,999) 33
Purchase of treasury stock
Stock Redemption
Dividends (paid) received 2,269 (2,269) -- -- --
Other (138) -- -- -- (138)
-------- ------- ------- ------- --------
Net cash (used in)/provided by
financing activities 8,654 6,647 (2,146) (8,856) 4,299
Effect of Foreign Exchange -- -- (96) 55 (41)
-------- ------- ------- ------- --------
Increase (decrease) in cash (673) 185 488 -- --
Cash at beginning of the period 698 3 554 -- 1,255
-------- ------- ------- ------- --------
Cash at end of the period $ 25 $ 188 $ 1,042 -- $ 1,255
======== ======= ======= ======= ========
</TABLE>
- 51 -
<PAGE> 52
SIMONDS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Twelve Months ended January 2, 1999
-----------------------------------------------------------------
Parent Guarantors Non-Guarantors Eliminations Consolidated
-------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities: $ 3,726 $ 1,569 $ 2,622 $ 1,196 $ 9,113
Cash flows from investing activities:
Proceeds from asset sales 4 -- 68 -- 72
Purchase of equipment (3,899) (168) (281) -- (4,348)
Acquisitions (5,471) (5,471) (5,471) 10,942 (5,471)
-------- ------- ------- -------- --------
Net cash (used in) investing activities (9,366) (5,639) (5,684) 10,942 (9,747)
Cash flows from financing activities:
Change in overdraft (246) -- 146 -- (100)
Net proceeds from revolving credit facility 7,065 -- (3,276) -- 3,789
Proceeds from issuance of long-term debt-
net of issuance cost 95,420 -- 2,643 -- 98,063
Principal payments of long-term debt (56,684) -- (1,067) -- (57,751)
Intercompany loans -- (641) 6,112 (5,471) --
Issuance of common stock 18,833 6,722 -- (6,722) 18,833
Purchase of treasury stock (65) -- -- -- (65)
Stock Redemption (53,791) -- -- -- (53,791)
Dividends (paid) received 3,685 (1,990) (1,695) -- --
-------- ------- ------- -------- --------
Net cash provided by
financing activities 14,217 4,091 2,863 (12,193) 8,978
Effect of Foreign Exchange -- -- (356) 55 (301)
-------- ------- ------- -------- --------
Increase (decrease) in cash 8,577 21 (555) -- 8,043
Cash at beginning of the period 25 188 1,042 -- 1,255
-------- ------- ------- -------- --------
Cash at end of the period $ 8,602 $ 209 $ 487 -- $ 9,298
======== ======= ======= ======== ========
</TABLE>
(12) FOREIGN EXCHANGE CONTRACTS
In order to reduce the impact of changes in foreign exchange rates on
consolidated results of operations and future cash flows, the Company entered
into foreign currency forward contracts with a major bank effective from January
2, 1999 to December 31, 1999 to sell approximately $5.5 million denominated in
foreign currency. The majority of these contracts relate to intercompany
accounts receivable, with specified minimum amounts of foreign currency to be
sold on a monthly basis during 1999. These contracts qualify for hedge
accounting. However, a portion of the contracts do not qualify for hedge
accounting and will be marked to market at the end of each accounting period
with a resulting gain or loss. These financial instruments are not held for
trading purposes. They were entered into to manage and reduce the impact of
change in foreign currency rates. The fair value of the contracts at January 2,
1999 was immaterial.
(13) SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(a) The following summarizes unaudited quarterly financial data for the
years ended December 27, 1997 and January 2, 1999 (in thousands):
1997
For the Quarters Ended
-------------------------------------------
March 29 June 28 Sept. 27 Dec. 27
-------- ------- -------- -------
Net Sales $27,174 $28,202 $27,950 $30,856
Gross Profit 8,291 8,838 8,668 9,587
Net Income 1,151 1,497 1,068 1,285
- 52 -
<PAGE> 53
1998
For the Quarters Ended
----------------------------------------------
March 28 June 27 Oct. 3 Jan. 2, 1999
-------- ------- ------ ------------
Net Sales $30,546 $32,095 $33,170 $30,485
Gross Profit 9,794 10,533 10,604 8,615
Net Income (loss) 1,660 1,654 (2,527) 50
- 53 -
<PAGE> 54
SCHEDULE II
SIMONDS INDUSTRIES INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED
DECEMBER 28, 1996, DECEMBER 27, 1997, AND JANUARY 2, 1999
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONS CURRENCY
BEGINNING WRITE- FROM TRANSLATION ENDING
BALANCE PROVISIONS OFFS (1) ACQUISITIONS ADJUSTMENTS BALANCE
--------------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS, CASH DISCOUNTS AND
CREDIT MEMOS
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 28, 1996 $748 $ 849 $ (832) $ 25 $ 8 $798
Year Ended December 27, 1997 $798 $1,156 $(1,160) $ 25 $(13) $806
Year Ended January 2, 1999 $806 $1,155 $(1,089) $126 $ (6) $992
</TABLE>
(1) Write-Offs includes credit memos, cash discounts and write-offs.
- 54 -
<PAGE> 55
SIMONDS INDUSTRIES INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Shareholders and Board of Directors of Simonds Industries Inc.:
We have audited the accompanying consolidated balance sheets of Simonds
Industries Inc. (a Delaware corporation) and subsidiaries listed in Item 14 (a)
of this Form 10-K as of January 2, 1999 and December 27, 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended January 2, 1999. These consolidated
financial statements and the schedule referred to below 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 audits 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 financial statements referred to above present fairly, in
all material respects, the financial position of Simonds Industries Inc. and
subsidiaries as of January 2, 1999 and December 27, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 2, 1999 in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14 (a) is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 26, 1999
- 55 -
<PAGE> 56
(b) Reports on Form 8-K.
None
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------
2.1 Stockholder Agreement dated as of July 7, 1998 among the Company and
its stockholders*
2.2 Stock Purchase Agreement dated August 1, 1997 among Simonds Holding
Company, Inc., Armstrong Manufacturing Company and Frederic B.
Andrianoff*
2.3 Share Purchase Agreement dated May 7, 1998 among Time Eclipse Limited,
SI Holding Corporation and the shareholders of W. Notting Limited*
3.1 Amended and Restated Certificate of Incorporation of Simonds*
3.2 By-laws of Simonds*
3.3 Certificate of Incorporation of Armstrong Manufacturing Company*
4.1 Indenture dated as of July 7, 1998 among the Company, the Guarantors
and the Trustee*
4.3 Credit Agreement dated as of July 2, 1998 among the Company, certain of
its Subsidiaries and First Union National Bank*
4.4 Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has
not filed herewith any instrument with respect to long-term debt which
does not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant hereby agrees to
furnish a copy of any such instrument to the Securities and Exchange
Commission upon request.
4.5 Promissory Notes of Simonds UK Holdings Ltd.*
10.1 Employment and Non-Competition Agreement between the Company and Ross
George dated May 26, 1995, as amended July 7, 1998*
10.2 Employment and Non-Competition Agreement between the Company and Joseph
Sylvia dated May 26, 1995, as amended July 7, 1998*
10.3 Employment agreement between the Company and Robert Deedrick dated June
1, 1993*
10.4 Employment agreement between the Company and James Palmer dated March
31, 1995*
10.5 Employment agreement between the Company and Roland Richard dated May
7, 1992*
10.6 Employment agreement dated November 14, 1995 between the Company and
F.A. DeVilling, III*
10.7 Employment Agreement dated March 31, 1998 between the Company and
Ronald Owens*
10.8 Simonds Industries Inc. Amended and Restated 1998 Stock Incentive Plan*
10.9 Escrow Agreement dated May 26 1995 among SI Holding Corporation, the
Company, Charles W. Doulton, the Massachusetts Capital Resource
Company, the shareholders of Simonds Industries, Inc., the option
holders of the Company and Fleet Bank of Massachusetts, N.A.*
10.10 Labor Agreement dated May 5, 1998 between the Company and Local
No. 7896 of the United Steel Workers of America*
- 56 -
<PAGE> 57
10.11 Agreement dated April 6, 1998 between the Company and Local 2737-16 of
the United Steelworkers of America, AFL-CIO*
10.12 Agreement dated April 6, 1998 between the Company and Local 2737-17 of
the United Steelworkers of America, AFL-CIO*
10.13 Employment Agreement between the Company and Harry Rogers dated
February 23, 1994*
12.1 Statement regarding computation of ratios
21.1 Subsidiaries
27.1 Financial Data Schedule
- ---------------
* The exhibits of the Company's Registration Statement on Form S-4, File No.
333-62795, are hereby incorporated by reference.
- 57 -
<PAGE> 58
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, on the ___ day of
March, 1999.
Simonds Industries Inc.
By: /s/ Ross George
-----------------------------
Ross George
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the ___day of March, 1999.
SIGNATURES TITLE
---------- -----
/s/ Ross George President, Chief Executive Officer and Director
- ------------------------ (principal executive officer)
Ross George
/s/ Joseph Sylvia Executive Vice President, Chief Financial Officer and
- ------------------------ Director (principal financial and accounting officer)
Joseph Sylvia
/s/ Habib Gorgi Director
- ------------------------
Habib Gorgi
/s/ Bernard Buonanno III Director
- ------------------------
Bernard Buonanno III
- 58 -
<PAGE> 1
EXHIBIT 12.1
SIMONDS INDUSTRIES INC. AND CONSOLIDATED SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amount in thousands, except ratios)
<TABLE>
<CAPTION>
----------------- ----------------------------------------
PREDECESSOR COMPANY
----------------- ----------------------------------------
Year 5 Months 7 Months YEAR ENDED
Ended Ended Ended ----------------------------
1994 5/26/95 12/30/95 1996 1997 1998
------ -------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income from continuing
operations 8,528 (3,602) 4,731 7,054 8,752 2,321
Add fixed charges:
Interest on indebtedness 1,623 650 2,880 4,399 4,963 7,900
Portion of rents representative
of the interest factor 204 92 113 203 213 275
------ ------ ----- ------ ------ ------
Income as adjusted 10,355 (2,860) 7,724 11,656 13,928 10,496
Fixed charges:
Interest on indebtedness 1,623 650 2,880 4,399 4,963 7,900
Capitalized interest
Portion of rents representative
of the interest factor 204 92 113 203 213 275
------ ------ ----- ------ ------ ------
Total Fixed Charges 1,827 742 2,993 4,602 5,176 8,175
Ratio of earning to fixed charges 5.7 2.6 2.5 2.7 1.3
====== ====== ===== ====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 21.1
Simonds Industries Inc. [the "Company]
DE Corporation: DOI 05/16/95; FYE: 12/31
Address: 135 Intervale Road, P.O. Box 500, Fitchburg,
Worcester County, Massachusetts 01420
SUBSIDIARIES
1. Simonds Industries FSC, Inc.
US Virgin Islands Corporation: DOI 10/3/88; FYE: 12/31
Address: c/o Chase Trade, Inc.
Chase Financial Center
11A & 11B Curacao Gade
P.O. Box 6220, St. Thomas, VI 00804
2. Simonds Industries Limited
UK Corporation: DOI 3/18/89; FYE: 12/31; Reg. No.: 2232753
Address: Unit 3 Motorway Industrial Estate
Sheffield ENG S9 1DH
3. Simonds Industries Inc.
Ontario Corporation: DOI 3/22/88; FYE: 12/31
Reg. No.: 765648 (Ontario); A-27480 (BC, 5/24/88)
Address: 106 East Drive
Brampton, Ontario L6W 324
4. Wespa Metallsagenfabrik Simonds Industries GmbH
German Corporation: DOI 11/00/92; FYE 12/31
Address: Postfach 1165
34282 Spangenberg, Germany
5. Strongridge Limited
Ontario Corporation: DOI 01/01/95; FYE 12/31
Reg. No.: 1111309
Address: 106 East Drive
Brampton, Ontario L6W 3Z4
6. Armstrong Manufacturing Company
Oregon Corporation: DOI 09/23/08; FYE 12/31
Address: 2135 NW 21st Avenue
Portland, Oregon 97208
7. Simonds UK Holding Limited
UK Corporation: DOI 1/18/98, FYE: 12/31; Reg. No.: 3484408
Address: Unit 3 Motorway Industrial Estate
Sheffield ENG S9 1DH
8. W. Notting Limited
UK Corporation: DOI 5/23/21; FYE: 12/31; Reg. No.: 174839
Address: 67-75 Garman Road, Tottenham
London ENG N17 OUE
W. Notting Limited ("Parent") - Subsidiaries
A. Notting Sales Limited (England, doi 6/4/68)
Registration No. 933186
67-75 Garman Road, Tottenham, London N17 OUE
B. Notting Canada Inc. (Ontario, doi 3/9/77)
Registration No. 354068
C. Notting America, Inc. (New York, doi 3/26/81)
D. Sevitroquel S.A. (Spain)
E. Notting de Mexico S.A. (Mexico)
F. ComputerCarton Limited (Guernsey)
This is a revised subsidiary list effective as of February 4, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-27-1997
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 9,298
<SECURITIES> 0
<RECEIVABLES> 16,250
<ALLOWANCES> 992
<INVENTORY> 27,226
<CURRENT-ASSETS> 57,139
<PP&E> 42,755
<DEPRECIATION> 8,370
<TOTAL-ASSETS> 118,239
<CURRENT-LIABILITIES> 21,343
<BONDS> 102,362
0
0
<COMMON> 1
<OTHER-SE> (12,680)
<TOTAL-LIABILITY-AND-EQUITY> 118,239
<SALES> 126,296
<TOTAL-REVENUES> 126,296
<CGS> 86,750
<TOTAL-COSTS> 86,750
<OTHER-EXPENSES> 28,771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,900
<INCOME-PRETAX> 2,321
<INCOME-TAX> 955
<INCOME-CONTINUING> 1,366
<DISCONTINUED> 0
<EXTRAORDINARY> (529)
<CHANGES> 0
<NET-INCOME> 837
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
