INDEX
KETEMA, INC.
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Statement of Operations - Three months ended
May 31, 1994 and 1993 3
Condensed Consolidated Balance Sheets - May 31, 1994
and February 28, 1994 4
Condensed Consolidated Statement of Cash Flows -
Three months ended May 31, 1994 and 1993 5
Notes to consolidated financial statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
Exhibit 11 - Computation of Earnings Per Common Share 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KETEMA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended
May 31, 1993(a)
Net sales $ 30,956 $ 33,477
Expenses:
Cost of sales, excluding depreciation 23,708 26,106
Selling, general and administrative 5,828 5,179
Depreciation 1,289 1,172
30,825 32,457
Operating income 131 1,020
Other income (expense):
Interest income 666 620
Interest expense (1,622) (1,623)
Other, net (7) 106
Income (loss) from continuing operations before
income taxes (832) 123
Benefit from (provision for) income taxes 266 (216)
Income (loss) from continuing operations (566) (93)
Discontinued operations, net of income taxes - (250)
Net income (loss) $ (566) $ (343)
Income (loss) per share(b)
Continuing operations $ (0.16) $ (0.03)
Discontinued operations - $ (0.06)
Net income (loss) $ (0.16) $ (0.09)
Average common shares outstanding 3,490 3,683
(a) Restated to reflect the disposition of Aluminum Extrusion Division
(Note 5).
(b) The fully diluted earnings per share are not shown since they are
antidilutive.
See accompanying notes.
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KETEMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except per share data)
May 31, February 28,
ASSETS 1994 1994
Current assets:
Cash and cash equivalents $ 921 $ 961
Marketable securities 59,127 59,719
Receivables 20,973 20,445
Inventories 12,456 11,322
Deferred income taxes 3,394 2,835
Net assets of discontinued operations 676 992
Prepaid expenses and other current assets 3,226 4,311
Total current assets 100,773 100,585
Property, plant and equipment, at cost 73,536 73,097
Less accumulated depreciation (48,733) (47,789)
Net property, plant and equipment 24,803 25,308
Intangibles, net of amortization 13,137 13,396
Deferred income taxes - 173
Other assets 8,143 9,511
$ 146,856 $ 148,973
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,095 $ 7,200
Accrued employee compensation and benefits 5,314 5,671
Other accrued liabilities 14,854 15,692
Income taxes payable - 309
Current maturities of long-term debt 4,505 4,505
Total current liabilities 31,768 33,377
Long-term debt 55,692 55,692
Deferred income taxes 112 -
Other long-term liabilities 2,969 2,923
Stockholders' equity 56,315 56,981
$ 146,856 $ 148,973
See accompanying notes.
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<TABLE>
KETEMA, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended May31,
1994 1993(a)
<S> <C> <C>
Cash flow from operating activities:
Income (loss) from continuing operations $ (566) $ (93)
Adjustments to reconcile income (loss) from continuing opera-
tions to net cash provided by (used in) operating activities:
Depreciation and amortization 1,649 1,535
Deferred income taxes and credits (274) 161
Changes in working capital (2,186) (9,492)
Investing activities included in income (loss) from
continuing operations (407) 107
Redemption of cash surrender values on officers'
life insurance 1,574 -
Other (259) 117
Net cash provided by (used in) continuing operations (469) (7,665)
Loss from discontinued operations - (250)
Change in net operating assets of discontinued operations
and other adjustments 316 (354)
Net cash provided by (used in) operating activities (153) (8,269)
Cash flow from investing activities:
Capital expenditures - continued operations (855) (1,541)
Capital expenditures - discontinued operations - (173)
Sale (purchase) of marketable securities 985 4,476
Proceeds from sale of other assets 85 102
Other (102) (16)
Net cash provided by (used in) investing activities 113 2,848
Cash flow from financing activities:
Principal repayments of long-term debt - (15)
Increase (decrease) in cash and cash equivalents (40) (5,436)
Cash and cash equivalents, beginning of period 961 6,303
Cash and cash equivalents, end of period $ 921 $ 867
(a) Restated to reflect the disposition of Aluminum Extrusion Division
(Note 5).
See accompanying notes.
</TABLE>
<PAGE>
KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements
The accompanying consolidated financial statements are unaudited, but the
Company believes that they include all adjustments necessary for fair
presentation of the consolidated financial position of the Company at May 31,
1994, the consolidated results of operations for the three-month periods
ended May 31, 1994 and 1993 and the consolidated cash flows for the three-
month periods ended May 31, 1994 and 1993.
Quarterly results of operations are not necessarily indicative of results
for the full year. The consolidated financial statements, which are
unaudited and contain condensed disclosures, should be read in conjunction
with the consolidated financial statements and related notes in the Company's
latest audited financial statements.
Note 2 - Earnings Per Share
Primary earnings per share is determined by dividing income (loss) by the
weighted average number of common shares outstanding during the period, after
adjusting for common stock equivalents arising from stock incentives, if
dilutive.
Earnings per share assuming full dilution is not presented since there is
no dilutive effect on earnings per share amounts assuming the conversion of
the Company's outstanding debentures into additional shares of common stock
and the exercise of outstanding stock incentives.
Note 3 - Income Taxes
The differences between the Company's federal income tax rate of 34% and
the Company's effective tax rate attributable to continuing operations were as
follows:
(In thousands)
Three months ended May 31,
1994 1993
Statutory federal tax benefit (provision) $ 283 $ (42)
State income taxes, net of federal income tax benefit 37 (33)
Valuation allowance for deferred tax assets - (141)
Other (54) -
Benefit from (provision for) income taxes $ 266 $ (216)
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KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Components of the Company's deferred tax assets and liabilities as of May
31, 1994 and February 28, 1994 are as follows:
(In thousands)
May 31, February 28,
1994 1994
Total deferred tax assets $ 7,747 $ 7,899
Valuation allowance for deferred tax assets (2,189) (2,189)
5,558 5,710
Total deferred tax liabilities (2,276) (2,702)
Net deferred tax assets $ 3,282 $ 3,008
In addition, income tax refund claims receivable of $1,694,000 included
in prepaids and other current assets at February 28, 1994 were collected in
March, 1994.
Note 4 - Inventories
Inventories are principally accounted for using the last-in, first-out
(LIFO) cost method. If the first-in, first-out (FIFO) method of accounting
for inventories had been used by the Company, inventories would have been
higher than that reported at May 31, 1994 and February 28, 1994 by $9,714,000.
During the three-month periods ended May 31, 1994 and 1993, certain
inventories were reduced resulting in the liquidation of LIFO inventory
layers carried at lower costs prevailing in prior years as compared with the
cost of purchases in the current periods, the effect of which decreased cost
of goods sold by approximately $85,000 and $207,000 for the three-month
periods ended May 31, 1994 and 1993, respectively.
The estimated components of inventory stated at lower of LIFO cost or
market are:
(In thousands)
May 31, February 28,
1994 1994
Raw materials $ 1,803 $ 1,831
Work in process 4,953 4,335
Finished goods 5,700 5,156
$ 12,456 $ 11,322
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KETEMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Progress payments (principally related to long-term contracts and
programs) of $945 at May 31, 1994 ($661 at February 28, 1994) have been
netted against inventories.
Note 5 - Discontinued Operations
Effective August 31, 1993, the Company sold its Aluminum Extrusion
Division for $10,978,000 which consisted of cash and short term notes of
$8,878,000 (all notes were fully collected by December 30, 1993) and a
non-cash item of 190,900 shares of Ketema, Inc. common stock which had a
market value of $2,100,000. In addition, the Company is entitled to
a contractually defined percentage of profits, if any, for the period from
September 1, 1993 through December 31, 1996, from the combined aluminum
extrusion operations consisting of the divested operation and two of the
purchaser's operations. No gain or loss on the sale was recognized since
the sales price, net of estimated divestiture expenditures, approximated the
division's book value. The remaining assets of the Aluminum Extrusion
Division at May 31, 1994 and February 28, 1994 of $676,000 and $992,000,
respectively, consist primarily of accounts receivable and some fixed assets
to be disposed of separately. The net assets and operating results of the
Aluminum Extrusion Division have been classified as discontinued operations
for all periods presented in the consolidated financial statements. Operating
results from discontinued operations for the three months ended May 31, 1993
consisted of sales of $8,930,000 and an operating loss before tax of $417,000.
Note 6 - Marketable Securities
During the first quarter of fiscal 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" effective
for fiscal years beginning after December 15,1993.
The effects of the adoption of FAS 115 were not material to the financial
position or results of operations of the Company.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
First Quarter of Fiscal 1995 Compared to the First Quarter of Fiscal 1994
The following comments compare the first quarter of fiscal 1995 to the same
period of fiscal 1994. Sales for 1995 were $31.0 million compared to $33.5
million in 1994, a decrease of $2.5 million or 7.5%. Operating income for
1995 was $0.1 million which was $0.9 million less than 1994. The changes in
sales and operating income by business group are shown in the following table:
<TABLE>
COMPARATIVE SALES AND OPERATING INCOME
<CAPTION>
(Dollars In Millions)
Sales Operating Income
Fiscal Fiscal Increase Fiscal Fiscal Increase
Group 1995 1994 (Decr.) 1995 1994 (Decr.)
<S> <C> <C> <C> <C> <C> <C>
Process $ 14.8 $ 14.0 $ 0.8 $ 1.2 $ 1.7 $ (0.5)
Aerospace 9.5 12.7 (3.2) 0.0 0.7 (0.7)
Industrial 6.4 6.8 (0.4) 0.8 0.8 0.0
American Innovations, Inc. 0.3 0.0 0.3 (0.2) (0.4) 0.2
Corporate Expenses NA NA NA (1.7) (1.8) 0.1
Totals $ 31.0 $ 33.5 $ (2.5) $ 0.1 $ 1.0 $ (0.9)
</TABLE>
Sales of the Process Group increased $0.8 million or 5.7% to $14.8 million,
compared to the prior year. Increases in shipments of heat exchangers and
miscellaneous process equipment of $0.6 million each, were partially offset
by a decrease in shipments of flow measurement devices of $0.4 million.
Operating profit for the Process Group was $1.2 million or a decrease $0.5
million compared to 1994. The increased shipments and somewhat higher margins
of heat exchangers favorably impacted operating profits by $0.2 million.
This gain, however, was more than offset by decreased operating profits of
$0.3 million resulting from reduced shipments and increased material and
marketing costs related to flow measurement devices and an operating profit
reduction of $0.4 million related to miscellaneous process equipment, despite
an increase in sales, caused by increased marketing costs and reduced margins
related to the introduction of new products in the filtration market.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont.)
First Quarter of Fiscal 1995 Compared to the First Quarter of Fiscal 1994
(cont.)
The Aerospace Group recorded sales of $9.5 million in 1995 a decrease of $3.2
million or 25.2% compared to 1994. This decrease was caused mainly by
ongoing delays and extensions of aerospace customer requirements related to
defense industry cutbacks and softness in the commercial airline business
which are expected to continue for some time in the future. In November,
1993, the Company received verbal notification from General Electric
Company ("G.E.") that it intended to transfer, over a several year period,
certain of its business to other suppliers because the Company would not
honor G.E.'s demand for additional substantial price reductions. G.E.
accounted for approximately 28% and 21% of the Company's net sales for
fiscal 1994 and the first quarter of fiscal 1995, respectively. While this
situation continues to be a concern for the Company, no significant transfers
have yet been made and the Company has received new orders from G.E. since
the notification. The operating profit of this group decreased $0.7 million
compared to 1994. The decrease in sales volume was the major cause of
the operating profit decrease. However, $0.2 million of the decrease resulted
from a lesser amount of profits related to LIFO inventory liquidation than
in the prior year.
The Industrial Group recorded sales of $6.4 million in 1995, a decrease of
$0.4 million or 5.9%. Shipments of extruded monofilaments decreased $0.9
million due primarily to the loss of a large specialty monofilament customer
in the fourth quarter of fiscal 1994. Recently, however, the Company was
notified verbally by this customer that it would resume business with the
Company beginning in July as the customer finds the Company's product to be of
higher quality. It is not certain at this time what the customer's
requirements will be in fiscal 1995. Sales of thermistors and die castings
increased $0.1 million and $0.5 million, respectively. Despite the
overall reduction in sales, the operating income of the Industrial Group did
not change over the prior year. Increased shipments of thermistors and die
castings resulted in increases in operating income of $0.1 million and $0.2
million, respectively, offsetting the decreased operating income that was
caused by the reduced sales of extruded monofilaments.
American Innovations, Inc., which had no sales last year, reported sales of
$0.3 million in 1995. Our efforts to penetrate this market continue to be
frustrated by the lengthy buying cycle in the utility industry. Operating
losses, consisting primarily of marketing and engineering costs, were
$0.2 million in 1995 compared to $0.4 million in 1994.
Corporate expenses were $1.7 million or $0.1 million less than 1994 despite
the recognition in the current period of $0.4 million of fees in connection
with the pending merger proposal. Reductions in expenses resulted principally
from reductions in staff, the discontinuance of the Supplemental Senior
Executive Death Benefit Program, and decreased legal and consulting fees.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont.)
First Quarter of Fiscal 1995 Compared to the First Quarter of Fiscal 1994
(cont.)
Other expense, net of other income increased $0.1 million compared to 1994
chiefly as a result of fewer gains on sales of unused capital equipment in
1995. The Company continues to experience a negative interest spread on its
nonprepayable (until October 1996) debt position compared to the low interest
earned on its almost equal cash and marketable securities position.
Included in the 1994 tax provision was a valuation allowance for certain
deferred tax assets related to 1994 losses that were, at that time, expected
to be nonrecoverable; such valuation allowance was not required for 1995.
Losses from continuing operations were $0.6 million or 16 cents per share
compared to a loss from continuing operations of $0.1 million or 3 cents per
share in 1994.
Net loss for the Company was $0.6 million or 16 cents per share this year
compared to a net loss of $0.3 million or 9 cents per share in 1994.
Review of Financial Condition
Liquidity and Capital Resources
Working capital at May 31, 1994 amounted to $69.0 million, compared to $67.2
million at February 28, 1994. This increase of $1.8 million was caused, for
the most part, by the receipt of $1.6 million of cash surrender value
payments on officers' life insurance related to the discontinuance and
settlement of the Supplemental Senior Executive Death Benefit Program in
1994. Included in current assets are cash and cash equivalents and marketable
securities of $60.0 million at May 31, 1994 and $60.7 million at February 28,
1994 (See note6 for discussion of adoption of FAS 115 regarding marketable
security valuation). Also included in current assets at May 31, 1994 are net
deferred income tax assets of $3.4 million, the recognition of which is
justified by the Company's ability to generate future taxable income through
tax planning strategies for inventories which are presently valued on a LIFO
basis. The ratio of current assets to current liabilities at May 31, 1994
was 3.17 to 1.
Cash used for operating activities was $0.2 million in 1995 compared to $8.3
million in the prior year. Of the $8.1 million change, $5.1 million resulted
from the 1994 funding of an escrow account that was related to the acquisition
of Aldan Industrial Machining, Inc. in 1993, which had been recorded as an
account payable at the time of acquisition. In addition, $1.6 million of
cash was received from the redemption of the cash surrender value on officers'
life insurance policies related to the discontinued Supplemental Senior
Executive Death Benefit Program. Cash provided by investing activities was
$0.1 million for 1995, including $1.0 million of proceeds from the sale of
marketable securities reduced by expenditures for plant and equipment of $0.9
million.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (cont.)
Liquidity and Capital Resources (cont.)
The Company's overall financial condition remained strong at May 31, 1994, and
its liquidity and capital resources were adequate for its operating needs.
On June 21, 1994, the Company entered into an Agreement and Plan of Merger
with KTM Holdings Corp. and KTM Acquisition Corp., which corporations had
been formed by the American Securities Group. Under the proposal, members of
the American Securities Group would acquire all the Common Stock of Ketema not
already owned by them at a price of $15.00 per share in cash through the
merger of KTM Acquisition Corp. into the Company. The American Securities
Group, which beneficially owns approximately 23% of the Company's
outstanding stock, including shares issuable upon conversion of Debentures
held by the Group, consists of clients of American Securities Partners, L.P.
and Hugh H. Williamson, III, the President and Chief Executive Officer of the
Company. Four members of the American Securities Group are Directors of
the Company. Consummation of the proposed merger is subject to certain
conditions, including, among other things, approval of the Merger Agreement
by the holders of a majority of the outstanding stock of the Company and
funding pursuant to a bank financing commitment.
<PAGE>
KETEMA, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits.
Exhibit 11 - Computation of Earnings Per Common Share.
b) Reports on Form 8-K.
Current report on Form 8-K filed June 29, 1994 - Item 1(b).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KETEMA, INC.
(Registrant)
By /s/ William E. Leisey
Controller
(Principal Accounting Officer
and duly authorized signer)
July 14, 1994
<PAGE>
EXHIBIT 11
KETEMA, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Quarter Ended May 31,
1994 1993
PRIMARY
Net income (loss) from continuing operations $ (566,000) $ (93,000)
Net income (loss) $ (566,000) $ (343,000)
Weighted average number of common shares
outstanding 3,490,202 3,683,287
Primary earnings (loss) per common share:
Income (loss) from continuing operations $ (0.162) $ (0.025)
Net income (loss) $ (0.162) $ (0.093)
ASSUMING FULL DILUTION
Income (loss) from continuing operations $ (566,000) $ (93,000)
Add after tax interest expense applicable to
8% subordinated convertible debentures due 2003 182,304 182,304
Income (loss) from continuing operations adjusted $ (383,696) $ 89,304
Discontinued operations, net of income taxes - (250,000)
Net income (loss), as adjusted $ (383,696) $ (160,696)
Weighted average number of common shares outstanding 3,490,202 3,681,102
Assuming conversion of 8% convertible subordinated
debentures due 2003 991,197 991,197
Assuming exercise of stock incentives reduced by the
number of shares which could have been purchased
with the proceeds from exercise of such incentives 58,663 36,116
Weighted average number of common shares
outstanding, as adjusted 4,540,062 4,708,415
Earnings (loss) per common share assuming full dilution:
Income (loss) from continuing operations $ (0.085)* $ 0.019*
Net income (loss) $ (0.085)* $ (0.034)*
* This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
<PAGE>
