10-Q 1 form10q.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------------------------------------------------------------------------- QUARTERLY REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2001 Commission File Number 333-19257 KINETEK, INC. (Exact name of registrant as specified in charter) Delaware 36-4109641 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ArborLake Centre, Suite 550 60015 1751 Lake Cook Road (Zip Code) Deerfield, Illinois (Address of Principal Executive Offices) Registrant's telephone number, including area code: (847) 945-5591 Former name, former address and former fiscal year, if changed since last report: Not applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. Yes x No --- --- The aggregate market value of voting stock held by non-affiliates of the Registrant is not determinable as such shares were privately placed and there is currently no public market for such shares. The number of shares outstanding of Registrant's Common Stock as of November 13, 2001: 100,000. KINETEK, INC. INDEX Part I FINANCIAL INFORMATION PAGE NO. ------ --------------------- -------- Item 1. Financial Statements (Unaudited) 3 Item 2. Management's Discussion and Analysis of Financial 9 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 11 Market Risk Part II OTHER INFORMATION ------- ----------------- Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security 12 Holders Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-k 12 Signatures 13 2 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (Unaudited) -------------------------------- PAGE NO. -------- Condensed Consolidated Balance Sheets at September 30, 2001 4 and December 31, 2000 Condensed Consolidated Statements of Operations for the 5 three and nine months ended September 30, 2001 and 2000 Condensed Consolidated Statements of Cash Flows for the nine 6 months ended September 30, 2001 and 2000 Notes to Condensed Consolidated Financial Statements 7-8 3

See accompanying notes to condensed consolidated financial statements. 6 KINETEK, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. Organization The unaudited condensed consolidated financial statements, which reflect all adjustments that management believes necessary to present fairly the results of interim operations and which are of a normal recurring nature, should be read in conjunction with the Company's consolidated financial statements for the year ended December 31, 2000, included in the Company's annual report on Form 10-K. The Company conducts its operations exclusively through its subsidiaries. Results of operations for the interim periods are not necessarily indicative of annual results of operations. 2. Summary of Significant Accounting Policies The condensed consolidated financial statements include the accounts of Kinetek, Inc. and its subsidiaries. Material intercompany transactions and balances are eliminated in consolidation. Operations of certain subsidiaries outside the United States are included for periods ending two months prior to the Company's year-end and interim periods to ensure timely preparation of the condensed consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in pretax income of $8.5 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 3. Inventories Inventories are summarized as follows: September 30, December 31, 2001 2000 ---------------- ---------------- Raw materials $23,727 $26,599 Work in process 11,619 12,564 Finished goods 4,976 5,385 ------- ------- $40,322 $44,548 ======= ======= 7

5. Credit Agreement On November 6, 2001, the Company amended its Credit Agreement to extend the final maturity date from November 7, 2001 to December 15, 2001 and to reduce the amount available for borrowing from $75.0 million to $40.0 million. As of September 30, 2001, the Company had $16.0 million of borrowings and $0.1 million in letters of credit outstanding under the Credit Agreement. 6. Business Segment Information See Part 1 "Financial Information" - Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Company's business segment disclosures. There have been no changes from the Company's December 31, 2000 consolidated financial statements with respect to segmentation or the measurement of segment profit. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------------------------

Consolidated Results of Operations Net sales for the third quarter of 2001 declined 14.4% ($11.8 million) from the same period for 2000. Net sales for the first nine months of 2001 decreased 8.8% ($21.5 million) from 2000. The decline in sales resulted from general softness in all of the company's principal markets. The motors segment experienced a 15.7% decrease in third quarter sales versus 2000, with year to date sales 10.5% below the same period in 2000. Net sales of subfractional motors were down 17.5% for the third quarter and 17.1% year to date, driven by weak demand for refrigeration appliance motors and by continued weakness in the bottle and can vending market. Net sales of fractional/integral motors decreased 14.5% for the third quarter and 6% for the year to date, compared with the same periods in 2000. The sales declines were led by reduced demand for AC and DC products used in the floor care end market and by sharp third quarter declines in sales of DC products used in material handling applications. Moderate sales declines in Europe during the third quarter were exacerbated by the negative impact of foreign currency translation on the Company's foreign operations. Net sales in the controls segment fell 10.8% in the third quarter and 4.0% for the year to date compared with 2000 performance, driven by general softness and moderate pricing pressures in the elevator modernization market. 9 Gross margins (excluding depreciation) decreased slightly from 36.4% of sales for the third quarter of 2000 to 36.0% in 2001. For the first nine months, gross margins (excluding depreciation) decreased from 37.0% in 2000 to 36.3% of sales for 2001. Operating income for the motors segment decreased 29.2% for the quarter to $9.4 million and decreased 24.5% to $30.5 million for the year to date. The operating income of the controls segment increased 3.3% to $2.6 million for the third quarter and increased 4.8% to $7.9 million for the nine month period then ending. Consolidated operating margins (excluding the goodwill charge in 2000 and management fees and corporate expenses) decreased from 19.3% to 17.1% of sales for the three months ended September 30, 2000 and 2001, respectively, and from 19.6% to 17.2% for the nine months ended September 30, 2000 and 2001, respectively. The lower operating margins are due to unfavorable manufacturing leveraging resulting from the decreased sales described above, and to increased research and development costs related to future products. Total operating income for the Company in the quarter ended September 30, 2001 is $9.6 million, compared to a loss of $1.3 million for the same period in 2000. For the nine months ended September 30, 2001, total operating income is $30.8 million, compared to income of $25.7 million for the same period in 2000. The variances for both periods are driven by the declines in sales and margins discussed above as well as the goodwill charge of $14.6 million in 2000. Liquidity and Capital Resources In general, the Company requires liquidity for working capital, capital expenditures, interest, taxes, debt repayment and its acquisition strategy. Of primary importance are the Company's working capital requirements, which increase whenever the Company experiences strong incremental demand or geographical expansion. The Company expects to satisfy its liquidity requirements through a combination of funds generated from operating activities and the funds available under its revolving credit facility. Operating activities. Net cash provided by operating activities for the nine months ended September 30, 2001 was $20.8 million, compared to $25.7 million provided from operating activities for the nine months ended September 30, 2000. The decrease is due primarily to lower operating income as discussed above. Investing activities. In the first nine months of 2001, the Company made $3.1 million in payments for capital expenditures. In addition, the Company also made $0.7 million in payments for acquisitions. Financing activities. The Company is party to a Credit Agreement under which the Company is able to borrow up to approximately $40.0 million to fund acquisitions and provide working capital, and for other general corporate purposes. Obligations under the Credit Agreement are guaranteed by Kinetek Industries' subsidiaries, and secured by pledges of the stock of Kinetek Industries' subsidiaries and liens in respect of certain assets of Kinetek Industries and its subsidiaries. As of November 13, 2001, the Company has approximately $24.0 million of available funds under this Credit Agreement. The Credit Agreement expires December 15, 2001. The Company intends to replace the revolving credit facility made under the Credit Agreement before that date and management is confident such refinancing will be obtained under favorable terms to the Company, however, such terms will be subject to market conditions, which may change significantly. 10 The Company expects its principal sources of liquidity to be from its operating activities and funding from the credit facility. The Company further expects that these sources will enable it to meet its cash requirements for working capital, capital expenditures, interest, taxes, and debt repayment for at least the next 12 months. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company's debt obligations are primarily fixed-rate in nature and, as such, are not sensitive to changes in interest rates. At September 30, 2001 the Company had variable rate debt outstanding of $16.0 million. A one percentage point increase in interest rates would increase the amount of annual interest paid by approximately $0.2 million. The Company does not believe that its market risk financial instruments on September 30, 2001 would have a material effect on future operations or cash flow. The Company is exposed to market risk from changes in foreign currency exchange rates, including fluctuations in the functional currency of foreign operations. The functional currency of operations outside the United States is the respective local currency. Foreign currency translation effects are included in accumulated other comprehensive income in shareholder's equity. 11 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS ----------------- None Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- None Item 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- None Item 5. OTHER INFORMATION ----------------- None Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- None 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KINETEK, INC. By: /s/ Daniel Drury ----------------- Daniel Drury Chief Financial Officer November 13, 2001 13

KINETEK INC 10-Q