-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+o8WGW8+LMmh74Y4gnHLMZJCE+IikZaCDp0+0ze/lC4DMdjI/ggh6InBPRwBdpL UkpF9dIJcJJRsfiYU5agSg== 0000894579-01-000039.txt : 20010313 0000894579-01-000039.hdr.sgml : 20010313 ACCESSION NUMBER: 0000894579-01-000039 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNATIONAL KNIFE & SAW INC CENTRAL INDEX KEY: 0001027909 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 570697252 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-17305 FILM NUMBER: 1566255 BUSINESS ADDRESS: STREET 1: 1299 COX AVENUE CITY: ERLANGER STATE: KY ZIP: 41018 BUSINESS PHONE: 6063710333 MAIL ADDRESS: STREET 1: 1299 COX AVENUE CITY: ERLANGER STATE: KY ZIP: 41018 10-K 1 0001.txt FORM 10-K FOR INTERNATIONAL KNIFE & SAW, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to Commission file number: 333-17305 International Knife & Saw, Inc. (Exact name of registrant as specified in its charter) Delaware 57-0697252 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 1299 Cox Avenue Erlanger, Kentucky 41018 (Address of registrant's principal (Zip Code) executive offices) Registrant's telephone number, including area code: (859) 371-0333 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]. As of January 1, 2001, there were 481,971 shares of the registrant's common stock outstanding, all of which were owned by an affiliate of the registrant. Documents incorporated by reference: None Unless otherwise indicated, industry and market data used throughout this report are based on Company estimates which, while believed by the Company to be reliable, have not been verified by independent sources. Unless otherwise indicated or the context otherwise requires, references to "IKS" or the "Company" are to International Knife & Saw, Inc. and its consolidated subsidiaries. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward looking statements. Certain matters discussed in this filing could be characterized as forward looking statements, such as statements relating to plans for future expansion, other capital spending, financing sources and effects of regulation and competition. Such forward looking statements involve important risks and uncertainties that could cause actual results to differ materially from those expressed in such forward looking statements. PART I ITEM 1. BUSINESS General International Knife & Saw, Inc. ("IKS" or the "Company") is a wholly-owned subsidiary of IKS Corporation, a Delaware corporation. The Company is a global leader in the manufacturing, servicing and marketing of industrial and commercial machine knives and saws. The Company's products, which are consumed in the normal course of machine operation and need resharpening or replacement many times a year, are mounted in industrial machines and are used in virtually every facet of cutting, slitting, chipping and forming of materials. The Company serves the following major market sectors: (i) Wood (44% of 2000 net sales); (ii) Paper & Packaging (36%); (iii) Metal (16%); and (iv) Plastic & Recycling (4%). The Company believes that it has a leading worldwide market share in each of these market sectors and that there is no other company that serves all four such sectors. IKS has undergone two leadership changes over the past two year period. Following CEO departures in May, 1999 and again in April, 2000, the Board of Directors of the Company established an executive committee comprised of Messrs. William M. Schult, Executive Vice President - CFO, Treasurer and Secretary; Bradley H. Widmann, Vice President - Operations for the Americas; and Jeffrey H. Welday, Vice President - Sales and Marketing for the Americas. This committee is responsible for all North American operations of the Company and reports directly to the Board of Directors. Thomas W.G. Meyer, Executive Vice President, Europe and Asia, continued in his role with responsibility over those regions and also reports directly to the Board of Directors. Deteriorating results in the Company's North American operations over the past two years, primarily attributable to leadership changes at the Company in 1999 and 2000, as well as an increasingly softening market, have more than offset improved results in the Company's European operations. For example, in 2000, excluding non-recurring one-time charges, the Company's North American operations accounted for approximately 57% of net sales and incurred an operating loss of $1.8 million, while its European operations accounted for approximately 38% of net sales and 95% of the Company's operating income. In 1998, the Company's North American operations accounted for approximately 71% of net sales and 70% of the Company's operating income, while its European operations accounted for approximately 25% and 25%, respectively. The Company incurred net losses of approximately $15.5 million and $3.4 million in the years ended December 31, 2000 and 1999, respectively, as compared to net income of approximately $1.6 million in the year ended December 31, 1998. In addition, the Company generated negative cash flow from operations of approximately $4.5 million during the year ended December 31, 2000, as compared to positive cash flow from operations of approximately $6.9 million and $10.7 million during the years ended December 31, 1999 and 1998, respectively. Continuing adverse market conditions and their negative effect on the Company's cash flow, coupled with limited liquidity, are likely to impede the Company's ability to make interest payments of approximately $5.1 million on each of May 15 and November 15, 2001 under the Company's 11 3/8% Senior Subordinated Notes due 2006 (the "Subordinated Notes"). I-1 These matters raise substantial doubt about the Company's ability to continue as a going concern. As a result, the Company has retained Jefferies & Company, Inc. to begin a process to address the Company's highly leveraged capital structure. The Company expects Jefferies to assist the Company in developing alternatives in connection with a restructuring of its Subordinated Notes. While the Company believes that there are certain alternatives available to the Company, there can be no assurance that the Company will be successful in implementing any such alternatives or that any such alternatives, if implemented, will enable the Company to meet its obligations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Recapitalization The Company issued $90 million in aggregate principal amount of Subordinated Notes on November 6, 1996 under an Indenture, dated as of November 6, 1996 (the "Indenture"), by and between the Company and United States Trust Company of New York, as trustee. The Subordinated Notes were issued concurrently with the consummation of a recapitalization (the "Recapitalization") of IKS Corporation. Prior to the Recapitalization, all of the issued and outstanding capital stock of IKS Corporation was held by members of the Klingelnberg family and the Company's issued and outstanding capital stock was held approximately 97% by IKS Corporation and approximately 3% by certain executive officers of the Company. Subsequent to the Recapitalization, all of the Company's issued and outstanding capital stock has been held by IKS Corporation. IKS Corporation's issued and outstanding capital stock is held approximately 50.4% (on a fully diluted basis) by Citicorp Venture Capital, Ltd. and co-investors ("CVC"), approximately 30% by certain Luxembourg holding companies (formerly held by the Klingelnberg family) and approximately 19.6% by certain current and former members of management of the Company. Business Strategy The Company believes that it can retain and improve its market position through the continued and renewed commitment to its business strategy. Key elements of this strategy include (i) maximizing stable, high margin end-user sales; (ii) increasing its global manufacturing, sourcing and marketing capabilities through strategic alliances; (iii) focusing on strategically identified product lines; (iv) maintaining its focus on cost improvement opportunities through continued rationalization of its factories; and (v) taking advantage of its purchasing strength and leveraging both the cost and inventory management aspects of its supply chain. Products and Markets The Company manufactures and sells its products in four major market sectors including (i) Wood (44% of 2000 net sales); (ii) Paper & Packaging (36%); (iii) Metal (16%); and (iv) Plastic & Recycling (4%). IKS offers an extensive variety of knives and saws which are mounted in industrial machines and are sold across a wide customer base and over numerous industries throughout the world. The Company's knives and saws are consumed in the normal course of machine operation and need resharpening or replacement many times per year. Wood IKS believes it is the largest manufacturer of industrial wood knives and saws with 2000 net sales of approximately $71 million. Industrial wood knives and saws are utilized in applications by companies such as Weyerhauser Co. and Louisiana Pacific Corp. for sawing logs into specific dimensional sized lumber for use in the housing industry; by companies such as Georgia Pacific Corp., Willamette Industries and Boise Cascade Corp. for peeling large diameter logs into veneer for use in the production of plywood, paneling and furniture; and by companies such as Fletcher Challenge and International Paper Co., Inc. for the production of wood chips used in their pulp mills to produce fine paper, newsprint and craft paper. In addition, the Company's knives are used to cut wood into chips, used for fuel by wood and coal burning power plants as well as generating power and steam for large paper and pulp mills worldwide. I-2 As timber becomes more expensive, the industry is increasingly cognizant of the need for more effective tree utilization and reducing material lost to inefficient sawing. As a result, the industry is trending toward engineered and composite materials made from specially sized wood chips leading to increased sales of waferizer and flaker knives, and wear parts. Wafer board and oriented strand board use tight tolerance waferizer and flaker knives to reduce smaller, less expensive raw material logs into specifically sized and shaped wood chips. The chips are then assembled with synthetic binders into boards, sheets and specialty profiles, having properties superior to plywood or solid wood predecessors which require more expensive large diameter logs as raw material. The Company believes that it is the leading North American manufacturer of these specialty knives. The Company is a leader in the manufacture of carbide edger saws. Using automated equipment in combination with skilled craftsmen, IKS produces extremely accurate saws used for the primary wood market to cut logs into dimensional finished lumber and panel boards. The Company is also a leader in the manufacture of long wood-peeling and slicing veneer knives. Veneer knives are among the more difficult industrial knives to manufacture due to their length (up to six meters) and quality requirements. IKS is one of only a limited number of manufacturers that can produce such a knife. As the market demands higher quality veneer knives, the Company believes that its expertise in the design and manufacture of such knives gives it a competitive advantage. The Company has a strong presence in the wood saw machinery market. The highly trained, experienced, technical sales staff provides primary wood end users with a valuable resource to improve their mills' performance, thereby creating mutually beneficial long-term exclusive supplier relationships for saws, saw maintenance equipment, and supplies. Paper & Packaging The Company believes it is the largest manufacturer and supplier of industrial paper & packaging knives with 2000 net sales of approximately $58 million. Among the Company's four major markets, the paper & packaging knife market is the largest and most diverse, with the widest variety of cutting methods. These knives are used in applications by companies such as Kimberly-Clark Corp., Fort James and Proctor & Gamble Co. for cutting and perforating tissue paper and paper towels and the production of disposable diapers; by companies such as Frito-Lay, Inc. and M&M Mars, Inc. which utilize Zig Zag knives to cut the top and bottom of snack food, salt and pepper and candy packages sold by convenience stores and fast food chains; and by companies such as Quebecor World, International Paper and RR Donnelly & Sons Co., Inc. for cutting and trimming paper in the production of copy paper, books and business forms. As a result of their many uses, paper & packaging knives represent the largest category of the Company's approximately 10,000 products with more than 2,500 paper & packaging knife products relating to every aspect of paper & packaging manufacturing and converting. Paper converting knives are made from a wide range of steel grades, from carbon steels to inlaid high speed steels and carbide. Recent trends in the paper industry, including an increase in the use of recycled fiber and a change in paper chemistry to more abrasive alkaline additives, have required upgrades by paper producers to higher quality, more expensive knife materials and designs which are better suited for more sophisticated and diverse cutting applications. The Company has developed an expertise in the manufacture of these more sophisticated cutting tools which allow the paper converter to run longer and produce better quality cuts, which gives IKS a competitive edge and positions it to offer the most complete package of new knife products and services in the world paper market. The Company has a strong presence in the printing market and a reputation of being a leading producer of high precision printing press knives and spare parts. IKS has also been able to expand its precision toothed knife manufacturing capabilities into the packaging and food industry, growing markets for the IKS group. The Company believes that the market for paper & packaging knives is strong worldwide and is growing in Europe, Latin America and Asia. The Company should benefit in Asia and Latin America as consumer markets in those regions emerge and the use of packaged consumer products rapidly increases. The Company believes that, I-3 through its continued emphasis on providing specialized technical assistance resulting in added value, it will continue to grow in these markets. Metal The Company believes it is the second largest manufacturer of metal knives with 2000 net sales of approximately $25 million. The Company's metal knives are used by steel processing facilities such as Heyco Corp., Edgecomb Metals Co. and Allegheny Ludlum Corp. and metal products manufacturers such as Deere & Co. Inc., Caterpillar, Inc. and Steelcase Corp.; in the cutting, shearing and chopping of steel being produced in steel mills used by companies such as Bethlehem Steel Corp., Rouge Steel Co. and USX Corp.; and in cutting metal sheets and slitting strips from rolls of sheet steel processed by companies such as California Steel Corp. and Joseph T. Ryerson & Son, Inc. In setting up their steel slitting lines, the Company's customers order knives specifically designed for the particular demands and characteristics of each production line. IKS offers expert technical and computer software assistance to companies setting up such a line. The Company has developed a proprietary software package, Slitting Assembly Very Easy ("SAVE"), which assists customers in choosing and setting up metal slitting knives. The IKS SAVE technology makes use of custom computer software to guide the personnel setting up the arbor in the selection of the individual slitter knife and spacer combination to an exact thickness, assuring that, as the arbor is loaded, the accumulated error is maintained near zero. The accuracy of this knife clearance directly affects the cut edge quality of the steel strip. By offering this technology, as well as personal technical assistance, the Company is an integral part of the steel slitting knife purchasing process, which the Company believes increases the likelihood that a customer will choose an IKS product. The market for industrial metal knives is dependent upon the steel usage by numerous industries including the automotive industry and metal and consumer product manufacturers, such as aluminum can and appliance manufacturers. Plastic & Recycling The Company believes it is one of the largest manufacturers of industrial plastic & recycling knives with 2000 net sales of approximately $7 million. Industrial plastic granulator knives are used for the manufacture of plastic, typically by companies such as Mobil Chemical Corp. and I.C.I. Americas, Inc. where pelletizing knives are used to cut plastic into small, precise pieces for processing; by companies such as E.I. DuPont de Nemours & Co. for cutting artificial fibers; by companies such as Wellman Inc. for recycling plastic containers; and by companies such as Waste Recovery Corp. for the environmental recycling of styrofoam, rubber and glass. The Company manufactures knives for all of these uses, as well as related knives used to cut computer tape, foil and film by companies such as Alcoa Aluminum Co. of America, Inc. and Eastman Kodak Co. and household products produced by Hasbro Corp. and Rubbermaid Inc. The market for industrial plastic granulator knives is currently strong in Europe as a result of government mandated recycling programs. There is a growing emphasis on recycling with respect to reclaiming the reusable value of material in plastic, rubber, glass and metal products, as well as with respect to easing the disposal of urban waste, medical waste, aluminum cans and soda bottles in accordance with environmental regulations. The Company believes that the recycling of copper and aluminum cable and wires will also increase as fiber optic and satellite communication technologies become more widespread. The Company manufactures the knives which are used in the granulator systems used in recycling these materials and is thus well positioned to benefit as demand for these products increases. Marketing and Distribution The Company is the only industrial knife and saw manufacturer with operations in North America, Europe, Asia, and Latin America and products sold in more than 75 countries. Historically, the Company's sales I-4 have been principally in North America and Europe; in the past five years the Company has expanded operations into the emerging markets of Asia and Latin America. The Company has one of the largest direct sales forces focused on industrial knives and saws. Complementing the Company's knowledgeable worldwide salesforce, the Company has a significant staff of market managers and product specialists who are experts in their respective fields and are responsible for product coordination among the Company's salespeople, customers and manufacturing operations. The Company concentrates its sales efforts on end-users, which represent 89% of 2000 net sales, through its direct sales force, distributors, agents and Company-owned and independent resharpening service centers. The remaining 11% of the Company's net sales are to original equipment manufacturers ("OEMs") of cutting machines through its direct sales force. In order to better serve its customers, the Company strategically places its inventory around the world to best suit geographical and customer needs. This results in the Company being able to ship most products to the end-users more rapidly than many of its competitors. End-users -- Direct Salesforce and Company-Owned Service Centers. Approximately 66% of the Company's 2000 net sales were direct to end-users through the Company's salesforce and Company-owned service centers, representing in excess of 10,000 customer accounts. The Company believes that it has been successful in selling to end-users because of its large and knowledgeable salesforce, broad product offering, customer service, the strategic placement of its inventory and its relationships with OEMs. The Company's salesforce develops close working relationships with end-users, continually providing customers with direct technical support, offering advice about the types of knives, materials and specifications which would be appropriate for their specific machines. The Company believes its competitive position will strengthen with this distribution channel as many large end-users consolidate and reduce their vendor base, requiring the technical support and wide breadth of product the Company offers. The Company is afforded additional direct access to end-users by providing resharpening services to end-users of both its own and its competitors' products through its fourteen service centers, seven in the United States, three in Canada, one in the Netherlands, one in France, one in Mexico, and one in Chile. In addition to company-owned service centers, the Company works very closely in conjunction with a network of independently owned dealers and regrind shops. This enables the Company to create even closer customer relationships which better position it to be the first choice of the end-user when a replacement is needed. Since industrial knives and saws are consumable, and generally need resharpening at least once per week and as often as 50 times over the life of a product, resharpening revenues can be significantly in excess of the cost of the product. The resharpening service centers also act as distributors as they sell replacement knives and saws. By owning and operating these service centers, the Company can replace competitors' products with IKS products, including IKS products that the service center may not have previously sold. End-users -- Distributors and Independent Service Centers. The Company sells approximately 23% of its net sales to end-users through distributors and independent resharpening service centers. The Company's long term relationships with these distributors, agents and independent resharpening service centers complements its salesforce by providing the opportunity to access additional niche markets. The Company will continue to utilize its distribution network to expand its sales reach and carry the IKS products in their inventory, ready to be sold to end-users. OEMs. Approximately 11% of IKS' 2000 net sales were directly to a variety of OEM manufacturers. The Company believes it is the leading supplier to the OEM market, placing the original knife or saw in the OEM machine, and has a close relationship with many of the major cutting machine manufacturers worldwide. The Company has developed and maintains these close relationships by providing advice to OEM manufacturers about the types of knives, materials and specifications which would be appropriate for their particular machines. In supplying over 350 OEMs, the Company's market managers have an enhanced ability to identify the needs of its customers and to coordinate the Company's technical capabilities with those needs. As a result, the Company I-5 believes that it has greater opportunities to place its products into OEM machines and by doing so provides itself with a competitive advantage in capturing the resultant end-user replacement sales. Strategic Alliances The Company's strategic alliances include over 50 business relationships with suppliers of finished industrial knives and saws throughout the world, four joint ventures and several strategic relationships with independent resharpening centers. These alliances enable the Company to expand its international presence, increase its product offerings, maintain a cost competitive position on its broad base of products and align itself with local entrepreneurs in international markets where local market expertise is needed while broadening its customer base with limited additional investment. Finished Goods Suppliers. The Company's relationships with suppliers of finished goods are typically with small manufacturers throughout the world. The Company's relationships with finished goods suppliers allow it the flexibility to manufacture or source a product based upon cost and delivery time, the quality of product needed, the region to be supplied and the material to be used. The more significant of these relationships provide the Company with the exclusive or semi-exclusive rights to market certain of its partners' products within the Company's markets and allow the Company to purchase finished goods for a relatively low cost and then resell these products at attractive margins often using the Company's trademarks and tradenames. The Company generally has at least two suppliers for most of the products it sources. In addition, the loss of any particular supplier would not have a material effect upon the Company, since the Company is able to manufacture substantially all of the products it sources. Joint Ventures. The Company also maintains its international presence through joint ventures in Asia and Latin America. These include two joint ventures in China which commenced operations in 1996. The Company increased its interest from 51% to 80% in 1999 in both Chinese joint ventures. These joint ventures sell products domestically within China and IKS exclusively exports these products to most of the rest of the world, providing the Company with a relatively low cost source of supply for resale to its customers. These joint ventures provide a distribution network for the Company to import its products from North America and Europe into the rapidly developing market in China as the economy expands and demands a greater variety of cutting tool products. The Company's other joint venture interests are a 42.5% interest in a distributor and service center in Chile which had net sales of approximately $1.2 million in 2000 and a 30% interest in a distributor in the Philippines which had net sales of approximately $.6 million in 2000. Raw Materials The Company has numerous suppliers of raw materials, including over 20 raw material suppliers of steel. IKS's steel purchase volume is typically large enough to allow the Company to purchase steel directly from steel mills. This advantage along with the Company's continued efforts to leverage its purchasing strength and consolidate its supplier base results in reduced raw material costs. The Company believes that its relationships with all of its steel vendors are good. The Company is not dependent on any one of its suppliers for all of its raw materials. Backlog Orders As of February 28, 2001, the dollar amount of backlog orders, believed by the Company to be firm totaled approximately $35.5 million. It is expected that a significant portion of all such orders will be filled during 2001. As of February 29, 2000 the dollar amount of backlog orders totaled approximately $34.7 million. Competition The industrial knife and saw market is highly fragmented with numerous participants. The Company competes principally on the basis of price, service, delivery, quality and technical expertise. The Company's competitors vary in each of the market sectors that the Company serves. No single company competes with the I-6 Company in all four of the market sectors that the Company serves and no single company is dominant in any of such market sectors. The Company believes that the reputation it has established over its long history for quality products, its sales and service network and its in-depth product knowledge combined with its end-users' supplier reduction programs, provide it with a competitive advantage in all the market sectors it serves. Trademarks and Tradenames The Company markets its products under certain trademarks, including "IKS(TM)," "IKS Klingelnberg," "Cascade Southern", "Chromavan," "Chromalit," "Compaflex," "Compalloy," "Durakut," "Durapid," "Duritan," "Dynabloc(TM)," "Dynapren," "Dynatherm," "Hyperhone(TM)," "Klirit," "KSFmicroplan," "Novacrom(TM)," "Novador," "QCP," "Quality Cut Knife Maintenance Program and Design," "Rolf Meyer", "SAVE," "Stop," "Surekut(TM)," "Systi-Matic", "Tecalloy(TM)," "Tecnolite(TM)," "Tungsten Carbide Quattro," "Diamond Cut," "New Wave," "Dialux," "Ultrid," and "Workalit." In addition, the Company uses the following tradenames: American Custom Metals; Ban-Carb; Buland; Canadian Knife & Saw; Diacarb; AK Vander Wijngaart Beheer; Diacarb Stansvormen; Mayemyton Trading; Durakut; Econokut; Hannaco; Hyperhone; IKS de Mexico; IKS Shanghai; Kodiak; SPS; Tuff-Tip; Ultrakut; and Boehler Miller Messer und Saegen. Employees At December 31, 2000, the Company had 1,594 full-time employees. Of such employees, 706 were located in North America, 589 were located in Europe and 299 were located in Asia. The Company considers its relations with its employees to be good. The Company's employees are primarily non-union. The Company's Bergisch Born, Germany facility, its Austrian facilities, its China facilities (operated in connection with its joint venture arrangements) and its Systi-Matic facility in Kirkland, Washington are the only facilities which employ union workers. The Company estimates that 50 of its German employees, 213 of its Austrian and 77 of its U.S employees are union members. The majority of the 281 employees at the facilities of the two China joint ventures are part of a governmental bargaining unit. The Company considers its relations with the unions to be good. Environmental and Regulatory Matters As with most industrial companies, the Company's facilities and operations are required to comply with and are subject to a wide variety of federal, state, local and foreign environmental and worker health and safety laws, regulations and ordinances, including those related to air emissions, wastewater discharges and chemical and hazardous waste management and disposal ("Environmental Laws"). Certain of these Environmental Laws hold owners or operators of land or businesses liable for their own and for previous owners' or operators' releases of hazardous or toxic substances, materials or wastes, pollutants or contaminants, including petroleum and petroleum products. Compliance with Environmental Laws also may require the acquisition of permits or other authorizations for certain activities and compliance with various standards or procedural requirements. The nature of the Company's operations, the long history of industrial uses at some of its current or former facilities, and the operations of predecessor owners or operators of certain of the businesses expose the Company to risk of liabilities or claims with respect to environmental and worker health and safety matters. There can be no assurance that material costs or liabilities will not be incurred in connection with such liabilities or claims. Based on the Company's experience to date, the Company believes that the future cost of compliance with existing Environmental Laws (or liability for known environmental liabilities or claims) should not have a material adverse effect on the Company's business, financial condition or results of operations. However, future events, such as changes in existing laws and regulations or their interpretation, may give rise to additional compliance costs or liabilities that could have a material adverse effect on the Company's business, financial condition or results of operations. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies or stricter or different interpretations of existing laws, may require additional expenditures by the Company that may be material. I-7 ITEM 2. PROPERTIES The Company is headquartered in Erlanger, Kentucky, located a few miles south of Cincinnati, Ohio. The Company currently owns or leases 25 facilities in North America, Europe, and Asia, that are used for manufacturing, distribution, sales, warehousing and service center activity. The Company also leases two facilities in North America that are idle; the Company is actively pursuing alternatives for these two leased facilities. The following table sets forth the location, square footage and principal functions of each of the Company's facilities. Approx. Location Sq. Ft. Use -------- ---------- --- North American Facilities 106,600 Manufacturing/Service Florence, SC Center/Distribution/Sales Erlanger, KY (corporate 99,700 Manufacturing/Service Headquarters) Center/Distribution/Sales Camden, AL.................. 44,700 Manufacturing/Service Center/Distribution/Sales McMinnville, OR............. 55,000 Manufacturing/ Distribution/Sales Granby, Quebec*............. 20,000 Manufacturing/Service Center/Distribution/Sales Langley, British Columbia... 19,200 Manufacturing/Service Center/Distribution/Sales Kirkland, WA *.............. 30,000 Manufacturing/Service Center/Distribution/Sales Milwaukie, OR*.............. 8,600 Idle. Former Manufacturing/ Service Center Hot Springs, AR............. 6,700 Distribution/Sales Appleton, WI*............... 5,000 Idle. Former Service Center/ Distribution/Sales Bangor, ME.................. 12,400 Service Center/Distribution/Sales Mississauga, Ontario*....... 11,800 Service Center/Distribution/Sales West Monroe, LA............. 7,500 Service Center/Distribution/Sales Mexico City, Mexico*........ 3,500 Service Center/Distribution/Sales Statesboro, GA*............. 2,700 Service Center/Distribution/Sales European Facilities Bargteheide, Germany........ 64,500 Manufacturing/Distribution/Sales Bergisch Born, Germany...... 56,000 Manufacturing/Distribution/Sales Geringswalde, Germany....... 30,700 Manufacturing Waidhofen, Austria* ........ 152,800 Manufacturing/Distribution/Sales Traismauer, Austria*........ 37,700 Manufacturing/Distribution/Sales Rotterdam, the Netherlands. 23,700 Service Center/Distribution/Sales Palaiseau, France........... 17,200 Service Center/Distribution/Sales Asian Facilities Jakarta, Indonesia*......... 2,700 Distribution/Sales Kuala Lumpur, Malaysia*..... 1,000 Distribution/Sales Joint Venture Facilities Shanghai, China** (80%)..... 32,000 Manufacturing/Distribution/Sales Concepcion, Chile (42.5%)... 3,700 Service Center/Distribution/Sales Manila, Philippines (30%).... 2,500 Distribution/Sales * Leased. ** Facility owned, land leased I-8 The Company believes that its facilities are suitable for its operations and provide sufficient capacity to meet the Company's requirements for the foreseeable future. The Company places a strong emphasis on producing high quality products. The Company's European facilities located in Bergisch Born, Germany, and Waidhofen and Traismauer, Austria have been awarded ISO 9001 certification, while its Erlanger, Kentucky facility has been awarded ISO 9002 certification indicating that these facilities have achieved and sustained a high degree of quality and consistency with respect to their production systems. The Company believes that ISO certification is an increasingly important selling feature both domestically and internationally, as it provides evidence to purchasers that the Company's systems have achieved specified standards and are being sustained. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in legal proceedings arising in the ordinary course of business. The Company believes there is no outstanding litigation which could have a material impact on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS This item is not applicable to the registrant for this filing on Form 10-K. I-9 PART II ITEM 5. MARKET FOR THE REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company is a wholly owned subsidiary of IKS Corporation. The Company's common equity is not publicly traded and, accordingly, an established market does not exist for such common equity. IKS Corporation has two classes of common equity outstanding as well as two classes of preferred stock. As of March 1, 2001, there were 32 holders of IKS Corporation's outstanding common equity. During 2000, IKS Corporation issued 40 shares of Class A Common Stock, 4.8 shares of Series A 12% Cumulative Compounding Preferred Stock and 4.8 shares of Series B 12% Cumulative Compounding Preferred Stock to a Director for total consideration of $10,000. The above securities were issued and sold in reliance upon the exemptions available under Section 4 (2) of the Securities Act of 1993, as amended, and Regulation D thereunder. See "Item 12. Security Ownership of Certain Beneficial Owners and Management." Since the consummation of the Recapitalization, the Company has not paid any dividends because the Indenture prohibits the Company from declaring or paying any dividend or making any distribution on account of the Company's equity interests unless certain conditions, as outlined in the Indenture, exist at the time of such payment. The Company is not prohibited from declaring or paying dividends in the form of capital stock of the Company. ITEM 6. SELECTED FINANCIAL DATA The following table contains selected historical financial data of the Company as of and for each of the five years in the period ended December 31, 2000. The information contained in this table should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", and the Company's historical consolidated financial statements, including the notes thereto, included elsewhere herein. II-1
Year Ended December 31, (dollars in thousands) 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- Operating Data: Net sales $ 160,917 $ 153,133 $ 150,891 $ 142,974 $ 119,441 Cost of sales 120,388 108,477 105,779 99,885 83,567 --------- --------- --------- --------- --------- Gross profit 40,529 44,656 45,112 43,089 35,874 Selling, general and administrative expenses 40,026 34,517 30,299 27,681 23,952 --------- --------- --------- --------- --------- Operating income 503 10,139 14,813 15,408 11,922 Interest expense, net 13,031 12,354 12,006 11,687 3,245 Minority interest 157 295 71 174 (271) --------- --------- --------- --------- --------- (Loss) income before income taxes (12,685) (2,510) 2,736 3,547 8,948 Provision for income taxes 2,844 880 1,146 1,499 2,924 --------- --------- --------- --------- --------- Net (loss) income $ (15,529) $ (3,390) $ 1,590 $ 2,048 $ 6,024 ========= ========= ========= ========= ========= Net (loss) income per common share $ (32.22) $ (7.03) $ 3.30 $ 4.25 $ 12.50 Other Data: EBITDA (1) $ 8,230 $ 16,893 $ 20,803 $ 20,027 $ 17,055 Net cash (used) provided by (4,534) 6,889 10,694 7,282 9,999 operating activities Net cash used in investing activities (5,747) (5,497) (17,687) (25,183) (8,998) Net cash provided (used) by financing activities 12,010 (1,332) 6,690 8,676 965 Depreciation and amortization (2) 7,307 6,360 5,620 5,145 4,596 Capital expenditures (3) 6,921 6,019 9,320 7,734 8,157 Gross margin 25.2% 29.2% 29.9% 30.1% 30.0% EBITDA margin 5.1% 11.0% 13.8% 14.0% 14.3% EBITDA including LIFO charges and credits $ 7,810 $ 16,499 $ 20,434 $ 20,553 $ 16,518 Balance Sheet Data: Working capital $ 12,286 $ 28,869 $ 26,095 $ 32,91 $ 40,753 Total assets 126,391 127,618 101,275 134,975 115,274 Debt (4) 128,357 114,957 122,455 109,265 100,075 Shareholder's deficit (39,654) (22,846) (18,093) (19,607) (19,644)
(1) EBITDA is defined as operating income plus depreciation and amortization adjusted to exclude LIFO charges (credits) of $420, $394, $370, ($526), and $537 for the years ended December 31, 2000, 1999, 1998, 1997 and 1996, respectively. EBITDA should not be construed as an alternative to operating income, net income or cash flows from operating activities (as determined in accordance with accounting principles generally accepted in the United States) and should not be construed as an indication of the Company's operating performance or as a measure of liquidity. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The EBITDA measure presented by the Company may not be comparable to similarly titled measures reported by other companies. (2) Depreciation and amortization as presented will not agree with amounts in the consolidated statement of cash flows because of the amortization of debt issuance costs reported below the operating income line. (3) 1998 included $2,172 of capital expenditures related to the implementation of a new computer system (SAP) and related system software. 1996 included $1,524 of capital expenditures related to the consolidation of the Company's west coast operations and the expansion of the Cincinnati facility and $1,105 of capital expenditures related to the expansion of the Chinese joint venture operations. (4) Debt includes notes payable and current portion of long-term debt and excludes capital lease obligations. II-2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes. General The Company is a global leader in the manufacturing, servicing and marketing of industrial and commercial machine knives and saws. Together with its predecessor, the Company has been manufacturing knives and saws for nearly 100 years, beginning in Europe and expanding its presence to the United States in the 1960s. The Company operates on an international basis with facilities in North America, Europe, Asia and Latin America and products sold in over 75 countries. The Company offers a broad range of products, used for various applications in numerous markets. Presence outside the U.S. The Company's North American operations accounted for approximately 57% of its 2000 net sales. The Company's other international operations account for the remainder and are located primarily in Europe (approximately 38% of 2000 net sales), and to a lesser extent in Asia. The Company's operating results are subject to fluctuations in foreign currency exchange rates as well as the currency translation of its foreign operations into U.S. dollars. The Company manufactures products in the U.S., Germany, Austria, Canada and China and exports products to more than 75 countries. The Company's foreign sales, the majority of which occur in Canada and European countries, are subject to exchange rate volatility. In addition, the Company consolidates German, Dutch, French, Austrian, Canadian, Mexican, Chinese and other Asian operations and changes in exchange rates relative to the U.S. dollar have impacted financial results. As a result, a decline in the value of the dollar relative to these other currencies can have a favorable effect on the profitability of the Company and an increase in the value of the dollar relative to these other currencies can have a negative effect on the profitability of the Company. Comparing exchange rates for 2000 to 1999, the weaker German Mark, Austrian Schilling, Dutch Guilder, and French Franc had the translation effect of decreasing 2000 net sales by $5.2, $2.9, $.8, and $.5 million, respectively, with a combined $.7 million negative impact on 2000 operating income. To mitigate the short-term effect of changes in currency exchange rates on the Company's foreign currency based purchases and its functional currency based sales, the Company occasionally enters into foreign exchange and U.S. dollar forward contracts to hedge a portion of its budgeted (future) net foreign exchange and U.S. dollar transactions over periods ranging from one to fifteen months. At December 31, 2000 the result of a hypothetical 10% adverse change in foreign currency rates would not significantly impact the Company's future results of operations, cash flows or financial position. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of the changes in exchange rates, changes in exchange rates also affect the volume of sales and the foreign currency sales price as competitors' products become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in the potential change in sales levels or local currency prices. II-3 Results of Operations IKS has undergone two leadership changes over the past two year period. Following CEO departures in May, 1999 and again in April, 2000, the Board of Directors of the Company established an executive committee comprised of Messrs. William M. Schult, Executive Vice President - CFO, Treasurer and Secretary; Bradley H. Widmann, Vice President - Operations for the Americas; and Jeffrey H. Welday, Vice President - Sales and Marketing for the Americas. This committee is responsible for all North American operations of the Company and reports directly to the Board of Directors. Thomas W.G. Meyer, Executive Vice President, Europe and Asia, continued in his role with responsibility over those regions and also reports directly to the Board of Directors. Deteriorating results in the Company's North American operations over the past two years, primarily attributable to leadership changes at the Company in 1999 and 2000, as well as a softening market, have more than offset improved results in the Company's European operations. For example, in 2000, excluding non-recurring one-time charges, the Company's North American operations accounted for approximately 57% of net sales and incurred an operating loss of $1.8 million, while its European operations accounted for approximately 38% of net sales and 95% of the Company's operating income. In 1998, the Company's North American operations accounted for approximately 71% of net sales and 70% of the Company's operating income, while its European operations accounted for approximately 25% and 25%, respectively. The following table sets forth the items in the Company's consolidated statements of income as percentages of its net sales for the periods indicated: Year Ended December 31, 2000 1999 1998 ------- ------- ------- Net sales.............................. 100.0% 100.0% 100.0% Cost of sales.......................... (74.8)% (70.8)% (70.1)% ---------- ---------- ---------- Gross margin....................... 25.2% 29.2% 29.9% Selling, general and administrative expenses.......................... (24.9)% (22.5)% (20.1)% ---------- ---------- ---------- Operating income.................. .3% 6.7% 9.8% Interest expense, net.................. 8.1% 8.1% 8.0% Minority interest...................... 0.1% 0.2% 0.0% --------- --------- --------- (Loss) income before income taxes.. (7.9)% (1.6)% 1.8% Provision for income taxes............. (1.8)% (0.6)% (0.8)% ---------- ---------- ---------- Net (loss) income............ (9.7)% (2.2)% 1.0% ========== ========== ========= As used in the following discussion of the Company's results of operations, (i) the term "gross profit" means the dollar difference between the Company's net sales and cost of sales and (ii) the term "gross margin" means the Company's gross profit divided by its net sales. Year Ended December 31, 2000 Compared To Year Ended December 31, 1999 Net Sales: Net sales increased 5.1% to $160.9 million in 2000 from $153.1 million in 1999 primarily attributable to the acquisition of Boehler Miller Messer und Saegen GmbH ("BMMS") in January 2000, significantly offset by poor results in North America primarily attributable to two leadership changes over the past two year period, market softness and the strengthening dollar relative to the European currencies. The Company experienced net sales reductions in its North American operations (8.8% to $91.4 million) and sales improvements in its other operations (31.4% to $69.5 million) in 2000 compared to the same period in 1999. II-4 Gross Profit: Gross profit decreased 9.2% to $40.5 million in 2000 from $44.7 million in 1999. Excluding the effect of the non-recurring charges discussed in Note 11 to the consolidated financial statements, gross profit would have been $41.0 million in 2000. Gross margin decreased to 25.2% in 2000 compared to 29.2% in 1999 primarily attributable to the factors noted above and the second quarter non-recurring charges. Excluding the second quarter non-recurring charges, gross margin for 2000 would have been 25.5%. The Company experienced gross profit declines in its North American operations (26.7% to $19.8 million) in 2000 compared to 1999, while gross margin also significantly declined to 21.7% from 26.9%. Excluding the second quarter non-recurring charges, the North American operations decline in gross profit would have been 24.8% to $20.3 million in 2000. The decrease in gross profit and gross margin is attributable to the factors noted above. The Company experienced gross profit improvements (16.9% to $20.7 million) in its other operations in 2000 compared to 1999 while gross margin decreased to 29.8% from 33.5%. The gross profit increase and gross margin decline was primarily due to the BMMS acquisition in January 2000. Selling, General and Administrative Expenses: Selling, general and administrative ("SG&A") expenses were $40.0 million for 2000 compared to $34.5 million for 1999. The increase, net of the second quarter non-recurring charges, is primarily attributable to the BMMS acquisition. SG&A expenses increased to 24.9% of net sales from 22.5% of net sales for the respective periods. Excluding the second quarter non-recurring charges, SG&A expenses would have increased to 23.6% of net sales in 2000. Interest Expense, net: Net interest expense increased to $13.0 million for 2000 compared to $12.4 million for 1999 due to an increase in borrowings related to the BMMS acquisition in January 2000 and increased working capital needs due to the decline in net sales in North America. Income Taxes: Due to pre-tax losses in the United States in 2000 for which no related current tax benefits were recorded in accordance with income tax accounting rules, and as a result of pre-tax income in the Company's other operations for which related tax provisions were recorded, the Company is reporting a consolidated provision for income tax on a consolidated pre-tax loss of $12.7 million. Due to pre-tax losses in the United States in 1999, the Company did not fully realize the related current tax benefits in accordance with income tax accounting rules. This resulted in a consolidated tax provision for income tax on a consolidated pre-tax loss of $2.5 million. The significant change in income taxes from 1999 is due to the above factors and the recording of a portion of tax benefits related to the pre-tax losses in the United States in 1999, but not in 2000. Year Ended December 31, 1999 Compared To Year Ended December 31, 1998 Net Sales: Net sales increased 1.5% to $153.1 million in 1999 from $150.9 million in 1998. The Company experienced net sales declines in its North American operations (6.3% to $100.2 million) compared to $106.9 million in 1998, primarily attributable to a leadership change in May 1999 and to a lesser extent due to pricing pressures from Asian, South American and domestic competitors that led to a loss of business in the major market sectors the Company serves. The Company experienced net sales improvements (20.2% to $52.9 million) in its other operations compared to $44.0 million in 1998, primarily attributable to acquisitions of Buland S.A. ("Buland") and A.K. van der Wijngaart Beheer B.V. ("Diacarb") in the fourth quarter of 1998. Gross Profit: Gross profit decreased slightly to $44.7 million in 1999 from $45.1 million in 1998. Gross margin also decreased slightly to 29.2% for 1999 compared to 29.9% in 1998. The Company experienced a significant decrease in gross profit in its North American operations (16.7% to $27.0 million) in 1999 compared to $32.4 million in 1998, while gross margin also significantly declined to 26.9% from 30.3%. The decrease in gross profit and gross margin is attributable to the factors noted above. The Company experienced significant gross profit improvements (39.4% to $17.7 million) in its other operations in 1999 compared to $12.7 million in 1998, while gross margin also significantly increased to 33.5% from 28.9%. The gross profit and gross margin improvement was primarily due to the fourth quarter 1998 acquisitions of Buland and Diacarb. Selling, General and Administrative Expenses: SG&A expenses were $34.5 million for 1999 compared to $30.3 million for 1998 and increased to 22.5% of net sales from 20.1% of net sales for the respective periods. The II-5 increase in SG&A expenses was primarily due to the Diacarb and Buland acquisitions and to a lesser extent due to reorganization costs in North America. Interest Expense, net: Net interest expense increased to $12.4 million in 1999 from $12.0 million in 1998 due to an increase in borrowings primarily related to the Diacarb and Buland acquisitions in the fourth quarter of 1998 and increased working capital needs due to the decrease in net sales in North America. Income Taxes: Due to pre-tax losses in the United States in 1999 for which the Company did not fully realize the related current tax benefits in accordance with income tax accounting rules, and as a result of pre-tax income in the Company's other operations for which the Company recorded related tax provisions, the Company has recorded a consolidated provision for income tax on a consolidated pre-tax loss of $2.5 million. The Company's effective tax rate was 41.9% in 1998. The significant change in income taxes from 1998 is due to the above factors and significant changes in income contributions for the Company's operations in certain tax jurisdictions. Liquidity and Capital Resources The Company's principal capital requirements are to fund working capital needs, to meet required debt payments and to complete planned maintenance and expansion expenditures. In the past, the Company's operating cash flow and available borrowings under the Company's multi-currency credit facilities have been sufficient to enable the Company to meet its working capital requirements, debt service requirements and capital expenditure requirements. However, deteriorating results in the Company's North American operations over the past two years, primarily attributable to leadership changes at the Company in 1999 and 2000 as well as a softening market, have more than offset improved results in the Company's European operations. The Company incurred net losses of approximately $15.5 million and $3.4 million in the years ended December 31, 2000 and 1999, respectively, as compared to net income of approximately $1.6 million in the year ended December 31, 1998. In addition, the Company generated negative cash flow from operations of approximately $4.5 million during the year ended December 31, 2000, as compared to positive cash flow from operations of approximately $6.9 million and $10.7 million during the years ended December 31, 1999 and 1998, respectively. Continuing adverse market conditions and their negative effect on the Company's cash flow, coupled with limited liquidity, are likely to impede the Company's ability to make interest payments of approximately $5.1 million on each of May 15 and November 15, 2001 under the Company's 11-3/8% Senior Subordinated Notes due 2006 (the "Subordinated Notes"). The Company is highly leveraged. As of December 31, 2000, the Company's total long-term debt and stockholder's deficit were approximately $112.3 million and $39.7 million, respectively. The Company's consolidated debt service obligations in 2001 are expected to be in excess of $12.0 million, including approximately $10.2 million of interest payments due under the Subordinated Notes. The Company does not have any significant capital expenditure commitments in 2001 that cannot be deferred; however, deferral of planned maintenance and expansion expenditures may negatively impact the Company's operations. At December 31, 2000, the Company had approximately $9.0 million available under its multi-currency credit facilities. However, certain provisions of the Company's German credit facilities limit the flow of cash from the Company's wholly owned German subsidiary, IKS Klingelnberg GmbH, and its consolidated subsidiaries to the Company. Such provisions include covenants requiring the maintenance of a minimum equity in IKS Klingelnberg GmbH and its consolidated subsidiaries equal to 30% of total asset value. As a result, U.S. availability was limited to approximately $4.3 million at December 31, 2000. In January 2001, a U.S. lender withdrew a $1.5 million working capital line that further reduced U.S. availability to approximately $2.8 million. At March 9, 2001, U.S. availability under credit facilities totaled approximately $1.3 million. In addition, the Company had approximately $.7 million cash on hand in the U.S. The Company's North American operations continue to generate negative cash flow from operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. As a result, the Company has retained Jefferies & Company, Inc. to begin a process to address the Company's highly leveraged capital structure. The Company expects Jefferies to assist the Company in developing alternatives II-6 in connection with a restructuring of its Subordinated Notes. While the Company believes that there are certain alternatives available to the Company, there can be no assurance that the Company will be successful in implementing any such alternatives or that any such alternatives, if implemented, will enable the Company to meet its obligations. In response to market conditions and as a part of its market strategy, in 2000 the Company sold six service centers in the U.S. The sales generated approximately $1.3 million in cash and eliminated the negative cash flow that these service centers were generating. The Company does not foresee any additional sales of service centers in 2001, but does expect a tax refund of approximately $1.1 million in the first quarter of 2001. The Company also expects to generate cash of approximately $1.5 million in the fourth quarter of 2001 from the planned sale of a building as part of the Company's continuing rationalization of its manufacturing operations. In addition, the Company is pursuing aggressive cost cutting programs. Net cash flow used by operations aggregated $4.5 million in 2000 as compared to cash provided of $6.9 million for 1999. The decrease was primarily attributable to a $12.1 million decrease in net income and a $1.7 million increase in working capital compared to 1999, offset by the $2.0 million loss on the disposition of businesses in 2000. Net cash flow from operations aggregated $6.9 million in 1999 as compared to $10.7 million in 1998. The decrease was primarily attributable to a $5.0 million decrease in net income offset by a $0.9 million decrease in working capital and additional depreciation and amortization of $0.7 million compared to 1998. Cash used in investing activities in 2000 was $5.7 million as compared to $5.5 million in 1999. Cash used in investing activities for 1999 was $5.5 million as compared to $17.7 million in 1998. The decrease in use of cash compared to 1998 was primarily attributable to a $8.8 million decrease in purchases of operations, net of cash acquired, and a $3.3 million decrease in capital expenditures. Cash provided in financing activities in 2000 was $12.0 million as compared to cash used of $1.3 million in 1999 and cash provided of $6.7 million in 1998. The cash provided in 2000 is primarily due to increased borrowings of $10.8 million, primarily attributable to the BMMS acquisition, and increased working capital needs offset by a decrease in amounts due to parent of $1.1 million. The 1999 use of cash is primarily due to repayments of $.9 million due to parent and $.5 million net payments of notes payable and long-term debt. Impact of Recently Issued Accounting Standards In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities issued in June 1999 and June 2000, respectively (collectively referred to as Statement 133), which was required to be adopted in fiscal years beginning after June 15, 2000. The Statement required the Company to recognize any derivatives on the balance sheet at fair value. The Company adopted this new Statement as of January 1, 2001. The adoption of this Statement did not have a significant effect on the Company's earnings or financial position. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information required by Item 7a is included in Item 7 on page II-3 of this form 10-K. II-7 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INTERNATIONAL KNIFE & SAW, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Page Report of Independent Auditors........................................... II-9 Consolidated Balance Sheets as of December 31, 2000 and 1999............. II-10 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998....................................... II-12 Consolidated Statements of Changes in Shareholder's Deficit for the years ended December 31, 2000, 1999 and 1998................... II-13 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................................... II-14 Notes to Consolidated Financial Statements............................... II-15 II-8 REPORT OF INDEPENDENT AUDITORS Board of Directors International Knife & Saw, Inc. We have audited the accompanying consolidated balance sheets of International Knife & Saw, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholder's deficit, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the index at Item 14(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Knife & Saw, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that International Knife & Saw, Inc. and subsidiaries will continue as a going concern. As more fully described in Note 2, the Company is highly leveraged and has incurred recurring net losses and generated negative cash flows from operations in the current year, which raises substantial doubt about the Company's ability to continue as a going concern. (Management's plans in regard to these matters are also described in Note 2.) The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ERNST & YOUNG LLP Cincinnati, Ohio March 8, 2001 II-9 International Knife & Saw, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2000 1999 ------------------------------ (in thousands) Assets Current assets: Cash and cash equivalents $ 3,392 $ 1,862 Accounts receivable, trade, less allowances for doubtful accounts of $2,428 and $1,856 24,223 25,620 Inventories 29,526 27,922 Due from parent 34 1,159 Other current assets 2,898 2,759 ------------------------------ Total current assets 60,073 59,322 Other assets: Goodwill 14,773 17,015 Debt issuance costs 2,271 2,736 Other noncurrent assets 2,478 2,163 ------------------------------ 19,522 21,914 Property, plant and equipment-net 46,796 46,382 ============================== Total assets $ 126,391 $ 127,618 ============================== See accompanying notes. II-10 International Knife & Saw, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2000 1999 -------------------------- (in thousands) Liabilities and shareholder's deficit Current liabilities: Notes payable $ 19,208 $ 4,362 Current portion of long-term debt 4,027 2,465 Accounts payable 10,807 13,007 Accrued liabilities 13,745 10,619 -------------------------- Total current liabilities 47,787 30,453 Long-term debt, less current portion 108,321 112,391 Other liabilities 8,865 6,557 -------------------------- Total liabilities 164,973 149,401 Minority interest 1,072 1,063 Shareholder's deficit: Common stock, no par value - authorized - 580,000 shares; issued - 526,904 shares; outstanding - 481,971 shares 5 5 Additional paid-in capital 10,153 10,153 Accumulated deficit (41,427) (25,898) Accumulated other comprehensive loss (4,953) (3,674) Treasury stock, at cost (3,432) (3,432) -------------------------- Total shareholder's deficit (39,654) (22,846) -------------------------- Total liabilities and shareholder's deficit $ 126,391 127,618 ========================== See accompanying notes. II-11 International Knife & Saw, Inc. and Subsidiaries Consolidated Statements of Income Year Ended December 31, 2000 1999 1998 ----------------------------------------- (in thousands, except per share amounts) Net sales $ 160,917 $ 153,133 $ 150,891 Cost of sales 120,388 108,477 105,779 ------------------------------------- Gross profit 40,529 44,656 45,112 Selling, general and administrative expenses 40,026 34,517 30,299 ------------------------------------- Operating income 503 10,139 14,813 Other expenses (income): Interest income (179) (141) (175) Interest expense 13,210 12,495 12,181 Minority interest 157 295 71 ------------------------------------- 13,188 12,649 12,077 ------------------------------------- Income (loss) before income taxes (12,685) (2,510) 2,736 Provision for income taxes 2,844 880 1,146 ===================================== Net income (loss) $ (15,529) $ (3,390) $ 1,590 ===================================== Net income (loss) per common share $ (32.22) $ (7.03) $ 3.30 See accompanying notes. II-12 International Knife & Saw, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholder's Deficit
Accumulated Additional Other Total Common Paid-in Accumulated Comprehensive Treasury Shareholder's Stock Capital Deficit (Loss) Income Stock Deficit ----------- ------------- --------------- --------------- ------------- --------------- (in thousands) Balance at December 31, 1997 $ 5 $ 10,153 $ (24,098) $ (2,235) $ (3,432) $ (19,607) Net income for the year 1,590 1,590 Minimum pension liability adjustment (297) (297) Foreign currency translation adjustments, net of tax expense of $50 221 221 ---------- Total comprehensive income 1,514 ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 5 10,153 (22,508) (2,311) (3,432) (18,093) Net loss for the year (3,390) (3,390) Minimum pension liability adjustment 222 222 Foreign currency translation adjustments, net of tax expense of $17 (1,585) (1,585) -------- Total comprehensive loss (4,753) -------- -------- -------- -------- -------- ---------- Balance at December 31, 1999 5 10,153 (25,898) (3,674) (3,432) (22,846) Net loss for the year (15,529) (15,529) Minimum pension liability adjustment 32 32 Foreign currency translation adjustments, net of tax benefit of $18 (1,311) (1,311) ---------- Total comprehensive loss (16,808) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 $ 5 $ 10,153 $ (41,427) $ (4,953)(A) $ (3,432) $(39,654) ========== ========== =========== ========== =========== ==========
(A) At December 31, 2000, accumulated other comprehensive income was a loss of $4,953 comprised of net foreign currency translation adjustments of $4,910 and a minimum pension liability of $43. See accompanying notes. II-13 International Knife & Saw, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31, 2000 1999 1998 ---- ---- ---- (in thousands) Operating activities Net (loss) income $(15,529) $(3,390) $ 1,590 Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities: Depreciation and amortization 7,773 6,827 6,087 Loss on disposition of businesses 1,981 -- -- Deferred income taxes 1,113 432 1,032 Loss on sale of property, plant and equipment 85 51 89 Minority interest in income of subsidiary 157 295 71 Changes in operating assets and liabilities net of effects from purchases of operations: Accounts receivable 3,323 (1,164) 1,832 Inventories 2,376 1,936 (336) Accounts payable (3,895) 1,078 (502) Accrued liabilities (1,936) 1,393 31 Other 18 (569) 800 ---------------------------- Net cash (used) provided by operating activities (4,534) 6,889 10,694 Investing activities Purchases of operations, net of cash acquired (956) (650) (9,418) Purchases of property, plant and equipment (6,921) (6,019) (9,320) Proceeds from sale of property, plant and equipment 999 578 349 Proceeds from disposition of businesses 1,290 -- -- Increase (decrease) in notes receivable and other (159) 594 702 assets ---------------------------- Net cash used in investing activities (5,747) (5,497) (17,687) Financing activities Increase (decrease) in amounts due to parent 1,125 (910) (810) Increase in notes payable and long-term debt 34,466 20,175 20,538 Repayment of notes payable and long-term debt (23,632) (20,631) (13,042) Cash received from investees 51 34 4 ---------------------------- Net cash provided (used) by financing activities 12,010 (1,332) 6,690 Effect of exchange rate on cash and cash equivalents (199) (230) (14) ---------------------------- Increase (decrease) in cash and cash equivalents 1,530 (170) (317) Cash and cash equivalents at beginning of year 1,862 2,032 2,349 ============================ Cash and cash equivalents at end of year $ 3,392 $ 1,862 $ 2,032 ============================ See accompanying notes. II-14 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (in thousands) 1. Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of International Knife & Saw, Inc. and its majority-owned subsidiaries (the "Company"). Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. Inventories Inventories are stated at the lower of cost or market. Cost in the United States is determined principally by use of the last-in, first-out method. Subsidiaries use the first-in, first-out method. Property, Plant, and Equipment Property, plant and equipment are stated at cost or, for assets acquired through business combinations, at fair value at the dates of the respective acquisitions. Depreciation is computed by the straight-line method based on the estimated useful lives of the assets. Depreciation expense includes amortization of assets recorded under capitalized leases. Amortization of Intangibles Goodwill is being amortized over 10-40 years by the straight-line method. The carrying value of goodwill is periodically reviewed using estimated undiscounted cash flows for the businesses acquired over the remaining amortization periods. Amortization charged to earnings amounted to $705, $731, and $633 for 2000, 1999 and 1998, respectively. As of December 31, 2000, accumulated goodwill amortization was $3,474. Debt issuance costs, which originated in 1996, are being amortized over the ten-year life of the related debt. Amortization of debt issuance costs charged to earnings amounted to $466, $467 and $467 for 2000, 1999 and 1998, respectively. As of December 31, 2000, accumulated amortization was $1,945. Income Taxes Deferred taxes are provided for accumulated temporary differences due to basis differences for assets and liabilities for financial reporting and income tax purposes. The Company's temporary differences are due to accelerated depreciation and amortization, allowances for doubtful accounts, expenses not currently deductible, and income not currently taxable. II-15 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 1. Significant Accounting Policies (continued) Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Revenue Recognition Revenue from product sales is recognized when the product is shipped, title has passed and all significant obligations of the Company have been satisfied and revenue from services is recognized as the services are performed. Revenue is reduced for estimated customer returns and allowances. Dividend Payments Dividend payments are restricted under the covenants of an indenture dated as of November 6, 1996 between the Company and United States Trust Company of New York in connection with the issuance of the $90,000 11 3/8% Senior Subordinated Notes due 2006 (the "Subordinated Notes"). Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassification Certain 1999 and 1998 amounts have been reclassified to conform to the current year presentation. Net (Loss) Income Per Common Share Net (loss) income per common share is based on the weighted average number of common shares outstanding, which amount has remained unchanged at 481,971 shares for 2000, 1999, and 1998, respectively. The Company does not have any common stock equivalents. II-16 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 1. Significant Accounting Policies (continued) Foreign Currency Translation The Company maintains the accounting records and prepares the financial statements of its foreign subsidiaries in their respective functional currencies. The accompanying financial statements, which include the effects of the consolidated results of operations of these companies, are expressed in U.S. dollar equivalents in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. It should not be construed that the assets and liabilities included at U.S. dollar equivalents can actually be realized in or extinguished by U.S. dollars at the exchange rates used in translation. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. The effects on the statements of income of transaction gains and losses is insignificant for all years presented. Foreign Currency Forwards To mitigate the short-term effect of changes in currency exchange rates on the Company's foreign currency based purchases and its functional currency based sales, the Company occasionally hedges by entering into foreign exchange and U.S. dollar forward contracts. A forward contract obligates the Company to exchange predetermined amounts of specified foreign currencies or U.S. dollars at specified exchange rates on specified dates or to make an equivalent foreign currency or U.S. dollar payment equal to the value of such exchange. Discounts or premiums (the difference between the spot exchange rate and the forward exchange rate at inception of the contract) are accreted or amortized to other operating expenses over the contract lives using the straight-line method while realized and unrealized gains and losses resulting from changes in the spot exchange rate (including those from open, matured, and terminated contracts), net of related taxes, are included in the accumulated other comprehensive loss in shareholder's deficit (the deferral accounting method). The related amounts due to or from counter parties are included in other assets or other liabilities. The unrecognized gains or losses were immaterial at year end. Accounting Changes In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities issued in June 1999 and June 2000, respectively (collectively referred to as Statement 133), which was required to be adopted in fiscal years beginning after June 15, 2000. The Statement required the Company to recognize any derivatives on the balance sheet at fair value. The Company adopted this new Statement as of January 1, 2001. The adoption of this Statement did not have a significant effect on the Company's earnings or financial position. II-17 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 1. Significant Accounting Policies (continued) In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." The EITF requires all shipping and handling amounts billed to a customer in a sale transaction to be classified as revenue. The EITF also states that a company may not net the shipping and handling costs against the shipping and handling revenues in the financial statements. Accordingly, the Company has restated net sales and cost of sales for the years ended December 31, 1999 and 1998, by reclassifying shipping and handling costs totaling $2,045 and $759, respectively, from net sales to cost of sales. Additional shipping and handling costs totaling $3,329, $3,143 and $2,936 for 2000, 1999 and 1998, respectively, are included in selling, general, and administrative expenses. Net sales disclosed in Note 14 for each of the first three quarters of 2000 and for each of the quarters of 1999 have been restated from amounts previously reported to comply with EITF 00-10. Net sales amounts disclosed in Note 13 for 1999 and 1998 have also been restated. 2. Going Concern The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred net losses of approximately $15.5 million and $3.4 million in the years ended December 31, 2000 and 1999, respectively, as compared to net income of approximately $1.6 million in the year ended December 31, 1998. In addition, the Company generated negative cash flow from operations of approximately $4.5 million during the year ended December 31, 2000, as compared to positive cash flow from operations of approximately $6.9 million and $10.7 million during the years ended December 31, 1999 and 1998, respectively. Continuing adverse market conditions and their negative effect on the Company's cash flow, coupled with limited liquidity, are likely to impede the Company's ability to make interest payments of approximately $5.1 million on each of May 15 and November 15, 2001 under the Company's Subordinated Notes. The Company is highly leveraged. As of December 31, 2000, the Company's total long-term debt and stockholder's deficit were approximately $112.3 million and $39.7 million, respectively. The Company's consolidated debt service obligations in 2001 are expected to be in excess of $12.0 million, including approximately $10.2 million of interest payments due under the Subordinated Notes. The Company does not have any significant capital expenditure commitments in 2001 that cannot be deferred; however, deferral of planned maintenance and expansion expenditures may negatively impact the Company's operations. At December 31, 2000, the Company had approximately $9.0 million available under its multi-currency credit facilities. However, certain provisions of the Company's German credit facilities limit the flow of cash from the Company's wholly owned German subsidiary, IKS Klingelnberg GmbH, and its consolidated subsidiaries to the Company. Such provisions include covenants requiring the maintenance of a minimum equity in IKS Klingelnberg GmbH and its consolidated subsidiaries equal to 30% of total asset value. As a result, U.S. availability was limited to approximately $4.3 million at December 31, 2000. In January 2001, a U.S. lender withdrew a $1.5 million working capital line that reduced U.S. availability to approximately $2.8 million. At March 9, 2001, U.S. availability under credit facilities totaled approximately $1.3 million. In addition, the Company had approximately $.7 million cash on hand in the U.S. The Company's North American operations continue to generate negative cash flow from operations. II-18 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 2. Going concern (continued) These matters raise substantial doubt about the Company's ability to continue as a going concern. As a result, the Company has retained Jefferies & Company, Inc. to begin a process to address the Company's highly leveraged capital structure. The Company expects Jefferies to assist the Company in developing alternatives in connection with a restructuring of its Subordinated Notes. While the Company believes that there are certain alternatives available to the Company, there can be no assurance that the Company will be successful in implementing any such alternatives or that any such alternatives, if implemented, will enable the Company to meet its obligations. In response to market conditions and as a part of its market strategy, in 2000 the Company sold six service centers in the U.S. The sale generated approximately $1.3 million in cash and eliminated the negative cash flow that these service centers were generating. The Company does not foresee any additional sales of service centers in 2001, but does expect a tax refund of approximately $1.1 million in the first quarter of 2001 and expects to generate cash of approximately $1.5 million in the fourth quarter of 2001 from the sale of a building resulting from the Company's rationalization of its manufacturing operations. In addition, the Company is pursuing aggressive cost cutting programs. 3. Acquisitions In January 2000, the Company's German subsidiary acquired all of the shares of Boehler Miller Messer und Saegen GmbH ("BMMS"). BMMS is headquartered in Waidhofen, Austria. The purchase price consisted of 13,300 Austrian Schillings (approximately $956) in cash, net of cash acquired, and 63,000 Austrian Schillings (approximately $4,530) in assumed debt. The Company's lines of credit were increased in order to finance the cash payment. Additional consideration is contingent upon BMMS achieving certain annual earnings and would be payable in 2002. BMMS produces knives, saws and ground flats for the wood, paper and metal industries with annual sales of approximately 300,000 Austrian Schillings (approximately $21,600). The acquisition was accounted for under the purchase method. There was no goodwill on this acquisition. In November, 1999, the Company acquired an additional 29% interest in its two Chinese joint venture companies, Shanghai IKS Lida Mechanical Blade Co., Ltd. and Shanghai IKS Mechanical Blade Co., Ltd. for approximately $1,100. There was no goodwill recorded on this acquisition. In November, 1998, the Company acquired all of the shares of A.K. van der Wijngaart Beheer B.V. and subsidiaries ("Diacarb"). Diacarb's business includes the regrinding and distribution of industrial knives in the Netherlands, Belgian and Luxembourg markets. Diacarb is also involved in the manufacture of stansformen (molds to punch holes) for the carton industry. Diacarb is located in Rotterdam, the Netherlands. The purchase price consisted of 12,000 Dutch guilders in cash (approximately $6,250), financed from existing lines of credit, 1,088 Dutch guilders (approximately $567) in assumed debt, and a II-19 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 3. Acquisitions (continued) 4.5% promissory note to the Seller for 5,000 Dutch guilders (approximately $2,605), subject to post closing adjustments. The promissory note is payable in installments of 1,000 Dutch guilders (approximately $521) on January 15, 2000, and 2,000 Dutch guilders (approximately $1,042) on January 15, 2001 and 2002. Accordingly, at December 31, 2000, 4,000 Dutch Guilders (approximately $2,084) remains to be paid. The acquisition was accounted for under the purchase method. Goodwill totaled $4,683 on this acquisition. In October, 1998, the Company executed an agreement to purchase the shares of Buland S.A. ("Buland") for 8,700 French Francs (approximately $1,560) in cash and 2,175 French Francs (approximately $395) in assumed debt, subject to post-closing adjustments. Headquartered in France, Buland is a reseller and regrinder of industrial knives for the printing industry and reseller of rotary and flexible dies, with annual sales of 36,000 French Francs (approximately $6,545). The acquisition was accounted for under the purchase method and was financed from borrowings under the Company's existing revolving credit facilities. Additional consideration is contingent upon Buland achieving certain annual earnings and is payable in 2002. Goodwill totaled $558 on this acquisition. In June and February, 1998, the Company completed the acquisitions of the assets of Valiquet, Inc., Des Plaines, IL; the Atlanta, GA division of K.S.W. Corporation; and Sheridan Saw Works, Sheridan, OR for approximately $1,200 in cash, $29 in assumed debt, post-closing contingent payments of $55 for achieving certain annualized earnings levels and promissory notes totaling $140 to two of the sellers, subject to post-closing adjustments. These service center acquisitions were financed from available cash balances. These operations have historically generated combined annual sales of approximately $1,700 and were accounted for under the purchase method. Goodwill totaled approximately $835 on these acquisitions. The consolidated financial statements include the results of operations generated by and financial position of the above acquisitions from the dates of acquisition. II-20 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 4. Inventories December 31, 2000 1999 ---- ---- Finished goods $18,275 $17,120 Work in process 4,795 5,088 Raw materials and supplies 6,456 5,714 ======= ======= $29,526 $27,922 ======= ======= Inventories include approximately $11,537 in 2000 and $14,285 in 1999 determined by the LIFO method. If the cost of LIFO inventories had been determined by the FIFO method for financial reporting, they would have been approximately $4,226 and $3,806 higher than the amounts reported at December 31, 2000 and 1999, respectively. 5. Property, Plant and Equipment-Net December 31, 2000 1999 ------- ------- Land and land improvements $ 6,000 $ 5,784 Buildings and leasehold improvements 15,420 16,875 Machinery and equipment 54,494 50,119 Furniture and fixtures 4,729 4,020 Construction in progress 1,574 740 Motor vehicles 1,967 2,432 ----------- ----------- 84,184 79,970 Less accumulated depreciation 37,388 33,588 ======= ======= $46,796 $46,382 ======= ======= Depreciation expense, including depreciation for assets under capital lease, was $6,602, $5,629 and $4,987, for 2000, 1999 and 1998, respectively. Depreciation is provided for on the straight-line method over the following estimated useful lives: Land improvements: 15 years Buildings and leasehold improvements: 15 to 40 years Machinery and equipment: 5 to 12 years Furniture and fixtures: 10 years Motor vehicles: 3 to 5 years II-21 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 6. Notes Payable and Long-Term Debt
December 31, 2000 1999 ---------------------------------------- Notes payable: Note payable on demand in German Marks to a German bank, issued under revolving credit agreements, interest payable quarterly $ 5,499 $ 1,347 Notes payable on demand in Chinese Yuan Renminbi to Chinese banks, issued under revolving credit agreements, interest payable monthly 2,125 1,765 Note payable on demand in U.S. Dollars to a German bank, issued under revolving credit agreements, interest payable quarterly 8,719 1,250 Note payable on demand in U.S. Dollars to a U.S. bank 1,500 - Note payable on demand in Austrian Schillings to an Austrian bank 1,365 - ------- ------- $19,208 $ 4,362 ======= ======= Long-term debt: 11-3/8% Senior Subordinated Notes due 2006 $90,000 $90,000 Notes payable in German Marks to a German bank 14,559 16,399 Notes payable in Chinese Yuan Renminbi to Chinese Banks 1,017 1,680 Capitalized lease obligations to U.S. lenders 3,199 4,261 Promissory notes payable in Austrian Schillings to an Austrian bank 1,746 - Promissory note payable in Dutch Guilders to a former shareholder of the Diacarb Company 1,792 2,414 Other 35 102 --------------------------------- 112,348 114,856 Less current portion 4,027 2,465 ================================= $108,321 $112,391 =================================
II-22 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 6. Notes Payable and Long-Term Debt (continued) Except for the Subordinated Notes, the carrying amount of the Company's long-term debt approximates fair value, which is determined using discounted cash flow analysis based on the Company's incremental borrowing rate for similar types of financing arrangements. At year-end 2000, the fair value of the Subordinated Notes was approximately $39,600. Such amounts are based on recent trade prices through registered securities brokers. The Subordinated Notes are senior subordinated indebtedness of the Company ranking pari passu with all other existing and future senior subordinated indebtedness of the Company. The notes payable of $14,559 have maturities that extend to 2011 at rates of 2.5% to 5.91%. Outstanding borrowings under the Company's senior credit facilities are included in long-term debt based on the expectation that these borrowings will remain outstanding for more than one year. Land and buildings in Germany with a net book value of $7,888 are pledged as collateral for the German revolving credit agreements and the German bank notes payable. The notes payable of $1,017 mature in 2003 at a rate of 9.3% and are non-recourse to the Company. The capitalized lease obligations of $3,199 are for capital leases on equipment that have maturities that extend to 2004 at rates of 6.99% to 8.7%. Included in property, plant and equipment-net is equipment under capital lease of $3,255. The notes payable of $1,746 have maturities that extend to 2006 at rates of 2.5% to 5.4%. The promissory note payable to a former shareholder of Diacarb of $1,792 is due in installments of 2,000 Dutch guilders in 2001 and 2002 at a rate of 4.5% in connection with the Diacarb acquisition. At December 31, 2000, the Company had committed global, multi-currency credit facilities totaling approximately $39,258. Unused committed lines of credit from these facilities available to the U.S. and German operations totaled $4,281 and $4,742, respectively, for a consolidated availability of $9,023, compared to $16,801 at December 31, 1999. In January 2001, a U.S. bank withdrew a $1,500 working capital line that reduced the Company's unused committed amount. Fees for these revolving credit arrangements were $20 in 2000 and $22 in 1999. The short-term note payable of $5,499 represents short-term bank borrowings at rates from 5.6% to 5.7%. The short-term notes payable of $2,125 represent short-term bank borrowings at a rate of 5.8% to 7.6% and are non-recourse to the Company. The short-term note payable of $8,719 represents short-term bank borrowings at a rate of 7.9%. II-23 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 6. Notes Payable and Long-Term Debt (continued) The short-term note payable of $1,500 represents short-term bank borrowings at a rate of 9.5%. The short-term note payable of $1,365 represents short-term bank borrowings at a rate of 2.8%. At December 31, 2000, amounts due as minimum payments under long-term debt were as follows: 2001 $ 4,027 2002 4,191 2003 5,117 2004 2,084 2005 1,819 Thereafter 95,110 -------------------- $ 112,348 ==================== Cash paid for interest amounted to $12,357, $12,097, and $11,670 in the years ended December 31, 2000, 1999 and 1998, respectively. 7. Accrued Liabilities December 31, 2000 1999 ----------------------------------- Salaries, wages and bonuses $ 3,044 $ 2,157 Profit sharing and 401(k) plans 846 809 Interest 1,408 1,322 Other employee related accruals 1,357 1,397 Other 7,090 4,934 =================================== $ 13,745 $ 10,619 =================================== 8. Income Taxes IKS Corporation files a consolidated Federal income tax return that includes the Company. The current and deferred tax expense and benefit for the Company are recorded as if it filed on a stand-alone basis. All participants in the consolidated income tax return are separately liable for the full amount of the taxes, including penalties and interest, if any, which may be assessed against the consolidated group. The current provision (benefit) for United States income taxes is recorded to the intercompany account with IKS Corporation. II-24 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 8. Income Taxes (continued) Summarized in the following tables are the Company's income (loss) before income taxes, its provision (benefit) for income taxes, the components of the deferred income taxes and a reconciliation of the U.S. statutory rate to the tax provision rate. Income (Loss) Before Income Taxes Year ended December 31, 2000 1999 1998 -------- -------- -------- United States $(16,792) $ (7,287) $ (705) Non-U.S 3,441 4,107 4,777 ======== ======== ======== $(12,685) $ (2,510) $ 2,736 ======== ======== ======== Components of Deferred Tax Assets and Liabilities December 31, 2000 1999 --------- --------- Current deferred tax assets (liabilities): Inventories, primarily obsolescence and additional costs inventoried for tax purposes $ 767 $ 559 Reserve for bad debts (220) (366) Accrued employee benefits 486 292 Other 337 166 ------- ------- Total current deferred tax assets 1,370 651 Noncurrent deferred tax assets (liabilities): Net operating loss carryforwards 8,607 2,545 Property, plant and equipment, primarily differences in Depreciation methods (3,969) (4,028) Deferred compensation 128 143 Goodwill, difference in amortization methods (600) (523) Other 117 (21) ------- ------- Total noncurrent deferred tax assets (liabilities): 4,283 (1,884) Less valuation allowance (8,654) (1,490) ------- ------- Total net noncurrent deferred tax liabilities (4,371) (3,374) ------- ------- Net deferred tax liabilities $(3,001) $(2,723) ======= ======= II-25 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 8. Income Taxes (continued) Provision (benefit) for Income Taxes Year Ended December 31, 2000 1999 1998 ----------- ---------- ----------- Current (benefit) provision Federal $ -- $ -- $ (562) State and local 300 (219) -- Foreign 1,431 1,504 676 ------- ------- ------- 1,731 1,285 114 Deferred provision (benefit) Federal 969 (909) 321 State and local 86 (6) 28 Foreign 58 510 683 ------- ------- ------- 1,113 (405) 1,032 ======= ======= ======= $ 2,844 $ 880 $ 1,146 ======= ======= ======= The differences between the provision and the amount computed by applying the statutory Federal income tax rate are as follows: Year Ended December 31, 2000 1999 1998 ---------------------------------- Income (loss) before income taxes $(12,685) $ (2,510) $ 2,736 ======== ========= ========= Tax (benefit) provision on above amount at 34% $ (4,313) $ (853) $ 930 Change in valuation allowance 7,164 1,490 -- State income tax (benefit) provision, net of federal tax impact 198 (225) 28 Foreign tax rates different than U.S. statutory rate 30 387 134 Foreign losses without tax benefit 49 69 56 Other, net (284) 12 (2) --------- --------- --------- Provision for income taxes $ 2,844 $ 880 $ 1,146 ======== ========= ========= At year-end 2000, the Company's U.S. operations had net loss carry forwards aggregating $23,263 which begin to expire in 2019. The Company has recorded a deferred tax asset of $8,607 related to the net loss carryforwards and a corresponding full valuation allowance related to its U.S. deferred tax assets. II-26 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 8. Income Taxes (continued) Undistributed earnings of foreign subsidiaries which are intended to be indefinitely reinvested aggregated approximately $11,759 at the end of 2000. In the event these earnings were to be repatriated, foreign income tax credits and deductions under existing U.S. federal income tax laws would offset a portion of any additional U.S. tax liability. 9. Employee Benefit Plans The Company has profit sharing plans for its U.S. and Canadian employees. Profit sharing contributions are determined annually by the respective Boards of Directors. The Company also has a 401(k) plan for its U.S. employees. Company contributions to the 401(k) plan are equal to one-half of employee contributions, up to a maximum of 2% of an employee's annual compensation, subject to certain statutory limitations. The expense for profit sharing contributions was $636 in 2000, $560 in 1999, and $953 in 1998. The Company's matching contributions to the 401(k) plan amounted to $287 in 2000, $285 in 1999, and $368 in 1998. Included in other liabilities are amounts for deferred compensation plans for former officers of $345 and $387 at December 31, 2000 and 1999, respectively. The plans provide for a maximum payment of $25 annually to each officer or beneficiary for a period of ten years commencing at retirement or death. The Company's German subsidiaries have pension plans covering a majority of their employees who qualify as to age and length of service. Entrance into the plan is at age 30 with defined benefits payable at age 65. Vesting requirements vary depending on employment category, contracts and years of service requirements which range from five to fifteen years. The following table sets forth the status of the Company's defined pension plan for certain employees in Germany. Consistent with customary practice in Germany, this plan has not been funded. Benefit payments are funded from current operations. Change in benefit obligation December 31, 2000 1999 ----------------- ---------------- Benefit obligation at beginning of year $ 1,503 $ 1,736 Service cost 20 23 Interest cost 88 100 Actuarial gains (25) (60) Currency exchange rate gain (99) (248) Benefits paid (41) (48) ================= ================ Benefit obligation at end of year $ 1,446 $ 1,503 ================= ================ II-27 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 9. Employee Benefit Plans (continued) Funded status at year-end December 31, 2000 1999 --------------- -------------- Projected benefit obligation $ 1,446 $ 1,503 Unrecognized net loss (75) (108) Unrecognized net obligation (150) (177) Additional minimum liability 193 252 =============== ============== Accrued pension cost - included in other liabilities $ 1,414 $ 1,470 =============== ============== Components of net periodic benefit costs Year Ended December 31, 2000 1999 1998 ---- ---- ---- Service cost $ 20 $ 24 $ 14 Interest cost on projected benefit obligation 88 100 92 Net amortization and deferral 14 19 12 ==== ==== ==== Net periodic benefit cost $122 $143 $118 ==== ==== ==== Weighted-average actuarial assumptions Year Ended December 31, 2000 1999 1998 ---- ---- ---- Discount rate 6.5% 6.5% 6.5% Rate of increase in future compensation levels 2.5% 2.5% 2.5% 10. Related Parties The consolidated financial statements include the following transactions and balances with companies which had been under common controlling ownership with the Company prior to the Recapitalization. Such companies are, and have been since the Recapitalization, controlled by a minority shareholder and board member of IKS Corporation. December 31, 2000 1999 1998 ----------------------------- Other payables to affiliated companies $ (42) $ (35) $ (62) Purchased administrative and manufacturing services 590 670 712 II-28 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 11. Disposition of Businesses and Other Non-recurring Charges The operating loss for 2000 includes second quarter non-recurring charges of $2,600, comprised primarily of a $1,981 loss on the sale of certain service centers and $449 in severance costs related primarily to the resignation of the Company's former CEO. In May and June, 2000 the Company completed the sale of six service centers for a combined selling price of $1,480, comprised of $1,290 in cash and a $190 note receivable. These service centers were located in Illinois, Wisconsin, Oregon, Virginia, Tennessee and Georgia. The decision to sell the service centers was made in order to redeploy assets to the Company's strategic core initiatives. On April 25, 2000, P. Daniel Miller, the Company's President and CEO, submitted his resignation to the Board of Directors of the Company. As of that date, the Board of Directors established an executive committee comprised of Messrs. William M. Schult, Executive Vice President-CFO, Treasurer and Secretary; Bradley H. Widmann, Vice President - Operations for the Americas; and Jeffrey H. Welday, Vice President of Sales and Marketing for the Americas. This committee is responsible for all North American operations of the Company and reports directly to the Board of Directors. Thomas W.G. Meyer, Executive Vice President, Europe and Asia, continued in his role with responsibility over those regions and also reports directly to the Board of Directors. 12. Operating Leases Future minimum rentals required under operating leases are as follows: Year ending December 31 Buildings Other Total - ----------------------------------------------------------------------------- 2001 $ 481 $ 29 $ 510 2002 334 20 354 2003 96 6 102 2004 22 2 24 2005 9 1 10 Rent expense was $705 for 2000, $553 for 1999 and $566 for 1998. II-29 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands) 13. Organization The Company operates in one business segment - industrial knives and saws. The Company manufactures, markets and services primarily industrial knives and saws internationally, and its customers include distributors, original equipment manufacturers and customers purchasing replacement parts and services. The Company has a leading market share in each of the major sectors it serves: Paper & Packaging; Wood; Metal; and Plastic & Recycling. The Company's operations are principally in the United States, Germany and Austria, representing 49%, 21% and 12% of 2000 net sales, respectively. The Company plans to continue its international growth. As a result of the Company's broad product range and numerous applications, no customer accounts for more than 4% of net sales. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Sales attributable to German and Austrian operations are based on external sales generated by subsidiaries located in those countries. The following table summarizes the Company's United States, German, Austrian and other operations. Year Ended December 31, 2000 1999 1998 - -------------------------------------- -------- -------- -------- United States Operations: Net sales - Customers $ 79,564 $ 87,476 $ 93,601 Long Lived Assets 19,607 22,111 22,479 German Operations: Net sales - Customers $ 34,210 $ 35,757 $ 34,762 Long Lived Assets 12,624 13,428 14,457 Austrian Operations: Net sales - Customers $ 18,850 $ -- $ -- Long Lived Assets 4,450 -- -- Other Operations: Net sales - Customers $ 28,293 $ 29,900 $ 22,528 Long Lived Assets 10,617 11,452 12,976 Consolidated: Net sales - Customers $160,917 $153,133 $150,891 Long Lived Assets 47,298 46,991 49,912 II-30 International Knife & Saw, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) (in thousands, except per share data) 14. Operating Results by Quarter (Unaudited) --------------------------------------------- 2000 --------------------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 -------- -------- --------- --------- Net sales $ 44,512 $ 42,055 $ 37,652 $ 36,698 Gross profit 12,254 10,473 9,836 7,966 Net loss (1,117) (4,781) (2,334) (7,297) Net loss per common share (2.32) (9.92) (4.84) (15.14) -------------------------------------------- 1999 -------------------------------------------- Qtr 1 Qtr 2 Qtr 3 Qtr 4 -------- -------- --------- --------- Net sales $ 39,767 $ 37,785 $ 37,980 $ 37,601 Gross profit 11,660 10,346 11,174 11,476 Net income (loss) 116 (804) (289) (2,413) Net income (loss) per common share .24 (1.67) (.60) (5.00) II-31 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the persons who are members of the Board of directors or executive officers of the Company. Directors serve for a term of one year or until their successors are elected and qualified; officers serve at the discretion of the Board of Directors. Name Age Position ---- --- -------- Thomas W. G. Meyer 44 Executive Vice President-- Europe and Asia William M. Schult 39 Executive Vice President-- Chief Financial Officer, Treasurer and Secretary Bradley H. Widmann 54 Vice President-- Operations/Americas Jeffrey H. Welday 48 Vice President-- Sales and Marketing/Americas W. Randolph Underhill 51 Vice President-- Operations Paul A. Severt 38 Vice President-- Financial Reporting/Controller David M. Hofmeister 41 Chief Information Officer W. Rayburn Connell 60 Vice President -- Service and Sales Director, North America Diether Klingelnberg 56 Director James A. Urry 46 Director Michael A. Delaney 46 Director Thomas W. G. Meyer, Executive Vice President -- Europe and Asia. Mr. Meyer has served as Executive Vice President since he joined the Company in 1993. Prior thereto, Mr. Meyer worked in the textile industry for ten years, including service as the head of marketing for Barmag AG from 1988 until 1991 and as a director of A. Monforts GmbH & Co., from 1991 until 1992. William M. Schult, Executive Vice President --Chief Financial Officer, Treasurer and Secretary. Mr. Schult joined the Company as Vice President -- Finance in July 1996. Prior to joining the Company, he served as Controller of IKS Corporation since 1995 and in several capacities at Siemens Corporation from 1987 until 1995. Prior to that, Mr. Schult held various accounting and auditing positions with the Allen Group, Salomon Brothers and Coopers & Lybrand. Bradley H. Widmann, Vice President - Operations/Americas. Mr. Widmann joined the Company in November 1999 as Vice President - Operations/Americas. From 1996 - 1999, he headed the global supply chain management for Magnetek, Inc. Prior to working with Magnetek, Inc., Mr. Widmann held senior operations positions with Textron, Inc., Gould, Inc. and General Electric Co. in both aerospace and commercial products industries. III-1 Jeffrey H. Welday, Vice President - Sales and Marketing/Americas. Mr. Welday joined the Company in March of 2000 as Vice President Industrial Division. He was promoted to Vice President - Sales and Marketing of both Industrial and Wood Products in April 2000. From 1992 - 2000, he managed the sales and marketing organization for the Consumable Products Division of Cincinnati Milacron, Inc., a global manufacturer of Machine Tools and Industrial Products. W. Randolph Underhill, Vice President -- Operations. Mr. Underhill joined the Company in 1977 as Product Manager. Mr. Underhill served in various capacities, including purchasing agent and sales manager, from 1977 to 1990, and became Vice President -- Operations in 1996. Paul A. Severt, Vice President -- Financial Reporting/Controller. Mr. Severt joined the Company as Vice President - Financial Reporting/Controller in April 1997. Prior to joining the Company, Mr. Severt held various accounting and auditing positions with Ernst & Young with which he was employed for 12 years. David M. Hofmeister - Chief Information Officer. Mr. Hofmeister joined the company as Chief Information officer in June 1997. From 1984 to 1997, Mr. Hofmeister worked for E.I.Du Pont de Nemours, holding various management positions in Du Pont's Consolidation Coal and Remington Arms subsidiaries. Prior to working with Du Pont, Mr. Hofmeister worked as a Management Science Analyst for the Gulf Oil Corporation. W. Rayburn Connell, Vice President - Service and Sales Director, North America. Mr. Connell joined the Company in 1991 as Vice President -- Service and Sales Director. From 1990 to 1991, Mr. Connell was the owner of Connell Distribution and prior to that was the part owner of Austin Saw and Knife, which the Company acquired in 1991. Between 1974 and 1990, Mr. Connell was the Company's sales manager. Diether Klingelnberg, Director. Mr. Klingelnberg served as Chief Executive Officer of the Company until March 1996. In addition, he served as Chairman of the Board and Chief Executive Officer of IKS Corporation from its formation until consummation of the Recapitalization. Mr. Klingelnberg is currently Managing Director of Klingelnberg Beteiligungs-GmbH, Chairman of Oerlikon Geartec AG and Eickhoff GmbH. James A. Urry, Director. Mr. Urry has been with Citibank, N.A. since 1981, serving as a Vice President since 1986. He has been a Vice President of CVC since 1989. He is a Director of Intersil Corporation, Hancor Holding Corporation, Airxcel, Inc., Palomar Technologies Corporation and York International Corporation. Michael A. Delaney, Director. Mr. Delaney has been a Vice President of CVC since 1989. Mr. Delaney is a Director of AmeriSource Health Corporation, Clark Material Handling Company, Chip PAC Inc., Delco Remy International, Inc., Great Lakes Dock and Dredge Corporation, GVC Holdings, JAC Holdings, Palomar Technologies Corporation, Paper Pak Products, Inc., SC Processing, Inc., MSX International and Triumph Holdings, Inc. III-2 Director Compensation and Arrangements With the exception of Mr. Richard J. Puricelli, who received $4,000 per quarter prior to his resignation effective February 26, 2001, other directors of the Company do not currently receive compensation for their services as directors. Members of the Board of Directors are elected pursuant to a Securities Purchase and Holders Agreement (the "Stockholders' Agreement") entered into in connection with the Recapitalization among IKS, IKS Corporation and its stockholders. Pursuant to the Stockholders' Agreement, the Board of Directors of the Company is composed at all times of five directors as follows: the president of the Company, which position remained vacant after April 25, 2000; one individual designated by Diether Klingelnberg; two individuals designated by CVC; and one independent director who shall be designated by CVC subject to the right of holders of the majority of the outstanding shares of Corp. Class A Stock (defined below) to veto the election of any such independent director. ITEM 11. EXECUTIVE COMPENSATION. The following table sets forth certain information concerning the compensation received for services rendered in 2000 by (i) each person who served as the Company's Chief Executive Officer during 2000 and, (ii) the four most highly compensated executive officers of the Company (other than the individuals who served as the Company`s Chief Executive Officer) in office on December 31, 2000.
Summary Compensation Table Annual Compensation ---------------------------------------------------------------------------- All Other Salary Bonus Other Compensation Name and Principal Position Year ($) ($) ($) ($) - ---------------------------------- ------------ ------------ ------------ ------------ ------------- P. Daniel Miller (1) 2000 350,000 -- -- 3,602(2) Former President and Chief 1999 216,705 302,400 -- 12,646(3) Executive Officer 1998 -- -- -- -- Thomas W.G. Meyer 2000 180,811 139,942 -- -- Executive Vice President-- Europe 1999 201,251 159,006 -- -- and Asia 1998 184,600 165,430 -- -- William M. Schult 2000 191,700 47,925 -- 3,065(4) Executive Vice President-- 1999 155,954 97,336 -- 7,899(5) Chief Financial Officer, 1998 135,000 38,750 -- 11,036(6) Treasurer and Secretary Bradley H. Widmann 2000 175,000 43,750 -- 1,836 Vice President -- Operations/Americas 1999 23,558 -- -- -- 1998 -- -- -- -- Jeffrey H. Welday 2000 114,692 24,850 25,021 739 Vice President-Sales & Marketing/ 1999 -- -- -- -- Americas 1998 -- -- -- --
III-3 (1) Mr. Miller's employment with the company terminated effective April 25, 2000. (2) Includes $3,400 in Company 401(k) contributions and $202 in group term life insurance premiums. (3) Includes $5,418 in Company Profit Sharing Plan contributions, $7,154 in car allowance, and $74 in group term life insurance premiums. (4) Includes $2,979 in Company 401(k) contributions, and $86 in group term life insurance premiums. (5) Includes $4,818 in Company Profit Sharing Plan contributions, $2,911 in Company 401(k) plan contributions, and $170 in group term life insurance premiums. (6) Includes $2,930 in Company 401(k) contributions, $8,000 in Company Profit Sharing Plan contributions and $106 in group term life insurance premiums. (7) Includes $1,615 in Company 401(k) contributions and $221 in group term life insurance premiums. (8) Mr. Welday received a sign-on bonus when he joined the Company. (9) Includes $655 in Company 401(k) contributions and $84 in group term life insurance premiums Employment Arrangements and Deferred Compensation Agreements P. Daniel Miller was hired by the Company as President and Chief Executive Officer pursuant to an Employment Agreement effective May 24, 1999. As compensation, Mr. Miller received a predetermined annual salary ($350,000 in 2000). Following the termination of Mr. Miller's employment on April 25, 2000, Mr. Miller continued and will continue to receive severance payments equal to his annual salary through April 24, 2001. Thomas Meyer was hired by IKS Klingelnberg GmbH as its Chief Executive Officer pursuant to an Employment Agreement effective January 1, 1993 which, following an extension on December 17, 1998, expires on December 31, 2003. As compensation, Mr. Meyer receives a predetermined annual salary (DM 400,000 in 2000) and receives certain fringe benefits including a bonus, an automobile, and insurance coverage. Following any termination of Mr. Meyer's employment, Mr. Meyer will be subject to a non-competition covenant for up to two years, in exchange for payment in each year of an amount equal to one-half of Mr. Meyer's most recently agreed upon annual compensation. William M. Schult was hired by IKS Corporation pursuant to an Employment Agreement effective August 16, 1995. He joined the Company in 1996. Mr. Schult was promoted to Chief Financial Officer on November 6, 1996 and to Executive Vice President on October 15, 1999. As compensation, Mr. Schult receives a predetermined annual salary ($191,700 in 2000) and receives certain fringe benefits including a bonus, an automobile, and insurance coverage. Following any termination of Mr. Schult's employment, Mr. Schult will be subject to a non-competition covenant for one year. The Company or Mr. Schult may terminate this employment agreement upon six months written notice. Bradley H. Widmann was hired by the Company as Vice President - Operations pursuant to an Employment Agreement effective November 1999. As compensation, Mr. Widmann receives a predetermined annual salary ($175,000 in 2000) and receives certain fringe benefits including a bonus and insurance coverage. Following any termination of Mr. Widmann's employment, Mr. Widmann will be subject to a non-competition covenant for one year. The Company may terminate this employment agreement upon six months written notice. Jeffrey H. Welday was hired by the Company as Vice President - Industrial Division pursuant to an Employment agreement effective March 2000. Mr. Welday was promoted to Vice President - Sales and Marketing on April 25, 2000. As compensation, Mr. Welday receives a predetermined annual salary ($142,000 in 2000) and III-4 receives certain fringe benefits including a one-time sign-on bonus, an annual performance bonus and insurance coverage. Following any termination of Mr. Welday's employment, Mr. Welday will be subject to a non-competition covenant for one year. The Company may terminate this employment agreement upon six months written notice. 401(k) and Profit Sharing Plan In 1997, the Company's tax qualified profit sharing plan was merged into the IKS Corporation 401(k) retirement plan. The combined plan was renamed the International Knife & Saw, Inc. 401(k) and Profit Sharing Plan. All of the Company's domestic non-unionized employees are eligible to participate after completing one year of service and attaining age 20 1/2. Subject to certain statutory limitations, employees may contribute up to 15 percent of their compensation to the plan on a pre-tax basis. The Company may make discretionary matching contributions equal to a percentage of the employees' pre-tax contributions. However, in determining the amount of matching contributions, only employee pre-tax contributions up to four percent of compensation are taken into account. Employees are fully vested in their benefits under the plan after two years of service. In addition to discretionary matching contributions on employees' pre-tax contributions, the Company may also make profit sharing contributions. These contributions are allocated to the accounts of the eligible employees in the same ratio that each eligible employee's compensation for the year bears to the total compensation of all eligible employees for the year. For allocation purposes, the compensation of any employee in excess of $170,000 is disregarded. Employees are fully vested in their benefits under the plan after five years of service. An employee may not receive a distribution of his benefits under the plan until following his termination of employment. Compensation Committee Interlocks and Insider Participation Each of the four current members of the Company's Board of Directors also serves on the compensation committee. See "Item 13. Certain Relationships and Related Transactions" for disclosure with respect to certain relationships of the some of the members of the compensation committee and the Company. In the event that Messrs. Urry and Delaney are unwilling or unable to serve, or otherwise cease to serve, CVC shall be entitled to select their replacement on the Board of Directors. In addition, the Stockholders' Agreement provides that Diether Klingelnberg or his designated representative shall serve as a director. III-5 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. All of the outstanding capital stock of the Company is currently owned by IKS Corporation. The following table sets forth certain information with respect to the beneficial ownership of IKS Corporation's preferred stock (the "Corp. Preferred Stock"), voting common stock (the "Corp. Class A Stock") and non-voting common stock (the "Corp. Class B Stock" and, together with the Corp. Class A Stock, the "Corp. Common Stock") by (i) each person or entity who owns five percent or more thereof, (ii) each director of the Company who is a stockholder, (iii) the Chief Executive Officer of the Company and the other executive officers named in the "Summary Compensation Table" above who are stockholders, and (iv) the directors and executive officers of the Company as a group. Unless otherwise specified, all shares are directly held.
Number and Percent of Shares Corp. Corp. Corp. Class A Corp. Class B Series A Preferred Stock Series B Preferred Stock Stock(2) Stock(3) Name of Beneficial Owner (1) Number Percent Number Percent Percent Percent Number Percent - ---------------------------- ------ ------- ------ ------- ------- ------- ------ ------- Citicorp Venture Capital Ltd 8,241 69.0% -- -- 31,453 35.3.% 11,234 76.5% 399 Park Avenue New York, New York 10043 Haulux, AG 5 0.04% 5 0.5% 17,040 19.1% -- -- Centre Etoile 5,bd de la Foire B.P. 351 L-2013 Luxembourg Dualux, AG -- -- -- -- 17,000 19.1% -- -- Centre Etoile 5,bd de la Foire B.P. 351 L-2013 Luxembourg John E. Halloran 600 5.0% 600 68.5% 5,000 5.6% -- -- 19 Jenkins Farm Way Simpsonville, SC 29680 Thomas W.G. Meyer 242 2.0% 2 0.3% 4,534 5.1% -- -- William M. Schult 48 0.4% 48 5.5% 956 1.1% -- -- James A. Urry (4) 58 0.5% -- -- 221 0.2% 79 0.5% Michael Delaney (4) 58 0.5% -- -- 221 0.2% 79 0.5% All directors and executive officers as a group 519 4.3% 163 18.6% 24,798 27.8% 157 1.1% (9 persons) (4)
- ---------- (1) Unless otherwise indicated, the address of each shareholder listed above is 1299 Cox Avenue, Erlanger, KY 41018. (2) Does not include shares of Corp. Class A Stock issuable upon conversion of Corp. Class B Stock. See "--- Corp. Common Stock" . (3) Does not include shares of Corp. Class B Stock issuable upon conversion of Corp. Class A Stock. See "---Corp. Common Stock". (4) Does not include shares beneficially held by CVC, which may be deemed beneficially owned by Messrs. Delaney and Urry. Messrs. Delaney and Urry disclaim beneficial ownership of shares held by CVC. III-6 Corp. Common Stock The Certificate of Incorporation of IKS Corporation provides that IKS Corporation may issue 400,000 shares of Corp. Common Stock, divided into two classes consisting of 200,000 shares of Corp. Class A Stock and 200,000 shares of Corp. Class B Stock. The holders of Corp. Class A Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Except as required by law, the holders of Corp. Class B Stock have no voting rights. Under the Certificate of Incorporation of IKS Corporation, a holder of either class of Corp. Common Stock may convert any or all of his shares into an equal number of shares of the other class of Corp. Common Stock; provided that in the case of a conversion from Corp. Class B Stock, which is nonvoting, into Corp. Class A Stock, which is voting, the holder of shares to be converted would be permitted under applicable law to hold the total number of shares of Corp. Class A Stock which would be held after giving effect to the conversion. Stockholders' Agreement In connection with the Recapitalization, the stockholders of IKS Corporation entered into the Stockholders' Agreement containing certain agreements among such stockholders with respect to the capital stock and corporate governance of IKS Corporation and the Company. The Stockholders' Agreement contains certain provisions which, with certain exceptions, restrict the ability of the stockholders from transferring any Corp. Common Stock, Corp. Preferred Stock or Junior Subordinated Debentures of IKS Corporation (the "Corp. Debentures"), except pursuant to the terms of the Stockholders' Agreement. If holders of more than 50% of the Corp. Common Stock approve the sale of the Company, each stockholder has agreed to consent to such sale and, if such sale includes the sale of stock, each stockholder has agreed to sell all of such stockholder's Corp. Common Stock on the terms and conditions approved by holders of a majority of the Corp. Common Stock then outstanding. In the event IKS Corporation proposes to issue and sell (other than in a public offering pursuant to a registration statement) any shares of Corp. Common Stock or any securities containing options or rights to acquire any shares of Corp. Common Stock or any securities convertible into Corp. Common Stock to CVC or its affiliates, IKS Corporation must first offer to each of the other shareholders a pro rata portion of such shares. Such preemptive rights are not applicable to the issuance of shares of Corp. Common Stock upon the conversion of shares of one class of Corp. Common Stock into shares of the other class. Pursuant to the Stockholders' Agreement, the Board of Directors of the Company is composed at all times of five directors as follows: the President of the Company, which position remained vacant after April 25, 2000; one individual designated by Diether Klingelnberg; two individuals designated by CVC; and one independent director who shall be designated by CVC subject to the right of holders of the majority of the outstanding shares of Corp. Class A Stock to veto the election of any such independent director. The Stockholders' Agreement also provides for certain additional restrictions on transfer of shares acquired by members of management pursuant to certain employee stock purchase plans adopted by IKS Corporation in 1997 ("Incentive Shares"), including the right of IKS Corporation to repurchase Incentive Shares held by a member of management (a "Participant") upon termination of such Participant's employment prior to 2001, at a formula price, and the grant of a right of first refusal in favor of IKS Corporation in the event a Participant elects to transfer such Incentive Shares of Corp. Common Stock. Registration Rights Agreement In connection with their entry into the Stockholders' Agreement, IKS Corporation, CVC and certain other stockholders of IKS Corporation entered into a Registration Rights Agreement (the "Corp. Registration Rights Agreement"). Pursuant to the Corp. Registration Rights Agreement, upon the written request of CVC, IKS Corporation has agreed to prepare and file a registration statement with the Securities and Exchange Commission concerning the distribution of all or part of the shares held by CVC and use its best efforts to cause such III-7 registration statement to become effective. If at any time IKS Corporation files a registration statement for the Corp. Common Stock pursuant to a request by CVC or otherwise (other than a registration statement on Form S-8, Form S-4 or any similar form, a registration statement filed in connection with a share exchange or an offering solely to IKS Corporation' employees or existing stockholders, or a registration statement registering a unit offering), IKS Corporation will use its best efforts to allow the other parties to the Corp. Registration Rights Agreement to have their shares of Corp. Common Stock (or a portion of their shares under certain circumstances) included in such offering of Corp. Common Stock if the registration form proposed to be used may be used to register such shares. Registration expenses of the selling stockholders (other than underwriting fees, brokerage fees and transfer taxes applicable to the shares sold by such stockholders or the fees and expenses of any accountants or other representatives retained by a selling stockholder) are to be paid by IKS Corporation. Employee Stock Purchase Plans In 1997, IKS Corporation adopted a Restricted Stock Plan, pursuant to which Participants were offered the opportunity to purchase Corp. Class A Stock. The Participants were given the opportunity to acquire an aggregate of up to 10% of the Corp. Class A Stock outstanding on a fully-diluted basis. Also in 1997, IKS Corporation adopted an Equity Investment Plan, pursuant to which Participants were offered the opportunity to purchase Corp. Class A Stock, Series A 12% Cumulative Compounding Preferred Stock, par value $.01 per share, and Series B 12% Cumulative Compounding Preferred Stock, par value $.01 per share. The Participants were given the opportunity to acquire an aggregate of up to 1,020 shares of Corp. Class A Stock, 122.4 shares of Series A Preferred Stock and 122.4 shares of Series B Preferred Stock. Upon the Participants' purchase of securities under the Restricted Stock Plan or the Equity Investment Plan (the "Plans"), such Participants became subject to the terms and conditions of the Stockholders' Agreement. See "--Stockholders' Agreement." In addition to the restrictions set forth above in the discussion of the Stockholders Agreement, the Stockholders' Agreement also provides the following restrictions with respect to the Participants: (i) the Incentive Shares acquired by a Participant will be subject to repurchase by IKS Corporation or its designee if such Participant's employment with the Company is terminated within five years after acquiring such securities at formula prices which vary based upon the time and circumstance of such termination, (ii) IKS Corporation has a right of first refusal through such date on all securities acquired by a Participant pursuant to a Plan, and (iii) if holders of a majority of Corp. Class A Stock approve a sale of IKS Corporation, Participants will consent to such sale. Other In connection with the Recapitalization, Arndt Klingelnberg, Diether Klingelnberg and CVC entered into an agreement pursuant to which their ownership percentages of the Corp. Preferred Stock and the Corp. Debentures may be adjusted. Upon the occurrence of certain events, their respective ownership percentages of Corp. Preferred Stock and Corp. Debentures will be adjusted so that they will be pro rata with their respective ownership percentages of Corp. Common Stock. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None III-8 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements. The following Consolidated Financial Statements of the Company and the Report of Independent Auditors set forth on pages II-9 through II-31 and II-8, respectively, are incorporated by reference into this item 14 of Form 10-K by item 8 hereof: - Report of Independent Auditors - Consolidated Balance Sheets as of December 31, 2000 and 1999. - Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. - Consolidated Statements of Changes in Shareholder's Deficit for the years ended December 31, 2000, 1999 and 1998. - Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. - Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedule. Schedule II - Valuation and Qualifying Accounts and Reserves is attached hereto at page IV-6 and is incorporated by reference into this Item 14 of Form 10-K. No other financial statement schedules have been filed herewith since they are either not required, are not applicable, or the required information is shown in the consolidated financial statements or related notes. IV-1 (a)(3) Exhibits. Exhibit No. Description --- ----------- 3.1 Restated Certificate of Incorporation, as amended, of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registra- tion Statement on Form S-4, Registration No. 333-17305) 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 4.1 Indenture dated as of November 6, 1996 between the Company and United States Trust Company of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 4.2 Registration Rights Agreement dated as of November 6, 1996 among the Company, Schroder Wertheim & Co. Incorporated and Smith Barney Inc. (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 4.3 Form of 113/8% Senior Subordinated Notes due 2006 (included in Exhibit 4.1) 10.1 Purchase Agreement dated October 31, 1996 among the Company, Schroder Wertheim & Co. Incorporated and Smith Barney Inc. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.2 Letter Agreement dated October 8, 1996 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.3 Letter Agreement dated October 8, 1996 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.4 Agreement and Plan of Recapitalization dated September 17, 1996 among Citicorp Venture Capital Ltd., IKS Corporation, the stock- holders of IKS Corporation and certain stockholders of the Company (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.5 Commercial Lease Contract dated March 1, 1992 between Howard & Howard Real Estate Partnership and IKS Service, Inc., as amended (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.6 Lease dated June 5, 1996 between Century Development Co. and the Company (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.7 Lease dated July 21, 1995 between 1st American Management Co., Inc. and the Company (incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.8 Lease Agreement dated April 17, 1991 between Tate Engineering, Inc. and IKS Eastern Services, Inc., as amended (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.9 Offer to Lease dated October 25, 1995 between Sigma Enterprises Ltd. and IKS Canadian Knife & Saw Ltd. (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) IV-1 10.10 Industrial Multiple Tenancy Lease dated June 14, 1995 between Geary Investments Limited "in Trust" and IKS Canadian Knife & Saw Ltd. (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.11 Lease dated March 12, 1992 between Gestion W. & L. Choiniere Inc. and IKS Canadian Knife & Saw Ltd., as amended (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.12 Joint Venture Company Contract dated September 24, 1995 between IKS Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery General Corporation (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.13 Joint Venture Company Contract dated September 24, 1995 between IKS Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery General Corporation (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.14 Letter Agreement dated September 23, 1997 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 1997, Registration No. 333-17305) 10.15 Summary of Permitted Indebtedness, Commitments from Banks, and Availability at September 30, 2000 (incorporated by reference to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2000, Registration No. 333-17305) 10.16 Letter agreement dated November 16, 1998 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.17 Letter agreement dated January 19, 1999 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.18 Letter agreement dated May 12, 1999 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.19 Letter agreement dated March 16, 2000 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q, for the IV-2 quarterly period ended June 30, 2000, Registration No. 333-17305) 10.20 Security Agreement dated December 11, 2000 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.20 to the Company's Current Report on Form 8-K, Registration No. 333-17305) 10.21 First Amendment to Security Agreement dated January 24, 2001 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.21 to the Company's Current Report on Form 8-K, Registration No. 333-17305) 10.22 Letter agreement dated December 11, 2000 between Deutsche Bank and the Company 21.1 Subsidiaries of the Company (b) Reports on Form 8-K. None. IV-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNATIONAL KNIFE & SAW, INC. By: /s/ William M. Schult --------------------------------------------- William M. Schult Executive Vice President - Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer, and Executive Committee Member) March 12, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 12, 2001. Signature Title --------- ----- /s/ William M. Schult Executive Vice President- Chief Financial William M. Schult Officer, Treasurer and Secretary (Principal Financial and Accounting Officer, and Executive Committee Member) /s/ Bradley H. Widmann Vice President- Operations/Americas and Bradley H. Widmann Executive Committee Member /s/ Jeffrey H. Welday Vice President- Sales & Marketing/ Jeffrey H. Welday Americas and Executive Committee Member /s/ Diether Klingelnberg Director Diether Klingelnberg /s/ James A. Urry Director James A. Urry IV-4 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. The registrant has not sent the following to security holders: (i) any annual report to security holders covering the registrant's last fiscal year; or (ii) any proxy statements, forms of proxy or other proxy soliciting material wither respect to any annual or other meeting of security holders. IV-5 SCHEDULE II INTERNATIONAL KNIFE & SAW, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (DOLLARS IN THOUSANDS)
COL. C COL. B ADDITIONS COL. E BALANCE AT CHARGED TO COL. D BALANCE COL. A BEGINNING COSTS AND OTHER DEDUCTIONS AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD YEAR ENDED 2000 Allowance for doubtful accounts $ 1,856 $ 1,013 $ $ 202(b) $ 572(a) 2,428 71(c) Allowance for inventory obsolescence 2,118 2,083 655(b) 835(a) 3,898 123(c) YEAR ENDED 1999 Allowance for doubtful accounts 1,780 1,005 -- 575(a) 1,856 354(c) Allowance for inventory obsolescence ......... 1,001 -- 1,438(a) 2,118 233(c) YEAR ENDED 1998 Allowance for doubtful accounts 1,480 231 261(b) 164(a) 1,780 28(c) Allowance for inventory obsolescence .......... 768 170(b) 481(a) 2,788 50(c)
(a) Represents amounts charged against the reserves during the year. (b) Consists of reserves of subsidiaries purchased during the year. (c) Represents foreign currency translation adjustments during the year. IV-6 EXHIBIT INDEX Exhibit No. Description --- ----------- 3.1 Restated Certificate of Incorporation, as amended, of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 4.1 Indenture dated as of November 6, 1996 between the Company and United States Trust Company of New York, as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 4.2 Registration Rights Agreement dated as of November 6, 1996 among the Company, Schroder Wertheim & Co. Incorporated and Smith Barney Inc. (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 4.3 Form of 113/8% Senior Subordinated Notes due 2006 (included in Exhibit 4.1) 10.1 Purchase Agreement dated October 31, 1996 among the Company, Schroder Wertheim & Co. Incorporated and Smith Barney Inc. (incorporated by reference to Exhibit 10.1 to the Company's Registra- tion Statement on Form S-4, Registration No. 333-17305) 10.2 Letter Agreement dated October 8, 1996 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.3 Letter Agreement dated October 8, 1996 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.4 Agreement and Plan of Recapitalization dated September 17, 1996 among Citicorp Venture Capital Ltd., IKS Corporation, the stockholders of IKS Corporation and certain stockholders of the Company (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.5 Commercial Lease Contract dated March 1, 1992 between Howard & Howard Real Estate Partnership and IKS Service, Inc., as amended (incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.6 Lease dated June 5, 1996 between Century Development Co. and the Company (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.7 Lease dated July 21, 1995 between 1st American Management Co., Inc. and the Company (incorporated by reference to Exhibit 10.7 to the Com- pany's Registration Statement on Form S-4, Registration No. 333-17305) 10.8 Lease Agreement dated April 17, 1991 between Tate Engineering, Inc. and IKS Eastern Services, Inc., as amended (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.9 Offer to Lease dated October 25, 1995 between Sigma Enterprises Ltd. and IKS Canadian Knife & Saw Ltd. (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.10 Industrial Multiple Tenancy Lease dated June 14, 1995 between Geary Investments Limited "in Trust" and IKS Canadian Knife & Saw Ltd. (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.11 Lease dated March 12, 1992 between Gestion W.& L. Choiniere Inc. and IKS Canadian Knife & Saw Ltd., as amended (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.12 Joint Venture Company Contract dated September 24, 1995 between IKS Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery General Corporation (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.13 Joint Venture Company Contract dated September 24, 1995 between IKS Klingelnberg Far East GmbH and Shanghai Printing & Packaging Machinery General Corporation (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-4, Registration No. 333-17305) 10.14 Letter Agreement dated September 23, 1997 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended September 30, 1997, Registration No. 333-17305) 10.15 Summary of Permitted Indebtedness, Commitments from Banks, and Availability at September 30, 2000 (incorporated by reference to Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended March 31, 2000, Registration No. 333-17305) 10.16 Letter agreement dated November 16, 1998 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.17 Letter agreement dated January 19, 1999 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.18 Letter agreement dated May 12, 1999 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.19 Letter agreement dated March 16, 2000 between Deutsche Bank and IKS Klingelnberg GmbH (incorporated by reference to Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q, for the quarterly period ended June 30, 2000, Registration No. 333-17305) 10.20 Security Agreement dated December 11, 2000 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.20 to the Company's Current Report on Form 8-K, Registration No. 333-17305) 10.21 First Amendment to Security Agreement dated January 24, 2001 between Deutsche Bank and the Company (incorporated by reference to Exhibit 10.21 to the Company's Current Report on Form 8-K, Registration No. 333-17305) 10.22 Letter agreement dated December 11, 2000 between Deutsche Bank and the Company 21.1 Subsidiaries of the Company EXHIBIT 21.1 Subsidiaries Name Jurisdiction ---- ------------ Hannaco Knives & Saws, Inc. Delaware IKS Canadian Knife & Saw Ltd. Canada IKS Klingelnberg GmbH Germany IKS Klingelnberg Asia Pte. Ltd. Singapore IKS Klingelnberg Far East GmbH Germany Shanghai IKS Lida Mechanical Blade Co. Ltd. China Shanghai IKS Mechanical Blade Co. Ltd. China IKS Knives & Saws (M) Sdn. Bhd. Malaysia PT. IKS Knife & Saw Indonesia Indonesia IKS Messerfabrik Geringswalde GmbH Germany Rolf Meyer GmbH Germany A.K. van der Wijngaart Beheer B.V. the Netherlands Diacarb B.V. the Netherlands A.K. van der Wijngaart B.V. the Netherlands Mayemyton Trading B.V. the Netherlands Diacarb Stansvormen v.o.f. the Netherlands Buland S.A. France Boehler Miller Messer und Saegen GmbH Austria IKS Mexican Holdings S.A. de C.V. Mexico International Knife and Saw de Mexico S.A. de C.V. Mexico International Knife and Saw Trading Corporation U.S. Virgin Islands P.T. Bevenmas Jaya Indonesia Exhibit 10.22 Translation of Letter from Deutsche Bank to International Knife & Saw, Inc. C/O IKS Klingelnberg GmbH December 11, 2000 Dear Mr. Meyer, Dear Mr. Schult: We refer to our telephone discussion of December 7, 2000, in which you informed us that the refinancing you were trying to obtain through U.S. banks will not occur. We confirm to you, that within the framework of General Conditions (AGB), we will continue to make available to you a line of credit in the amount of US $13,000,000 (in words: thirteen million US dollars). This line of credit is open ended, assuming economic and financial conditions remain the same. As we have already made clear in our previous correspondence, the agreed upon covenants have been violated. As discussed in the meantime, you will now pledge the following to us: o All inventories and all accounts receivable and all existing rights thereto, and o All shares in IKS Klingelnberg GmbH, Remscheid, Germany The details of these pledges will be agreed upon in separate contracts. Costs incurred in connection with filing and perfecting our liens must be borne by you. In this connection you confirm to us, that the subsidiaries of IKS Klingelnberg GmbH Remscheid are not being sold or pledged to third parties. The agreements from September 21, 2000 and October 17, 2000 regarding the maintenance of the equity ratios and shareholder relationship of International Knife & Saw, Inc. with IKS Klingelnberg GmbH continues to remain in effect. In addition, we reserve the right, in accordance with the previous and currently in-effect agreements, to demand additional collateral in the form of fixed assets. You hereby confirm to us that you will give us security interests in these assets upon demand. Drawdowns may occur in increments of at least $500,000 at Interbank rates plus a margin of 2% per year. We will also charge a commitment fee on the unused portion of the line equal to 0.25% per year, due and payable at the end of every calendar quarter. In consideration of the statutory regulations, in particular ss. 18 of the (German) credit law, you will inform us in the future, as in the past, about the economic and financial condition of International Knife & Saw, Inc. on a stand alone and consolidated basis, and of IKS Klingelnberg GmbH and its subsidiaries, by sending us audited financial statements within 6 months after the fiscal year end as well as appropriate interim numbers (quarterly reports). Every amount that is to be paid on the basis of this agreement must be made in its entirety and without the deduction of any type of withholding taxes at source. Such taxes are taxes, fees and public payments of any kind, which are deducted from payments made in accordance with the contract, either in Germany or the U.S. If such taxes are legally required, you must pay the additional amount required, in order that the payment we receive after such deductions corresponds to the full amount, that we would have received, if such a deduction had not been required. This loan agreement and all rights and obligations existing as a result thereof are in accordance with German law. The court of jurisdiction is Wuppertal, Germany. Please indicate your legally binding agreement with the content of this commitment by signing the enclosed copy and sending it back to us. We look forward to continuing a cooperative and trustworthy relationship. Regards, Deutsche Bank AG Remscheid Branch Signed by Mr. Wolff and Mr. Jakobi Agreed to and signed by William M. Schult, CFO of International Knife & Saw, Inc. -----END PRIVACY-ENHANCED MESSAGE-----