UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------------------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2005
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 1-11406
KADANT INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1762325
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
One Acton Place, Suite 202
Acton, Massachusetts 01720
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (978) 776-2000
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 whether or not the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 4, 2005
---------------------------- -----------------------------
Common Stock, $.01 par value 13,894,703
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
KADANT INC.
Condensed Consolidated Balance Sheet
(Unaudited)
Assets
July 2, January 1,
(In thousands) 2005 2005
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 46,221 $ 82,089
Accounts receivable, less allowances of $2,479 and $1,678 41,879 30,022
Unbilled contract costs and fees 18,111 10,258
Inventories (Note 5) 38,295 27,316
Deferred tax asset 9,013 6,691
Other current assets 7,639 6,703
Assets of discontinued operation (Note 14) 14,919 15,650
-------- --------
Total Current Assets 176,077 178,729
-------- --------
Property, Plant, and Equipment, at Cost 85,239 68,224
Less: Accumulated depreciation and amortization 51,402 51,160
-------- --------
33,837 17,064
-------- --------
Other Assets 19,447 11,342
-------- --------
Intangible Assets 37,574 3,694
-------- --------
Goodwill 121,732 74,408
-------- --------
Total Assets $388,667 $285,237
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 2, January 1,
(In thousands, except share amounts) 2005 2005
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current maturities of long-term obligations (Note 6) $ 9,037 $ -
Accounts payable 24,724 21,327
Accrued payroll and employee benefits 13,478 11,261
Accrued warranty costs (Note 8) 3,766 3,582
Accrued restructuring costs (Note 9) 9,289 10,026
Accrued income taxes 5,345 886
Other current liabilities 17,036 10,419
Liabilities of discontinued operation (Note 14) 6,572 7,578
-------- --------
Total Current Liabilities 89,247 65,079
-------- --------
Deferred Income Taxes 21,295 4,370
-------- --------
Long-Term Obligations (Note 6) 51,980 -
-------- --------
Other Long-Term Liabilities 11,407 3,327
-------- --------
Minority Interest 1,174 -
-------- --------
Shareholders' Investment:
Preferred stock, $.01 par value, 5,000,000 shares authorized;
none issued - -
Common stock, $.01 par value, 150,000,000 shares authorized;
14,604,520 shares issued 146 146
Capital in excess of par value 97,525 98,450
Retained earnings 135,251 129,173
Treasury stock at cost, 709,817 and 689,407 shares (17,930) (18,158)
Deferred compensation (299) (50)
Accumulated other comprehensive items (Note 2) (1,129) 2,900
-------- --------
213,564 212,461
-------- --------
Total Liabilities and Shareholders' Investment $388,667 $285,237
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
Three Months Ended
---------------------------
July 2, July 3,
(In thousands, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 65,086 $ 52,652
-------- --------
Costs and Operating Expenses:
Cost of revenues 40,385 32,255
Selling, general, and administrative expenses 18,497 14,575
Research and development expenses 1,247 581
-------- --------
60,129 47,411
-------- --------
Operating Income 4,957 5,241
Interest Income 379 318
Interest Expense (473) (4)
-------- --------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest Expense 4,863 5,555
Provision for Income Taxes 1,654 1,558
Minority Interest Expense 62 14
-------- --------
Income from Continuing Operations 3,147 3,983
Income (Loss) from Discontinued Operation (net of income tax expense
of $111 in 2005 and income tax benefit of $130 in 2004) (Note 14) 207 (240)
-------- --------
Net Income $ 3,354 $ 3,743
======== ========
Basic Earnings per Share (Note 3):
Continuing Operations $ .23 $ .28
Discontinued Operation .01 (.02)
-------- --------
Net Income $ .24 $ .26
======== ========
Diluted Earnings per Share (Note 3):
Continuing Operations $ .22 $ .27
Discontinued Operation .02 (.01)
-------- --------
Net Income $ .24 $ .26
======== ========
Weighted Average Shares (Note 3):
Basic 13,891 14,218
======== ========
Diluted 14,181 14,555
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Statement of Income
(Unaudited)
Six Months Ended
---------------------------
July 2, July 3,
(In thousands, except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $115,830 $100,152
-------- --------
Costs and Operating Expenses:
Cost of revenues 72,367 60,288
Selling, general, and administrative expenses 33,391 28,346
Research and development expenses 2,295 1,469
-------- --------
108,053 90,103
-------- --------
Operating Income 7,777 10,049
Interest Income 851 647
Interest Expense (475) (12)
-------- --------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest Expense 8,153 10,684
Provision for Income Taxes 1,857 3,353
Minority Interest Expense 62 14
-------- --------
Income from Continuing Operations 6,234 7,317
Loss from Discontinued Operation (net of income tax benefit
of $84 and $456) (Note 14) (156) (846)
-------- --------
Net Income $ 6,078 $ 6,471
======== ========
Basic Earnings per Share (Note 3):
Continuing Operations $ .45 $ .51
Discontinued Operation (.01) (.05)
-------- --------
Net Income $ .44 $ .46
======== ========
Diluted Earnings per Share (Note 3):
Continuing Operations $ .44 $ .50
Discontinued Operation (.01) (.06)
-------- --------
Net Income $ .43 $ .44
======== ========
Weighted Average Shares (Note 3):
Basic 13,909 14,220
======== ========
Diluted 14,196 14,579
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
---------------------------
July 2, July 3,
(In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 6,078 $ 6,471
Loss from discontinued operation (Note 14) 156 846
-------- --------
Income from continuing operations 6,234 7,317
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 2,719 1,833
Provision for losses on accounts receivable 44 218
Loss (gain) on sale of property, plant, and equipment 30 (140)
Minority interest expense 62 14
Other non-cash items 34 312
Changes in current accounts, net of effects of acquisition:
Accounts receivable 2,402 (232)
Unbilled contract costs and fees (6,125) (878)
Inventories 3,066 (416)
Other current assets 902 (83)
Accounts payable (1,619) 1,297
Other current liabilities (2,866) (980)
-------- --------
Net cash provided by operating activities 4,883 8,262
-------- --------
Investing Activities:
Acquisition, net of cash acquired (Note 4) (101,365) -
Capitalized acquisition costs (Note 4) 3,073 -
Acquisition of minority interest in subsidiary - (318)
Purchases of property, plant, and equipment (875) (919)
Proceeds from sale of property, plant, and equipment 9 1,279
Other, net (1,041) (93)
-------- --------
Net cash used in investing activities (100,199) (51)
-------- --------
Financing Activities:
Proceeds from issuance of short- and long-term obligations (Note 6) 60,000 -
Increase in short- and long-term obligations (Note 4) 4,000 -
Net proceeds from issuance of Company common stock 639 4,598
Purchases of Company common stock (2,085) (6,159)
Repayments of long-term obligations - (598)
-------- --------
Net cash provided by (used in) financing activities 62,554 (2,159)
-------- --------
Exchange Rate Effect on Cash (2,675) 698
-------- --------
Net Cash (Used in) Provided by Discontinued Operation (431) 240
-------- --------
(Decrease) Increase in Cash and Cash Equivalents (35,868) 6,990
Cash and Cash Equivalents at Beginning of Period 82,089 74,412
-------- --------
Cash and Cash Equivalents at End of Period $ 46,221 $ 81,402
======== ========
Non-cash Investing Activities:
Fair value of assets acquired $156,667 $ -
Cash paid for acquired business (104,531) -
Obligation to be paid for acquired business (4,000) -
-------- --------
Liabilities assumed of acquired business $ 48,136 $ -
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
The interim condensed consolidated financial statements and related notes
presented have been prepared by Kadant Inc. (also referred to in this document
as "we," "Kadant," "the Company," or "the Registrant") without audit and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the Company's financial position at July 2,
2005, its results of operations for the three- and six-month periods ended July
2, 2005, and July 3, 2004, and cash flows for the six-month periods ended July
2, 2005, and July 3, 2004. Interim results are not necessarily indicative of
results for a full year.
The condensed consolidated balance sheet presented as of January 1, 2005,
has been derived from the consolidated financial statements that have been
audited by the Company's independent auditors. The condensed consolidated
financial statements and related notes are presented as permitted by Form 10-Q
and do not contain certain information included in the annual consolidated
financial statements and related notes of the Company. The condensed
consolidated financial statements and notes included herein should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
January 1, 2005, filed with the Securities and Exchange Commission.
Results for the six-month period ended July 3, 2004 have been
reclassified to reflect the Company's composite building products business as a
discontinued operation (Note 14).
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying condensed consolidated balance
sheet, including foreign currency translation adjustments and deferred gains and
losses on foreign currency contracts. The components of comprehensive income are
as follows:
Three Months Ended Six Months Ended
------------------------ ----------------------
July 2, July 3, July 2, July 3,
(In thousands) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,354 $ 3,743 $ 6,078 $ 6,471
------- ------- ------- -------
Other Comprehensive Items:
Foreign Currency Translation Adjustments (2,997) (949) (3,663) 1,087
Deferred Loss on Foreign Currency Contracts (266) (14) (366) (36)
------- ------- ------- -------
(3,263) (963) (4,029) 1,051
------- ------- ------- -------
Comprehensive Income $ 91 $ 2,780 $ 2,049 $ 7,522
======= ======= ======= =======
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings per Share
Basic and diluted earnings per share are calculated as follows:
Three Months Ended Six Months Ended
------------------------ ----------------------
July 2, July 3, July 2, July 3,
(In thousands, except per share amounts) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 3,147 $ 3,983 $ 6,234 $ 7,317
Income (Loss) from Discontinued Operation 207 (240) (156) (846)
------- ------- ------- -------
Net Income $ 3,354 $ 3,743 $ 6,078 $ 6,471
======= ======= ======= =======
Basic Weighted Average Shares 13,891 14,218 13,909 14,220
Effect of Stock Options 290 337 287 359
------- ------- ------- -------
Diluted Weighted Average Shares 14,181 14,555 14,196 14,579
======= ======= ======= =======
Basic Earnings per Share:
Continuing Operations $ .23 $ .28 $ .45 $ .51
Discontinued Operation .01 (.02) (.01) (.05)
------- ------- ------- -------
Net Income $ .24 $ .26 $ .44 $ .46
======= ======= ======= ========
Diluted Earnings per Share:
Continuing Operations $ .22 $ .27 $ .44 $ .50
Discontinued Operation .02 (.01) (.01) (.06)
------- ------- ------- -------
Net Income $ .24 $ .26 $ .43 $ .44
======= ======= ======= =======
Options to purchase approximately 218,000 and 222,400 shares of common
stock for the second quarters of 2005 and 2004, respectively, and 222,700 and
234,700 shares of common stock for the first six months of 2005 and 2004,
respectively, were not included in the computation of diluted earnings per share
because the options' exercise prices were greater than the average market price
for the common stock and the effect of their inclusion would have been
anti-dilutive.
4. Acquisition
On May 11, 2005, the Company acquired all the outstanding stock of The
Johnson Corporation (Kadant Johnson), a leading supplier of steam and condensate
systems, components, and controls used primarily in the dryer section of the
papermaking process and during the production of corrugated boards, metals,
plastics, rubber, and textiles. Kadant Johnson was a privately held company
based in Three Rivers, Michigan with approximately 575 employees and 2004 annual
revenues of $76,092,000. The purchase price for the acquisition was $101,458,000
in cash, subject to a further post-closing adjustment, and $3,073,000 of
acquisition-related costs. In addition to the consideration paid at closing, the
Company issued a letter of credit to the sellers for $4,000,000 related to
certain tax assets of Kadant Johnson, the value of which the Company expects to
realize. This amount is subject to adjustment based on The Johnson Corporation's
final tax returns for 2004 and 2005. This additional consideration, of which
$600,000 is included in other current liabilities and $3,400,000 is included
other long-term liabilities in the accompanying condensed consolidated balance
sheet, is due over the next five years as follows: 15% in May of 2006, 2007,
2008 and 2009, and 40% in May 2010.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition (continued)
The parties also agreed in the purchase agreement to an earn-out
provision, based on the achievement of certain revenue targets between the
closing date (May 11, 2005) and July 1, 2006, which could increase the purchase
price by up to $8,000,000. This contingent consideration will be accounted for
as an increase in goodwill, if and when the revenue targets are achieved.
To fund a portion of the purchase price, the Company entered into a term
loan and revolving credit facility (see Note 6 for further discussion).
Pursuant to the purchase agreement, at the closing of the acquisition
$12,750,000 of the purchase price was deposited into an escrow fund, primarily
to secure certain indemnification obligations of the sellers. On the 18th-month
anniversary of the closing, the balance of the escrow fund in excess of
$2,000,000 and amounts held for unresolved claims will be distributed to the
sellers. The remainder of the escrow fund will be held until the fifth
anniversary of the closing to satisfy certain tax, environmental, and other
indemnity claims.
The following table summarizes the purchase method of accounting for the
acquisition and the estimated fair values of the assets acquired and the
liabilities assumed (in thousands):
Allocation of Purchase Price
Cash and Cash Equivalents $ 4,071
Accounts Receivable, net 17,733
Notes Receivable 5,577
Inventory 13,280
Other Current Assets 5,258
Property, Plant, and Equipment 18,551
Long-Term Deferred Tax Assets 8,689
Other Assets 657
Intangible Assets 34,480
Goodwill 48,371
--------
Total Assets Acquired $156,667
--------
Accounts Payable $ 6,578
Other Current Liabilities 15,242
Short- and Long-Term Debt 3,286
Long-Term Deferred Tax Liabilities 17,148
Other Liabilities 4,727
Minority Interest 1,155
--------
Total Liabilities Assumed 48,136
--------
Net Assets Acquired $108,531
========
Consideration Paid:
Cash $ 41,458
Debt 60,000
Short- and Long-Term Obligations 4,000
Acquisition Costs 3,073
--------
Total Consideration Paid $108,531
========
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition (continued)
The estimated values of current assets, excluding inventory, and current
liabilities were based upon their historical costs in the hands of the seller on
the date of acquisition due to their short-term nature. Inventory and property,
plant, and equipment were recorded at estimated fair value based primarily on
cost and market approaches.
The following are the identifiable intangible assets acquired and the
respective periods over which the assets will be amortized on a straight-line
basis:
(In thousands) Amount Life
- -------------------------------------------------------------------------------------------------------------------
Existing technology $ 7,840 11 years *
Customer relationships 15,700 17 years *
Distribution network 2,400 17 years
Trade name 8,100 Indefinite
Licensing agreement 400 20 years
Non-compete agreements 40 3 years
--------
$ 34,480
========
* approximate weighted-average lives
The amount assigned to identifiable intangible assets acquired was based
on their respective fair values determined as of the acquisition date by an
outside valuation consultant, using income and cost approaches. The excess of
the purchase price over the tangible and identifiable intangible assets was
recorded as goodwill and amounted to approximately $48,371,000. In accordance
with current accounting standards, the goodwill will not be amortized and will
be tested for impairment annually in the fourth quarter of the Company's fiscal
year, as required by Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
The amortization expense associated with these acquired intangibles was
$268,000 in the second quarter of 2005. The estimated future amortization
expense associated with these acquired intangible assets is $983,000 in the
second half of 2005; $1,967,000 in 2006; $1,967,000 in 2007; $1,952,000 in 2008;
$1,943,000 in 2009; $1,943,000 in 2010; and the remaining $15,357,000
thereafter.
The acquisition was recorded under the purchase method of accounting as
of May 11, 2005 and the operating results of Kadant Johnson were included in
Kadant's condensed consolidated statement of income from the acquisition date of
May 11, 2005 to July 2, 2005.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisition (continued)
The following condensed consolidated statement of income is presented as
if the acquisition of Kadant Johnson had been made at the beginning of the
periods presented. This information is not necessarily indicative of what the
actual condensed combined statement of income of Kadant and Johnson would have
been for the periods presented, nor does it purport to represent the future
combined results of operations of Kadant and Johnson.
Six Months Ended
-------------------------------------
(In thousands) July 2, 2005 July 3, 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 145,031 $ 138,142
--------- ---------
Operating (Loss) Income * (2,553) 13,824
--------- ---------
(Loss) Income from Continuing Operations (2,676) 7,843
Loss from Discontinued Operation (156) (846)
--------- ---------
Net (Loss) Income $ (2,832) $ 6,997
========= =========
Basic (Loss) Earnings per Share:
(Loss) Income from Continuing Operations $ (.19) $ .55
Net (Loss) Income $ (.20) $ .49
Diluted (Loss) Earnings per Share:
(Loss) Income from Continuing Operations $ (.19) $ .54
Net (Loss) Income $ (.20) $ .48
* Included in operating loss for the first six months of 2005 was $11.0 million in one-time bonuses and $3.1 million
in acquisition-related costs incurred by The Johnson Corporation prior to the acquisition.
5. Inventories
The components of inventories are as follows:
(In thousands) July 2, 2005 January 1, 2005
- -----------------------------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $ 18,060 $ 12,849
Work in Process 7,538 6,047
Finished Goods (includes $635 and $611 at customer locations) 12,697 8,420
--------- ---------
$ 38,295 $ 27,316
========= =========
6. Short- and Long-Term Obligations
The components of short- and long-term obligations are as follows:
(In thousands) July 2, 2005 January 1, 2005
- -----------------------------------------------------------------------------------------------------------------------------
Current Portion of Term Loan $ 9,000 $ -
Other Short-Term Obligations 37 -
--------- ---------
Current Maturities of Long-Term Obligations $ 9,037 $ -
========= =========
Long-Term Portion of Term Loan $ 51,000 $ -
Other Long-Term Obligations 980 -
--------- ---------
Long-Term Obligations $ 51,980 $ -
========= =========
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Short- and Long-Term Obligations (continued)
To fund a portion of the purchase price for the acquisition of Kadant
Johnson, the Company entered into a term loan and revolving credit facility (the
"Credit Agreement") effective May 9, 2005 in the aggregate principal amount of
up to $85,000,000, including a $25,000,000 revolver. The Credit Agreement is
among Kadant, as Borrower, the Foreign Subsidiary Borrowers from time to time
parties thereto, the several banks and other financial institutions or entities
from time to time parties thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent. On May 11, 2005, the Company borrowed $60,000,000 under
the term loan facility, which is repayable in equal quarterly installments over
a five-year period. The aggregate principal to be repaid each year is as
follows: $4,500,000, $9,000,000, $10,500,000, $13,500,000, $15,000,000, and
$7,500,000 in 2005, 2006, 2007, 2008, 2009, and 2010, respectively. Interest on
the revolving loan and the term loan accrues and is payable quarterly in arrears
at one of the following rates selected by Kadant: (a) the prime rate plus an
applicable margin initially set at 0% for 2005, and up to 0.25% thereafter or,
(b) a Eurocurrency rate plus an applicable margin initially set at 1% for 2005,
and between 0.625% and 1.25% thereafter. The applicable margin is determined
based upon Kadant's total debt to earnings before interest, taxes, depreciation
and amortization (EBITDA) ratio.
In connection with the Credit Agreement, Kadant agreed to pay a
commitment fee, payable quarterly, at an initial rate of 0.25% per annum of the
unused amount of revolving credit commitments, subject to adjustment based upon
Kadant's total debt to EBITDA ratio (resulting in a per annum rate of between
0.175% and 0.275%).
Debt issuance costs were approximately $646,000 and are included in other
assets in the accompanying condensed consolidated balance sheet. These costs are
being amortized to interest expense over five years based on the
effective-interest method. As of July 2, 2005, the unamortized debt issuance
costs were approximately $616,000.
The obligations of Kadant under the Credit Agreement may be accelerated
upon the occurrence of an event of default under the Credit Agreement, which
include customary events of default including, without limitation, payment
defaults, defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related
defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
In addition, the Credit Agreement contains negative covenants applicable
to Kadant and its subsidiaries, including financial covenants requiring Kadant
to comply with a maximum consolidated leverage ratio of either 2.5 or 3.0 and a
minimum consolidated fixed charge coverage ratio of 1.5, and restrictions on
liens, indebtedness, fundamental changes, dispositions of property, making
certain restricted payments (including dividends and stock repurchases),
investments, transactions with affiliates, sale and leaseback transactions, swap
agreements, changing Kadant's fiscal year, negative pledges, arrangements
affecting subsidiary distributions, and entering into new lines of business. As
of July 2, 2005, Kadant was in compliance with these covenants.
The loans under the Credit Agreement are guaranteed by certain domestic
subsidiaries of Kadant and secured by a pledge of 65% of the stock of the
Company's first-tier foreign subsidiaries and the Company's subsidiary
guarantors pursuant to a guarantee and pledge agreement effective May 9, 2005 in
favor of JPMorgan Chase Bank, N.A., as agent on behalf of the lenders.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Swap Agreement
Kadant entered into a swap agreement (the "Swap Agreement"), which was
effective May 17, 2005, to convert $36,000,000 of the principal balance of the
$60,000,000 term loan from a floating rate to a fixed rate of interest. The Swap
Agreement has a five-year term, the same quarterly payment dates as the hedged
portion of the term loan and reduces proportionately in line with the
amortization of the term loan. Under the Swap Agreement, Kadant will receive a
3-month LIBOR rate and pay a fixed rate of interest of 4.125%. The net effect on
interest expense for the hedged portion of the term loan ($36,000,000) is that
Kadant will pay a fixed interest rate of up to 5.375% (the sum of the 4.125%
fixed rate under the Swap Agreement and the applicable margin of up to 1.25% on
the term loan). The guarantee provisions and the default and financial
covenants, as well as certain restrictions on the payment of dividends, included
in the Credit Agreement, which are outlined in Note 6, also apply to the Swap
Agreement.
The Swap Agreement has been designated as a cash flow hedge and is
carried at fair value. As of July 2, 2005, the unrealized loss associated with
the Swap Agreement was $127,000, which is included in other long-term
liabilities in the accompanying condensed consolidated balance sheet. Management
believes that any credit risk associated with the swap is remote based on the
creditworthiness of the financial institution issuing the Swap Agreement.
8. Warranty Obligations
The Company provides for the estimated cost of product warranties at the
time of sale based on our actual historical return rates and repair costs. In
the Pulp and Papermaking Systems (Papermaking Systems) segment, the Company
typically negotiates the terms regarding warranty coverage and length of
warranty depending on the products and applications. While the Company engages
in extensive product quality programs and processes, the Company's warranty
obligation is affected by product failure rates, repair costs, service delivery
costs incurred in correcting a product failure, and supplier warranties on parts
delivered to the Company. Should actual product failure rates, repair costs,
service delivery costs, or supplier warranties on parts differ from the
Company's estimates, revisions to the estimated warranty liability would be
required.
The changes in the carrying amount of the Company's product warranties
for the three- and six-month periods ended July 2, 2005 and July 3, 2004 are as
follows:
Three Months Ended Six Months Ended
--------------------------- --------------------------
July 2, July 3, July 2, July 3,
(In thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 3,755 $ 3,921 $ 3,582 $ 3,661
Provision charged to income 117 574 970 1,373
Usage (238) (1,011) (912) (1,593)
Acquired warranty obligation 232 - 232 -
Other, net (a) (100) (24) (106) 19
------- ------- ------- -------
Balance at End of Period $ 3,766 $ 3,460 $ 3,766 $ 3,460
======= ======= ======= =======
(a) Represents the effects of currency translation.
See Note 14 for warranty information related to the discontinued operation.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Restructuring Costs
In an effort to improve operating performance at the Papermaking Systems
segment's Kadant Lamort subsidiary in France, the Company approved a proposed
restructuring of that subsidiary on November 18, 2004. This restructuring was
initiated to strengthen Kadant Lamort's competitive position in the European
paper industry. Under French law, the proposed restructuring required
consultation with Kadant Lamort's workers' council, which consists of elected
employees supported by trade union representatives, before implementation. The
restructuring originally proposed the reduction of up to 136 full-time positions
across all functions in France, and is expected to be implemented in 2005. The
Company accrued a restructuring charge of $9,235,000 in the fourth quarter of
2004, in accordance with Statement of Financial Accounting Standards (SFAS) No.
112, "Employers' Accounting for Postemployment Benefits - An Amendment of
Financial Accounting Standards Board (FASB) Statements No. 5 and 43," for
severance and other termination costs in connection with the workforce
reduction. As a result of the restructuring, the Company expects to realize a
curtailment resulting in a reduction in the accrued liability associated with
Kadant Lamort's pension plan of approximately $800,000, which will be recognized
in 2005 when the restructuring plan has been implemented. In addition, during
the fourth quarter of 2004, the Company recorded restructuring costs of
$280,000, which were accounted for in accordance with SFAS No. 112, related to
severance costs of 11 employees at one of the Papermaking Systems segment's U.S.
subsidiaries.
A summary of the changes in accrued restructuring costs is as follows:
(In thousands) Severance
- ----------------------------------------------------------------------------------------------
Balance at January 1, 2005 $10,026
Usage (150)
Currency translation (587)
-------
Balance at July 2, 2005 $ 9,289
=======
The specific restructuring measures and associated estimated costs are
based on the Company's best judgments under prevailing circumstances. The
Company believes that the restructuring reserve balance is adequate to carry out
the restructuring activities formally identified and committed to during the
fourth quarter of 2004, and anticipates that all actions related to these
liabilities will be completed in 2005.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
10. Business Segment Information
The Company has combined its operating entities into one reportable
operating segment, Papermaking Systems. In addition, the Company has two
separate product lines; Fiber-based Products and Casting Products, which are
included in the "Other" category below. In classifying operational entities into
a particular segment, the Company considered how management assesses performance
and makes operating decisions and aggregated businesses with similar economic
characteristics, products and services, production processes, customers, and
methods of distribution.
Three Months Ended Six Months Ended
---------------------------- ---------------------------
July 2, July 3, July 2, July 3,
(In thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues (a):
Pulp and Papermaking Systems $ 62,528 $ 50,933 $110,099 $ 96,497
Other (c) 2,558 1,719 5,731 3,655
-------- -------- -------- --------
$ 65,086 $ 52,652 $115,830 $100,152
======== ======== ======== ========
Income from Continuing Operations Before Provision
for Income Taxes and Minority Interest Expense (a):
Pulp and Papermaking Systems (b) $ 5,934 $ 6,152 $ 9,310 $ 12,495
Corporate and Other (c,d) (977) (911) (1,533) (2,446)
-------- -------- -------- --------
Total Operating Income 4,957 5,241 7,777 10,049
Interest (Expense) Income, Net (94) 314 376 635
-------- -------- -------- --------
$ 4,863 $ 5,555 $ 8,153 $ 10,684
======== ======== ======== ========
Capital Expenditures (a):
Pulp and Papermaking Systems $ 612 $ 505 $ 752 $ 835
Corporate and Other (c,d) 97 50 123 84
-------- -------- -------- --------
$ 709 $ 555 $ 875 $ 919
======== ======== ======== ========
July 2, 2005 January 1, 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets:
Pulp and Papermaking Systems $341,147 $196,248
Corporate and Other (c,d) 32,601 73,339
-------- --------
Total Assets from Continuing Operations 373,748 269,587
Total Assets from Discontinued Operations 14,919 15,650
-------- --------
$388,667 $285,237
======== ========
(a) The results for Kadant Johnson are included from the acquisition date of May 11, 2005 to July 2, 2005.
(b) Includes a pre-tax gain of $970 in the six-month period ending July 3, 2004, which resulted from
renegotiating a series of agreements with one of the Company's licensees.
(c) Other includes the results from the Fiber-based Products business and Casting Products business.
(d) Corporate primarily includes general and administrative expenses.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
11. Stock-Based Compensation Plans and Pro Forma Stock-Based Compensation
Expense
As permitted by SFAS No. 148, "Accounting for Stock-based Compensation -
Transition and Disclosure," and SFAS No. 123, "Accounting for Stock-based
Compensation" (SFAS No. 123), the Company has elected to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), and related interpretations to account for its
stock-based compensation plans. No stock-based employee compensation cost
related to stock option awards is reflected in net income, as all options
granted under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Had compensation cost for awards
granted after 1994 under the Company's stock-based compensation plans been
determined based on the fair values at the grant dates consistent with the
method set forth under SFAS No. 123, the effect on certain of the Company's
financial results would have been as follows:
Three Months Ended Six Months Ended
----------------------- -------------------------
July 2, July 3, July 2, July 3,
(In thousands, except per share amounts) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 3,147 $ 3,983 $ 6,234 $ 7,317
Income (Loss) from Discontinued Operation 207 (240) (156) (846)
------- ------- ------- -------
Net Income As Reported 3,354 3,743 6,078 6,471
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (147) (623) (349) (1,129)
------- ------- ------- -------
Pro forma net income $ 3,207 $ 3,120 $ 5,729 $ 5,342
======= ======= ======= =======
Basic Earnings per Share:
As reported:
Income from continuing operations $ 0.23 $ 0.28 $ 0.45 $ 0.51
Net income $ 0.24 $ 0.26 $ 0.44 $ 0.46
Pro forma:
Income from continuing operations $ 0.22 $ 0.24 $ 0.42 $ 0.44
Net income $ 0.23 $ 0.22 $ 0.41 $ 0.38
Diluted Earnings per Share:
As reported:
Income from continuing operations $ 0.22 $ 0.27 $ 0.44 $ 0.50
Net income $ 0.24 $ 0.26 $ 0.43 $ 0.44
Pro forma:
Income from continuing operations $ 0.21 $ 0.23 $ 0.41 $ 0.42
Net income $ 0.23 $ 0.21 $ 0.40 $ 0.37
12. Employee Benefit Plans
One of the Company's U.S. subsidiaries has a noncontributory defined
benefit retirement plan. Benefits under the plan are based on years of service
and employee compensation. Funds are contributed to a trustee as necessary to
provide for actuarially determined costs, generally equal to the minimum amounts
required by the Employee Retirement Income Security Act (ERISA). The same
subsidiary has a post-retirement welfare benefits plan (reflected in the table
below in "Other Benefits"). No future retirees are eligible for the
post-retirement welfare benefits plan, and the plan includes a limit on the
subsidiary's contributions.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Employee Benefit Plans (continued)
The Company's Kadant Lamort subsidiary sponsors a defined benefit pension
plan, which is included in the table below in "Other Benefits." Benefits under
this plan are based on years of service and projected employee compensation.
Kadant Johnson also offers a post-retirement welfare benefit plan
(reflected in the table below in "Other Benefits") to its U.S. employees upon
attainment of eligible retirement age. Kadant Johnson pays 75% of all plan costs
for retirees with a retirement date prior to January 1, 2005, and 50% of all
plan costs for retirees with a retirement date after January 1, 2005, with no
limits on its contributions. The accrued post-retirement benefit cost associated
with this plan was $4,753,000 at July 2, 2005, and is included in other
long-term liabilities in the accompanying condensed consolidated balance sheet.
The components of the net periodic benefit cost for the pension benefits
and other benefits plans in the three- and six-month periods ended July 2, 2005
and July 3, 2004 are as follows:
Three Months Ended Three Months Ended
(In thousands) July 2, 2005 July 3, 2004
- -------------------------------------------------------------------------------------------------------------------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 182 $ 84 $ 158 $ 34
Interest cost 250 79 227 42
Expected return on plan assets (351) - (342) -
Recognized net actuarial (gain) loss (1) 9 - 9
Amortization of prior service cost 12 (12) 11 (15)
-------- ------- ------- --------
Net periodic benefit cost $ 92 $ 160 $ 54 $ 70
======== ======== ======== ========
Six Months Ended Six Months Ended
July 2,2005 July 3, 2004
-------------------------------------- -------------------
Pension Other Pension Other
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Components of Net Periodic Benefit Cost:
Service cost $ 357 $ 118 $ 320 $ 38
Interest cost 503 119 484 59
Expected return on plan assets (702) - (684) -
Recognized net actuarial loss - 17 - 18
Amortization of prior service cost 24 (24) 22 (30)
-------- -------- -------- --------
Net periodic benefit cost $ 182 $ 230 $ 142 $ 85
======== ======== ======== ========
The weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate 6.00% 5.10% 6.25% 4.80%
Expected long-term return on plan assets 8.50% - 8.50% -
Rate of compensation increase 4.00% 2.50% 4.00% 2.50%
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
12. Employee Benefit Plans (continued)
No cash contributions are expected for the U.S. subsidiary's
noncontributory defined benefit retirement plan and no cash contributions, other
than funding current benefit payments, are expected for the other pension and
post-retirement welfare benefits plans in 2005.
On December 8, 2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was enacted that provides for a Medicare
prescription drug benefit beginning in 2006 and federal subsidies to employers
who provide drug coverage to retirees. The Company's accumulated postretirement
benefit obligation or net periodic postretirement benefit cost do not reflect
any amount associated with the subsidy as the Company has not yet determined
whether the benefits provided by the plan are actuarially equivalent to or
better than Medicare Part D under the Act.
13. Recent Accounting Pronouncements
Share-Based Payment
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-
Based Payment" (SFAS No. 123R). SFAS No. 123R replaces SFAS No. 123, supersedes
APB Opinion No. 25, and amends SFAS No. 95 "Statement of Cash Flows." SFAS No.
123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. SFAS No. 123R is effective for the Company on January 1,
2006. The pro forma disclosures previously permitted under SFAS No. 123 will no
longer be an alternative to financial statement recognition. As permitted by
SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB Opinion No. 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options. Under SFAS
123R, companies must determine the appropriate fair value model to be used at
the date of adoption. The transition methods include prospective and
retrospective adoption options. Management is evaluating the requirements of
SFAS No. 123R. The impact of the adoption of SFAS No. 123R cannot be predicted
at this time because it will vary based on the levels of share-based payments
granted in the future and the options then outstanding.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which requires that abnormal amounts of
idle facility expense, freight, handling costs and wasted material be recognized
as current-period charges. This Statement also introduces the concept of "normal
capacity" and requires the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. Unallocated overheads
must be recognized as an expense in the period in which they are incurred. SFAS
No. 151 will be effective for the Company on January 1, 2006. Management is
currently evaluating the requirements of SFAS No. 151 and the impact this
standard will have on its financial statements.
14. Discontinued Operation
On October 27, 2004, the Company's board of directors approved a plan and
management committed to sell the Company's composite building products business
(composites business) after making a determination that the business no longer
aligned with the Company's long-term strategy. The Company intends to sell the
composites business as a going concern and has engaged an investment banking
firm for that purpose. The Company plans to sell this business in 2005 at a
price that is reasonable compared to its carrying value. As a result of this
decision, the Company evaluated whether the composites business should be
classified as a discontinued operation under SFAS No. 144. The Company has
presented the composites business in the accompanying condensed consolidated
financial statements as a discontinued operation, as all the criteria under SFAS
No. 144 have been met. All prior periods have been restated to reflect the
composites business as a discontinued operation.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
14. Discontinued Operation (continued)
Operating results for the composites business are as follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
July 2, July 3, July 2, July 3,
(In thousands) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 5,548 $ 5,130 $ 10,784 $ 9,357
------- -------- -------- --------
Income (Loss) Before Provision for Income Taxes 318 (370) (240) (1,302)
Income Tax (Provision) Benefit (111) 130 84 456
------- -------- -------- --------
Income (Loss) From Discontinued Operation $ 207 $ (240) $ (156) $ (846)
======= ======== ======== ========
The major classes of assets and liabilities of the discontinued operation included in the accompanying condensed
consolidated balance sheet are as follows:
July 2, January 1,
(In thousands) 2005 2005
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ - $ 39
Accounts receivable, less allowances 1,705 2,252
Inventories 3,861 4,035
Other current assets 1,966 1,981
Property, plant, and equipment, at cost, net 6,803 6,760
Other assets 584 583
-------- --------
Total Assets 14,919 15,650
-------- --------
Accounts payable 1,262 1,446
Accrued warranty costs 3,486 4,327
Other current liabilities 924 905
Other liabilities 900 900
-------- --------
Total Liabilities 6,572 7,578
-------- --------
Net Assets $ 8,347 $ 8,072
======== ========
The composites business offers a standard limited warranty to the
original owner of its decking and roofing products, limited to repair or
replacement of the defective product or a refund of the original purchase price.
The composites business records an estimate for warranty-related costs at the
time of sale based on actual historical return rates and repair costs, as well
as other analytical tools for estimating future warranty claims. These estimates
are revised for variances between actual and expected claims rates. The analysis
of expected warranty claims rates includes detailed assumptions associated with
potential product returns, including the type of product sold, temperatures at
the location of installation, density of boards, and other factors. Certain
assumptions, such as the effect of weather conditions and high temperatures on
the product installed, include inherent uncertainties that are subject to
fluctuation, which could impact future warranty provisions. Due to the highly
subjective nature of these assumptions, the Company has recorded its best
estimate of the cost of expected warranty claims. It is reasonably possible that
the ultimate settlement of such claims may exceed the amount recorded.
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KADANT INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
14. Discontinued Operation (continued)
The composites business experienced warranty issues that affected its
profitability in 2003 and 2004. There was a substantial increase in warranty
claims in 2004, with the most significant increase occurring in the three-month
period ended October 2, 2004. During the first six months of 2004, the majority
of the claims were associated with contraction of certain decking products. In
the three-month period ended October 2, 2004, the increased claims were
associated with a new issue concerning excessive oxidation that affected the
integrity of the plastic used in some of the decking products manufactured prior
to October 2003. As a result of the increase in claims received and the estimate
for future potential claims, the Company increased its warranty expense in 2004
compared to prior periods. Included in this increased warranty expense was the
cost of exchanging material held by the composites business' distributors with
new material and its best estimate of costs related to future potential valid
claims arising from installed products.
A summary of the changes in accrued warranty costs in the six-month
periods ended July 2, 2005 and July 3, 2004 is as follows:
Six Months Ended
------------------------
July 2, July 3,
(In thousands) 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Period $ 4,327 $ 869
Provision 633 1,330
Usage (1,474) (728)
-------- --------
Balance at End of Period $ 3,486 $ 1,471
======== ========
The Company likely will not be able to transfer all the liabilities of
the composites business in a sale. Any changes associated with the carrying
value of liabilities that are not assumed by a buyer would continue to impact
the Company's consolidated results after the sale is completed.
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KADANT INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
This Quarterly Report on Form 10-Q includes forward-looking statements
that are not statements of historical fact, and may include statements regarding
possible or assumed future results of operations. Forward-looking statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of our management, using information currently available to our management. When
we use words such as "believes," "expects," "anticipates," "intends," "plans,"
"estimates," "should," "likely," "will," "would," or similar expressions, we are
making forward-looking statements.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties, and assumptions. Our future results of operations
may differ materially from those expressed in the forward-looking statements.
Many of the important factors that will determine these results and values are
beyond our ability to control or predict. You should not put undue reliance on
any forward-looking statements. We undertake no obligation to publicly update
any forward-looking statement, whether as a result of new information, future
events, or otherwise. For a discussion of important factors that may cause our
actual results to differ materially from those suggested by the forward-looking
statements, you should read carefully the section captioned "Risk Factors" in
this Report.
Overview
Company Background
We are a leading supplier of equipment used in the global papermaking and
paper recycling industry and are also a manufacturer of granules made from
papermaking byproducts. Our continuing operations consist of one reportable
operating segment, Pulp and Papermaking Systems (Papermaking Systems), and two
separate product lines; Fiber-based Products and Casting Products. In
classifying operational entities into a particular segment, we considered how
our management assesses performance and makes operating decisions, and
aggregated businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution. We also
manage a composite building products business (composites business), which is
presented as a discontinued operation in the accompanying condensed consolidated
financial statements as a result of our decision to sell that business.
We were incorporated in Delaware in November 1991 to be the successor-
in-interest to several papermaking equipment businesses of Thermo Electron
Corporation (Thermo Electron). In November 1992, we completed an initial public
offering of a portion of our outstanding common stock. On July 12, 2001, we
changed our name to Kadant Inc. from Thermo Fibertek Inc. In August 2001, Thermo
Electron disposed of its remaining equity interest in us by means of a stock
dividend to its shareholders. In May 2003, we moved the listing of our common
stock to the New York Stock Exchange, where it continues to trade under the
symbol "KAI."
Pulp and Papermaking Systems Segment
Our Papermaking Systems segment designs and manufactures stock-
preparation systems and equipment, paper machine accessory equipment, and
water-management systems for the paper and paper recycling industries. With the
acquisition of The Johnson Corporation (Kadant Johnson) in May 2005, we added
fluid handling systems, which improve dryer performance during the papermaking
process. Our principal products include:
- Stock-preparation systems and equipment: custom-engineered systems and
equipment, as well as standard individual components, for pulping,
de-inking, screening, cleaning, and refining recycled and virgin
fibers for preparation for entry into the paper machine during the
production of recycled paper;
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KADANT INC.
Overview (continued)
- Paper machine accessory equipment: doctoring systems and related
consumables that continuously clean papermaking rolls to keep paper
machines running efficiently; doctor blades made of a variety of
materials to perform functions including cleaning, creping, web
removal, and application of coatings; and profiling systems that
control moisture, web curl, and gloss during paper production;
- Water-management systems: systems and equipment used to continuously
clean paper machine fabrics and to drain, purify, and recycle process
water during paper sheet formation; and
- Fluid handling: rotary joints, precision unions, steam and condensate
systems, components, and controls used primarily in the dryer section
of the papermaking process and during the production of corrugated
boxboard, metals, plastics, rubber, and textiles.
Other
Our other business lines include the Fiber-based Products business and
Casting Products business.
Our Fiber-based Products business produces biodegradable, absorbent
granules from papermaking byproducts for use primarily as carriers for
agricultural, home lawn and garden, and professional lawn, turf and ornamental
applications, as well as for oil and grease absorption.
Our Casting Products business manufactures grey and ductile iron
castings.
Discontinued Operation
We produce composite building products, including decking and railing
systems and roof tiles, made from recycled fiber, plastic, and other material,
which are marketed through distributors primarily to the building industry.
On October 27, 2004, our board of directors approved a plan and
management committed to sell our composites business after making a
determination that the business no longer aligned with our long-term strategy.
We intend to sell the composites business as a going concern and are working
with an investment banking firm for that purpose. We plan to sell the composites
business by the end of 2005 at a price that is reasonable compared to its
carrying value. The composites business had total assets and liabilities of
$14.9 million and $6.6 million, respectively, as of July 2, 2005, including
accrued warranty costs of $3.5 million, which we may retain in the sale of the
business. In addition, revenues and net income for the second quarter of 2005
were $5.5 million and $0.2 million, respectively, and the revenues and net loss
for the first six months of 2005 were $10.8 million and $0.2 million,
respectively. The composites business has been presented as a discontinued
operation in the accompanying condensed consolidated financial statements for
all periods presented.
International Sales
During the first six months of 2005 and 2004, approximately 62% and 61%,
respectively, of our sales were to customers outside the United States,
principally in Europe and Asia. We generally seek to charge our customers in the
same currency in which our operating costs are incurred. However, our financial
performance and competitive position can be affected by currency exchange rate
fluctuations affecting the relationship between the U.S. dollar and foreign
currencies. We seek to reduce our exposure to currency fluctuations through the
use of forward currency exchange contracts. We may enter into forward contracts
to hedge certain firm purchase and sale commitments denominated in currencies
other than our subsidiaries' functional currencies. These contracts hedge
transactions principally denominated in U.S. dollars.
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KADANT INC.
Overview (continued)
Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these condensed consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our condensed consolidated financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are defined as those that reflect
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting policies, upon which our financial
condition depends and which involve the most complex or subjective decisions or
assessments, are those described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" under the section captioned
"Application of Critical Accounting Policies and Estimates" in Item 7 of our
Annual Report on Form 10-K for the fiscal year ended January 1, 2005, filed with
the Securities and Exchange Commission. There have been no material changes to
these critical accounting policies since fiscal year-end 2004 that warrant
further disclosure.
Industry and Business Outlook
Our products are primarily sold to the pulp and paper industry. The paper
industry had been in a prolonged downcycle for the past several years. While the
performance of paper producers, especially in North America, has been gradually
improving over the past year, the industry is continuing to experience sluggish
demand. The profitability of paper producers is still being negatively affected
by higher operating costs, especially higher energy and chemical costs. We
believe paper companies are still cautious about increasing their capital and
operating spending in the current market environment. We expect, however, if the
market recovers, paper companies will increase their capital and operating
spending, which would have a positive effect on paper company suppliers, such as
Kadant, although the timing of such effect is difficult to predict. We continue
to concentrate our efforts on several initiatives intended to improve our
operating results, including: (i) integrating the Kadant Johnson acquisition,
(ii) penetrating new markets outside the paper industry, (iii) opening a
stock-preparation production plant in China, (iv) increasing aftermarket sales,
(v) completing the Kadant Lamort restructuring, and (vi) selling the composites
business. In addition, we continue to focus our efforts on managing our
operating costs, capital expenditures, and working capital.
In an effort to improve operating performance at our Kadant Lamort
subsidiary in France, we approved a proposed restructuring of that subsidiary on
November 18, 2004. This restructuring is intended to strengthen Kadant Lamort's
competitive position in the European paper industry. Under French law, the
proposed restructuring required consultation with Kadant Lamort's workers'
council, which represents the employees, before implementation. The
restructuring originally proposed the reduction of up to 136 full-time positions
in France. We accrued a restructuring charge of $9.2 million in the fourth
quarter of 2004 for severance and other termination costs in connection with the
workforce reduction. Kadant Lamort experienced intermittent work stoppages by
employees protesting the proposed restructuring while the consultations with
the workers' council were in process. We recently completed the necessary
consultations with the workers' council and expect the restructuring to be fully
implemented by the fourth quarter of 2005. We expect that Kadant Lamort will
continue to experience significant operating losses until these restructuring
actions are completed.
We continue to pursue market opportunities outside North America. In the
last several years, China has become a significant market for our
stock-preparation equipment. To capitalize on this growing market, we plan to
build a manufacturing and assembly facility in China for our stock-preparation
equipment and related aftermarket products.
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KADANT INC.
Overview (continued)
Revenues from China are primarily derived from large capital orders, the timing
of which is often difficult to predict. For the past several quarters, our
customers in China have experienced delays in obtaining financing for their
capital addition and expansion projects, which we believe is due to efforts by
the Chinese government to control economic growth, which are reflected in a
slowdown in financing approvals in China's banking system. This has caused
delays in receiving orders and, as a result, will delay our recognizing revenue
on these projects to periods later than originally expected. We plan to use our
new facility in China as a base for increasing our aftermarket business, which
we believe will be more predictable.
On May 11, 2005, we acquired all the outstanding stock of Kadant Johnson,
a leading supplier of steam and condensate systems, components, and controls
used primarily in the dryer section of the papermaking process and during the
production of steel, plastics, rubber, and textiles. Kadant Johnson was a
privately held company based in Michigan with approximately 575 employees at
operations in North and South America, Europe and Asia. Kadant Johnson's primary
products include rotary joints, syphons, and related steam and condensate
systems. The purchase price was $101.5 million in cash, subject to a further
post-closing adjustment as outlined in the purchase agreement for Kadant
Johnson, and $3.1 million in acquisition related costs. In addition to the cash
consideration, we issued a letter of credit to the sellers for $4 million,
subject to adjustment, related to certain tax assets of Kadant Johnson, the
value of which we expect to realize. The parties also agreed in the purchase
agreement to an earn-out provision, based on the achievement of certain revenue
targets between the closing date and July 1, 2006, which could increase the
purchase price by up to $8 million. The majority of the results for Kadant
Johnson will be reported in the Pulp and Papermaking Systems segment within the
fluid handling product line. Results associated with the Casting Products
business will be reported in "Other."
Our 2005 guidance reflects expected revenues and earnings per share from
continuing operations, which excludes the results from our composite building
products business (accounted for as a discontinued operation). For the third
quarter of 2005, we expect to earn between $.19 to $.21 per diluted share, on
revenues of $65 to $67 million. For the full year, we expect to earn between
$.92 to $1.00 per diluted share, on revenues of $250 to $260 million.
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KADANT INC.
Results of Operations
Second Quarter 2005 Compared With Second Quarter 2004
- -----------------------------------------------------
The following table sets forth our unaudited condensed consolidated
statement of income expressed as a percentage of total revenues for the second
fiscal quarters of 2005 and 2004. The results of operations for the fiscal
quarter ended July 2, 2005 are not necessarily indicative of the results to be
expected for the full fiscal year.
Three Months Ended
-------------------------------
July 2, July 3,
2005 2004
- -----------------------------------------------------------------------------------------------------------------------------
Revenues 100% 100%
------- -------
Costs and Operating Expenses:
Cost of revenues 62 61
Selling, general, and administrative expenses 28 28
Research and development expenses 2 1
------- -------
92 90
------- -------
Operating Income 8 10
Interest Income (Expense), net - 1
------- -------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest Expense 8 11
Provision for Income Taxes 3 3
Minority Interest Expense - -
------- -------
Income from Continuing Operations 5 8
Income (Loss) from Discontinued Operation - (1)
------- -------
Net Income 5% 7%
======= =======
Revenues
Revenues increased $12.4 million, or 24%, to $65.1 million in the second
quarter of 2005 from $52.7 million in the second quarter of 2004. Revenues in
the second quarter of 2005 include an $11.1 million, or 21%, increase from
recently acquired Kadant Johnson, and the favorable effect of currency
translation of $1.2 million, or 2%, due to a weaker U.S. dollar relative to most
of the functional currencies in countries in which we operate.
Revenues for the second quarters of 2005 and 2004 from our Papermaking
Systems segment and other businesses are as follows:
Three Months Ended
----------------------------
July 2, July 3,
(In thousands) 2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 62,528 $ 50,933
Other 2,558 1,719
-------- --------
$ 65,086 $ 52,652
======== ========
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KADANT INC.
Results of Operations (continued)
Pulp and Papermaking Systems Segment. Revenues at the Papermaking Systems
segment increased $11.6 million, or 23%, to $62.5 million in the second quarter
of 2005 from $50.9 million in the second quarter of 2004. Revenues in the second
quarter of 2005 include a $10.6 million, or 21%, increase from recently acquired
Kadant Johnson, and the favorable effect of currency translation described
above, all of which related to this segment.
Revenues at the Papermaking Systems segment by product line are as
follows:
Increase
(Decrease)
Three Months Ended Excluding
------------------------- Effect of
July 2, July 3, Increase Currency
(In millions) 2005 2004 (Decrease) Translation
- ----------------------------------------------------------------------------------------------------------------------------------
Product Line:
Stock-Preparation Equipment $ 29.2 $ 26.9 $ 2.3 $ 1.7
Accessories 15.3 15.9 (0.6) (1.1)
Water-Management 7.0 7.8 (0.8) (0.9)
Fluid Handling 10.6 - 10.6 10.6
Other 0.4 0.3 0.1 0.1
------- ------- -------- --------
$ 62.5 $ 50.9 $ 11.6 $ 10.4
======= ======= ======== ========
Revenues from the segment's stock-preparation equipment product line
increased $2.3 million, or 9%, in the second quarter of 2005 compared to the
second quarter of 2004, including a $0.6 million increase from the favorable
effect of currency translation. Excluding the effect of currency translation,
revenues from the stock-preparation equipment product line increased $1.7
million, or 6%, due to a $7.7 million increase in sales in our North
American-based business due to strong sales in our Chemi-Washer(TM) product
line. This increase was offset in part by a $3.9 million, or 37%, decrease in
sales in China in the second quarter of 2005 related to the timing of several
large orders and to continued delays by customers in securing their financing
approvals from the Chinese government. In addition, sales in Europe decreased
$2.1 million, or 20%, in the second quarter of 2005 due to continuing weakness
in the European market for stock-preparation capital equipment.
Revenues from the segment's accessories product line decreased $0.6
million, or 4%, in the second quarter of 2005 compared to the second quarter of
2004, including a $0.5 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's accessories product line decreased $1.1 million, or 7%, due to a
decrease in sales in North America and Europe due to weaker demand for our
capital equipment.
Revenues from the segment's water-management product line decreased $0.8
million, or 10%, in the second quarter of 2005 compared to the second quarter of
2004, including a $0.1 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's water-management product line decreased $0.9 million, or 12%, due
primarily to weak demand for our capital equipment in North America.
Revenues from the fluid handling product line were $10.6 million in the
second quarter of 2005, which reflects the results for Kadant Johnson from the
acquisition date of May 11, 2005 to July 2, 2005.
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KADANT INC.
Results of Operations (continued)
Other. Revenues from the Fiber-based Products business increased $0.4
million, or 19%, to $2.1 million in the second quarter of 2005 from $1.7 million
in the second quarter of 2004, primarily as a result of an increase in sales to
an existing customer of Biodac(TM), our product family of biodegradable granules
that we produce from papermaking byproducts. Revenues from the Casting Products
business were $0.5 million in the second quarter of 2005.
Gross Profit Margin
Gross profit margin was 38% in the second quarter of 2005 compared to 39%
in the second quarter of 2004.
Gross profit margins for the second quarters of 2005 and 2004 for our
Papermaking Systems segment and our other businesses are as follows:
Three Months Ended
----------------------------
July 2, July 3,
2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Systems 38% 38%
Other 37 45
------ ------
38% 39%
The gross profit margin at the Papermaking Systems segment was 38% in the
second quarter of 2005 and 2004. The fluid handling product line contributed a
3% increase in gross profit margins in the second quarter of 2005, which was
offset by lower margins in our stock-preparation product line. The gross profit
margin at our other businesses decreased to 37% in the second quarter of 2005
from 45% in the second quarter of 2004 due to the inclusion of lower margins at
the Casting Products business.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
remained constant at 28% in the second quarters of 2005 and 2004. Selling,
general, and administrative expenses increased to $18.5 million in the second
quarter of 2005 from $14.6 million in the second quarter of 2004, an increase of
$3.9 million, or 27%, due primarily to the inclusion of $4.1 million in selling,
general, and administrative expenses from Kadant Johnson. In addition, an
increase of $0.4 million in the second quarter of 2005 was due to the
unfavorable impact of foreign currency translation in the Papermaking Systems
segment compared to the second quarter of 2004.
Research and development expenses were $1.2 million and $0.6 million in
the second quarters of 2005 and 2004, respectively, and represented 2% and 1% of
revenues in the 2005 and 2004 periods, respectively.
Interest Income
Interest income increased to $0.4 million in the second quarter of 2005
from $0.3 million in the second quarter of 2004 primarily due to higher
prevailing interest rates, offset in part by a decrease in the average cash
balances resulting from the May 2005 acquisition of Kadant Johnson.
Interest Expense
Interest expense increased to $0.5 million in the second quarter of 2005
from $4 thousand in the second quarter of 2004 due to interest expense
associated with the $60.0 million in borrowings entered into in May 2005 to fund
the Kadant Johnson acquisition.
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KADANT INC.
Results of Operations (continued)
Income Taxes
Our effective tax rate was 34% and 28% in the second quarters of 2005 and
2004, respectively. The 28% effective tax rate in the second quarter of 2004
consisted of our 35% recurring tax rate offset by a 7% non-recurring tax benefit
resulting from a reduction of $0.4 million in tax reserves primarily associated
with our foreign operations, as the reserves were no longer required.
Income from Continuing Operations
Income from continuing operations decreased to $3.1 million in the second
quarter of 2005 from $4.0 million in the second quarter of 2004, a decrease of
$0.9 million, or 21%. The largest components of this decrease can be attributed
to a decrease in gross profit margins and an increase in interest expense
(see Gross Profit Margin and Interest Expense above for further discussion).
Income (Loss) from Discontinued Operation
The discontinued operation had net income of $0.2 million in the second
quarter of 2005 compared to a net loss of $0.2 million in the second quarter of
2004, due primarily to a $0.4 million increase in revenues, and a $0.3 million
decrease in operating expenses, which was offset by a $0.2 million increase in
income taxes.
First Six Months 2005 Compared With First Six Months 2004
- ---------------------------------------------------------
The following table sets forth our unaudited condensed consolidated
statement of income expressed as a percentage of total revenues for the first
six months of 2005 and 2004. The results of operations for the first six months
of 2005 are not necessarily indicative of the results to be expected for the
full fiscal year.
Six Months Ended
---------------------------
July 2, July 3,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Revenues 100% 100%
------- -------
Costs and Operating Expenses:
Cost of revenues 62 60
Selling, general, and administrative expenses 29 28
Research and development expenses 2 2
------- -------
93 90
------- -------
Operating Income 7 10
Interest Income, net - 1
------- -------
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest Expense 7 11
Provision for Income Taxes 2 4
Minority Interest Expense - -
------- -------
Income from Continuing Operations 5 7
Loss from Discontinued Operation - (1)
------- -------
Net Income 5% 6%
======= =======
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KADANT INC.
Results of Operations (continued)
Revenues
Revenues increased $15.6 million, or 16%, to $115.8 million in the first
six months of 2005 from $100.2 million in the first six months of 2004. Revenues
in the 2005 period include a $10.6 million, or 11%, increase from recently
acquired Kadant Johnson, and the favorable effect of currency translation of
$2.3 million due to a weaker U.S. dollar relative to most of the functional
currencies in countries in which we operate.
Revenues by segment for the first six months of 2005 and 2004 were as
follows:
Six Months Ended
----------------------------
July 2, July 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Pulp and Papermaking Systems $ 110,099 $ 96,497
Other 5,731 3,655
--------- ---------
$ 115,830 $ 100,152
========= =========
Pulp and Papermaking Systems Segment. Revenues at the Papermaking Systems
segment increased $13.6 million, or 14%, to $110.1 million in the first six
months of 2005 from $96.5 million in the first six months of 2004. Revenues in
the first six months of 2005 include the favorable effect of currency
translation described above, all of which related to this segment.
Revenues at the Papermaking Systems segment by product line are as
follows:
Increase
(Decrease)
Three Months Ended Excluding
------------------------- Effect of
July 2, July 3, Increase Currency
(In millions) 2005 2004 (Decrease) Translation
- ----------------------------------------------------------------------------------------------------------------------------------
Product Line:
Stock-Preparation Equipment $ 53.8 $ 48.6 $ 5.2 $ 4.0
Accessories 30.6 31.9 (1.3) (2.2)
Water-Management 14.3 15.3 (1.0) (1.2)
Fluid Handling 10.6 - 10.6 10.6
Other 0.8 0.7 0.1 0.1
------- ------- -------- ---------
$ 110.1 $ 96.5 $ 13.6 $ 11.3
======= ======= ========= =========
Revenues from the segment's stock-preparation equipment product line
increased $5.2 million, or 11%, in the first six months of 2005 compared to the
first six months of 2004, including a $1.2 million increase from the favorable
effect of currency translation. Excluding the effect of currency translation,
revenues from the stock-preparation equipment product line increased $4.0
million, or 8%, due to a $9.9 million, or 76%, increase in sales in our North
American-based business. These increases were offset in part by a $4.9 million,
or 28%, decrease in sales in China in the first six months of 2005 due to
continued delays by customers in securing their financing approvals from the
Chinese government. In addition, sales in Europe decreased $1.0 million, or 5%,
in the first six months of 2005 due to continued weakness in the European market
for stock-preparation capital equipment.
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KADANT INC.
Results of Operations (continued)
Revenues from the segment's accessories product line decreased $1.3
million, or 4%, in the first six months of 2005 compared to the first six months
of 2004, including a $0.9 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's accessories product line decreased $2.2 million, or 7%, due to a
decrease in sales in North America and Europe.
Revenues from the segment's water-management product line decreased $1.0
million, or 6%, in the first six months of 2005 compared to the first six months
of 2004, including a $0.2 million increase from the favorable effect of currency
translation. Excluding the effect of currency translation, revenues from the
segment's water-management product line decreased $1.2 million, or 8%, due
primarily to a decrease in capital sales in North America.
Revenues from the fluid handling product line were $10.6 million in the
first six months of 2005, which reflects the results for Kadant Johnson from the
acquisition date of May 11, 2005 to July 2, 2005.
Other. Revenues from the Fiber-based Products business increased $1.5
million, or 43%, to $5.2 million in the first six months of 2005 from $3.7
million in the first six months of 2004, primarily as a result of an increase in
sales to an existing customer of Biodac(TM), our product family of biodegradable
granules that we produce from papermaking byproducts. Revenues from the Casting
Products business were $0.5 million in the first six months of 2005.
Gross Profit Margin
Gross profit margin was 38% in the first six months of 2005 compared to
40% in the first six months of 2004.
Gross profit margins for the first six months of 2005 and 2004 for our
Papermaking Systems segment and our other businesses are as follows:
Six Months Ended
--------------------------
July 2, July 3,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Profit Margin:
Pulp and Papermaking Systems 37% 40%
Other 40 39
------ ------
38% 40%
The gross profit margin at the Papermaking Systems segment decreased to
37% in the first six months of 2005 from 40% in the first six months of 2004.
The fluid handling product line contributed a 1% increase in gross profit
margins in the first six months of 2005, which was offset by lower margins in
our stock-preparation product line. The gross profit margin at our other
businesses was 40% and 39% in the first six months of 2005 and 2004,
respectively.
Operating Expenses
Selling, general, and administrative expenses as a percentage of revenues
were 29% and 28% in the first six months of 2005 and 2004, respectively.
Selling, general, and administrative expenses increased to $33.4 million in the
first six months of 2005 from $28.3 million in the first six months of 2004, an
increase of $5.1 million, or 18%. The $5.1 million increase was primarily due to
$4.1 million of selling, general, and administrative expenses in the 2005 period
associated with Kadant Johnson and a gain of approximately $1.0 million in the
first quarter of 2004. The gain in the first quarter of 2004 resulted from the
renegotiation of a series of agreements with one of our licensees, which lowered
selling, general, and administrative expenses in that period.
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KADANT INC.
Results of Operations (continued)
Research and development expenses were $2.3 million and $1.5 million and
represented 2% of revenues in the first six months of 2005 and 2004. Included in
the $0.8 million increase in research and development expenses were $0.2 million
of research and development expenses associated with Kadant Johnson.
Interest Income
Interest income increased to $0.9 million in the first six months of 2005
from $0.6 million in the first six months of 2004 primarily due to higher
prevailing interest rates.
Interest Expense
Interest expense increased to $0.5 million in the first six months of
2005 from $12 thousand in the first six months of 2004 due to interest expense
associated with the $60.0 million in borrowings entered into in May 2005 to fund
the Kadant Johnson acquisition.
Income Taxes
Our effective tax rate was 23% and 31% in the first six months of 2005
and 2004, respectively. The 23% effective tax rate in the first six months of
2005 consisted of our 34% recurring tax rate, offset by an 11% non-recurring tax
benefit associated with a reimbursement of $0.9 million received from our former
parent company, Thermo Electron, pursuant to our tax matters agreement for tax
years in which we were included in Thermo Electron's consolidated tax return.
The 31% effective tax rate in the first six months of 2004 consisted of a 35%
recurring tax rate, offset by a 4% non-recurring tax benefit resulting from a
reduction of $0.4 million in tax reserves primarily associated with our foreign
operations, as the reserves were no longer required.
Income from Continuing Operations
Income from continuing operations decreased to $6.2 million in the first
six months of 2005 from $7.3 million in the first six months of 2004, a decrease
of $1.1 million, or 15%. The largest component of this decrease can be
attributed to a decrease in gross profit margins (see Gross Profit Margin
above for further discussion).
Loss from Discontinued Operation
The loss from our discontinued operation decreased to $0.2 million in the
first six months of 2005 from $0.8 million in the first six months of 2004, due
primarily to a $1.4 million increase in revenues.
Liquidity and Capital Resources
Consolidated working capital, including the discontinued operation, was
$86.8 million at July 2, 2005, compared with $113.7 million at January 1, 2005.
Included in working capital are cash and cash equivalents of $46.2 million at
July 2, 2005, compared with $82.1 million at January 1, 2005. At July 2, 2005,
$23.9 million of cash and cash equivalents were held by our foreign
subsidiaries.
Our operating activities provided $4.9 million and $8.3 million of cash
during the first six months of 2005 and 2004, respectively. The most significant
components of the cash provided in the first six months of 2005 were the cash
provided by income from continuing operations of $6.2 million and a non-cash
charge for depreciation and amortization expense of $2.7 million. The remaining
portion of the cash provided in the first six months of 2005 is comprised of the
following offsetting components. An increase in unbilled contract costs and fees
used cash of $6.1
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KADANT INC.
Liquidity and Capital Resources (continued)
million in the first six months of 2005. A decrease in inventories in the first
six months of 2005 provided cash of $3.1 million. A decrease in other current
liabilities used cash of $2.9 million in the first six months of 2005. A
decrease in accounts receivable in the first six months of 2005 provided an
increase in cash of $2.4 million primarily at the Papermaking Systems segment,
due to the timing of payments.
Our investing activities used cash of $100.2 million and $51 thousand in
the first six months of 2005 and 2004, respectively. During the first six months
of 2005, we used cash of $101.4 million to acquire the stock of The Johnson
Corporation. In addition, during the first six months of 2005, $3.1 million of
deferred acquisition costs associated with the Kadant Johnson acquisition were
capitalized to goodwill.
Our financing activities provided cash of $62.6 million in the first six
months of 2005 and used cash of $2.2 million in the first six months of 2004.
During the first six months of 2005, we received proceeds of $60 million from a
term loan we entered into to fund a portion of the purchase price for Kadant
Johnson. We also increased our short- and long-term obligations by $4 million,
which represents additional consideration for Kadant Johnson to be paid over the
next five years. In addition, we used cash of $2.1 million to purchase our
common stock on the open market. In the first six months of 2004, we used cash
of $6.2 million to purchase our common stock on the open market and received
$4.6 million from the issuance of common stock in connection with the exercise
of employee stock options.
Our discontinued operation used cash of $0.4 million in the first six
months of 2005 and provided cash of $0.2 million in the first six months of
2004. The use of cash of $0.4 million in the first six months of 2005 was
primarily due to a decrease in accrued warranty costs of $0.8 million, and the
loss from discontinued operation of $0.2 million, offset by a decrease in
accounts receivable of $0.5 million.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was
signed into law. The Act creates a temporary incentive for U.S. multinationals
to repatriate accumulated income earned outside the U.S. at an effective tax
rate of 5.25%. On December 21, 2004, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position, "Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" (FAS No. 109-2). FAS No. 109-2 allows companies additional time to
evaluate the effect of the law on unrepatriated foreign earnings, and whether
they continue to qualify for the exception in SFAS No. 109, "Accounting for
Income Taxes," to recognizing deferred tax liabilities, and would require
explanatory disclosures from those who need the additional time. Through July 2,
2005, we have not provided U.S. income taxes on approximately $52.3 million of
unremitted foreign earnings because such earnings were intended to be
indefinitely reinvested outside the U.S. Whether we will ultimately utilize and
benefit from the provisions of the Act depends on a number of factors, including
the results of reviewing future Congressional guidance before a decision can be
made. Until that time, we will make no change in our current intention to
indefinitely reinvest accumulated earnings of our foreign subsidiaries, except
in instances in which we can remit such earnings without a significant
associated tax cost. We do not expect that this will have a material adverse
effect on our current liquidity. Absent the repatriation incentive of the Act,
we believe that any U.S. tax liability due upon remittance of such earnings
would be immaterial due to the availability of U.S. foreign tax credits
generated from such remittance. The related foreign tax withholding, which would
be required if we remitted the foreign earnings to the U.S., would be
approximately $1.9 million.
In May 2004, our board of directors authorized the repurchase of up to
$30 million of our equity securities in the open market or in negotiated
transactions through May 18, 2005. Prior to January 1, 2005, we had repurchased
460,400 shares of our common stock under this authorization for $9.3 million.
For the period from January 2, 2005 through May 18, 2005, we repurchased an
additional 109,700 shares of our common stock under this authorization for $2.1
million. On May 6, 2005, our board of directors authorized the repurchase of up
to $15 million of our equity securities in the open market or in negotiated
transactions for the period from May 18, 2005 through May 18, 2006. As of July
2, 2005, we had repurchased 1,200 shares of our common stock under this new
authorization for $25 thousand.
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KADANT INC.
Liquidity and Capital Resources (continued)
We completed our acquisition of Kadant Johnson on May 11, 2005 for $101.5
million in cash, subject to a further post-closing adjustment as outlined in the
purchase agreement for Kadant Johnson, and $3.1 million in acquisition related
costs. In addition to the cash consideration, we issued a letter of credit to
the sellers for $4 million, subject to adjustment, related to certain tax assets
of Kadant Johnson, the value of which we expect to realize. We also agreed in
the purchase agreement to an earn-out provision, based on the achievement of
certain revenue targets between the closing date and July 1, 2006, which could
increase the purchase price by up to $8 million. To fund $60 million of the
purchase price, we entered into a term loan and revolving credit facility (the
Credit Agreement) effective as of May 9, 2005 in the aggregate principal amount
of up to $85 million, including a $25 million revolver. The Credit Agreement
includes a $60 million five-year term loan, which is repayable in equal
quarterly installments over a five-year period. The aggregate principal to be
repaid each year is as follows: $4.5 million, $9 million, $10.5 million, $13.5
million, $15 million, and $7.5 million in 2005, 2006, 2007, 2008, 2009, and
2010, respectively. Interest on the revolving loan and the term loan accrues and
is payable quarterly in arrears at one of the following rates selected by us:
(a) the prime rate plus an applicable margin initially set at 0% for 2005, and
up to 0.25% thereafter or, (b) a eurocurrency rate plus an applicable margin
initially set at 1% for 2005, and between 0.625% and 1.25% thereafter. The
applicable margin is determined based upon our total debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) ratio.
The obligations for us under the Credit Agreement may be accelerated upon
the occurrence of an event of default under the Credit Agreement, which include
customary events of default including, without limitation, payment defaults,
defaults in the performance of affirmative and negative covenants, the
inaccuracy of representations or warranties, bankruptcy- and insolvency-related
defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
In addition, the Credit Agreement contains negative covenants applicable
to us and our subsidiaries, including financial covenants requiring us to comply
with a maximum consolidated leverage ratio of either 2.5 or 3.0 and a minimum
consolidated fixed charge coverage ratio of 1.5, and restrictions on liens,
indebtedness, fundamental changes, dispositions of property, making certain
restricted payments (including dividends and stock repurchases), investments,
transactions with affiliates, sale and leaseback transactions, swap agreements,
changing our fiscal year, negative pledges, arrangements affecting subsidiary
distributions, and entering into new lines of business. As of July 2, 2005, we
are in compliance with all the covenants in the Credit Agreement.
The loans under the Credit Agreement are guaranteed by certain of our
domestic subsidiaries and secured by a pledge of 65% of the stock of our
first-tier foreign subsidiaries and our subsidiary guarantors pursuant to a
guarantee and pledge agreement effective as of May 9, 2005 in favor of JPMorgan
Chase Bank, N.A., as agent on behalf of the lenders.
Although we currently have no material commitments for capital
expenditures, we plan to make expenditures during the remainder of 2005 for
property, plant, and equipment of approximately $3.9 million, including $1.2
million for our manufacturing and assembly facility in China to support our
stock-preparation equipment business. This estimate excludes the capital
expenditure requirement for Kadant Johnson, which will not have a significant
effect on our liquidity in the second half of 2005.
Our future liquidity position will be primarily affected by the level of
cash flows from operations and the amount of cash expended on debt repayments,
capital projects, stock repurchases, or additional acquisitions, if any. We
believe that our existing resources, together with the cash available from our
credit facility and the cash we expect to generate from continuing operations,
will be sufficient to meet the capital requirements of our operations for the
foreseeable future.
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KADANT INC.
Risk Factors
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we wish to caution readers that the following
important factors, among others, in some cases have affected, and in the future
could affect, our actual results and could cause our actual results in 2005 and
beyond to differ materially from those expressed in any forward-looking
statements made by us, or on our behalf.
Our business is dependent on the condition of the pulp and paper industry.
We sell products primarily to the pulp and paper industry, which is a
cyclical industry. Generally, the financial condition of the global pulp and
paper industry corresponds to the condition of the general economy, as well as
to a number of other factors, including pulp and paper production capacity
relative to demand. In recent years, the industry in certain geographic regions,
notably North America, has been in a prolonged downcycle, resulting in depressed
pulp and paper prices, decreased spending, mill closures, consolidations, and
bankruptcies, all of which have adversely affected our business. As paper
companies consolidate in response to market weakness, they frequently reduce
capacity and postpone or even cancel capacity addition or expansion projects.
These cyclical downturns can cause our sales to decline and adversely affect our
profitability.
Our business is subject to economic, currency, political, and other risks
associated with international sales and operations.
During the first six months of 2005 and 2004, approximately 62% and 61%,
respectively, of our sales were to customers outside the United States,
principally in Europe and Asia. International revenues are subject to a number
of risks, including the following:
- agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system;
- foreign customers may have longer payment cycles;
- foreign countries may impose additional withholding taxes or
otherwise tax our foreign income, impose tariffs, or adopt other
restrictions on foreign trade; and
- the protection of intellectual property in foreign countries may be
more difficult to enforce.
Although we seek to charge our customers in the same currency in which
our operating costs are incurred, fluctuations in currency exchange rates may
affect product demand and adversely affect the profitability in U.S. dollars of
products we provide in international markets where payment for our products and
services is made in their local currencies. Any of these factors could have a
material adverse impact on our business and results of operations.
A significant portion of our international sales has, and may in the
future, come from China. An increase in revenues, as well as our planned
operation of a manufacturing and assembly facility in China, will expose us to
increased risk in the event of changes in the policies of the Chinese
government, political unrest, unstable economic conditions, or other
developments in China or in U.S.-China relations that are adverse to trade,
including enactment of protectionist legislation or trade restrictions. Orders
from customers in China, particularly for large systems that have been tailored
to a customer's specific requirements, involve increased credit risk due to
payment terms that are applicable to doing business in China. In addition, the
timing of these orders is often difficult to predict.
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KADANT INC.
Risk Factors (continued)
We are subject to intense competition in all our markets.
We believe that the principal competitive factors affecting the markets
for our products include quality, price, service, technical expertise, and
product innovation. Our competitors include a number of large multinational
corporations that may have substantially greater financial, marketing, and other
resources than we do. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their services and products.
Competitors' technologies may prove to be superior to ours. Our current
products, those under development, and our ability to develop new technologies
may not be sufficient to enable us to compete effectively. Competition,
especially in China, could increase if new companies enter the market or if
existing competitors expand their product lines or intensify efforts within
existing product lines.
Our debt may adversely affect our cash flow and may restrict our investment
opportunities.
On May 9, 2005, we entered into a Credit Agreement, consisting of a $60
million five-year term loan and a $25 million revolver. On May 11, 2005, we
borrowed $60 million to fund the acquisition of Kadant Johnson under the term
loan. We may also obtain additional long-term debt and working capital lines of
credit to meet future financing needs, which would have the effect of increasing
our total leverage.
Our leverage could have negative consequences, including:
- increasing our vulnerability to adverse economic and industry
conditions,
- limiting our ability to obtain additional financing,
- limiting our ability to pay dividends on or repurchase our capital
stock,
- limiting our ability to acquire new products and technologies through
acquisitions or licensing, and
- limiting our flexibility in planning for, or reacting to, changes in
our business and the industries in which we compete.
Our indebtedness bears interest at floating rates pursuant to the terms
of the Credit Agreement. As a result, our interest payment obligations on this
indebtedness will increase if interest rates increase. To reduce the exposure to
floating rates, we have converted $36 million, or 60%, of our indebtedness to a
fixed rate of interest through an interest rate swap.
Our ability to satisfy our obligations and to reduce our total debt
depends on our future operating performance and on economic, financial,
competitive, and other factors beyond our control. Our business may not generate
sufficient cash flows to meet these obligations or to successfully execute our
business strategy. If we are unable to service our debt and fund our business,
we may be forced to reduce or delay capital expenditures or research and
development expenditures, seek additional financing or equity capital,
restructure or refinance our debt or sell assets. We may not be able to obtain
additional financing or refinance existing debt or sell assets on terms
acceptable to us or at all.
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KADANT INC.
Risk Factors (continued)
Restrictions in our Credit Agreement may limit our activities.
Our Credit Agreement contains, and future debt instruments to which we
may become subject may contain, restrictive covenants that limit our ability to
engage in activities that could otherwise benefit us, including restrictions on
our ability and the ability of our subsidiaries to:
- incur additional indebtedness,
- pay dividends on, redeem or repurchase our capital stock,
- make investments,
- create liens,
- sell assets,
- enter into transactions with affiliates, and
- consolidate, merge or transfer all or substantially all of our assets
and the assets of our subsidiaries.
We are also required to meet specified financial ratios under the terms
of our Credit Agreement. Our ability to comply with these financial restrictions
and covenants is dependent on our future performance, which is subject to
prevailing economic conditions and other factors, including factors that are
beyond our control such as foreign exchange rates, interest rates, changes in
technology, and changes in the level of competition.
Our failure to comply with any of these restrictions or covenants may
result in an event of default under our Credit Agreement, which could permit
acceleration of the debt under that instrument and require us to repay that debt
before its scheduled due date.
If an event of default occurs, we may not have sufficient funds available
to make the required payments under our indebtedness. If we are unable to repay
amounts owed under our Credit Agreement, those lenders may be entitled to
foreclose on and sell the collateral that secures our borrowings under that
agreement.
Our inability to successfully integrate Kadant Johnson into our business could
have a material adverse effect on our business.
On May 11, 2005, we acquired Kadant Johnson. Over the coming months, we
will be working to integrate Kadant Johnson into our business. This integration
will involve the merger of employees, products and services over multiple U.S.
and international locations. We may not be successful in integrating this
business into our current structure, or in obtaining the anticipated cost
savings or synergies from the acquisition. To meet our quarterly certification
requirements and in anticipation of incorporating Kadant Johnson into our 2006
Sarbanes-Oxley compliance process, we will also be performing a detailed review
of Kadant Johnson's internal control structure to ensure that its controls over
financial reporting are consistent with our policies and procedures. Given the
multi-location structure of the Kadant Johnson business, this review will take
significant time and effort, similar to our Sarbanes-Oxley compliance efforts in
2004, and will involve significant cost. We may identify control deficiencies
during this process. Our ability to realize the value of the goodwill and other
intangibles recorded for this acquisition will depend on the future cash flows
of the Kadant Johnson business. If these future cash flows are below what we
anticipated, we may incur future impairment losses associated with goodwill and
intangibles, which could have a material adverse effect on our results of
operations.
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KADANT INC.
Risk Factors (continued)
Our inability to successfully identify and complete acquisitions or successfully
integrate any new or previous acquisitions could have a material adverse effect
on our business.
Our strategy includes the acquisition of technologies and businesses that
complement or augment our existing products and services. Promising acquisitions
are difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory, including
antitrust, approvals. We do incur costs from time to time associated with
potential acquisitions, which are deferred during the due diligence phase.
Future operating results could be negatively impacted in any quarter in which we
determine that a potential acquisition will not close and these associated costs
are expensed. Any acquisition we may complete may be made at a substantial
premium over the fair value of the net assets of the acquired company. We may
not be able to complete future acquisitions, integrate any acquired businesses
successfully into our existing businesses, make such businesses profitable, or
realize anticipated cost savings or synergies, if any, from these acquisitions.
In addition, we have previously acquired several companies and businesses. As a
result of these acquisitions, we have recorded significant goodwill on our
condensed consolidated balance sheet, and in conjunction with the adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets," in 2002, we recorded a
transitional impairment charge upon the adoption of this standard. Any future
impairment losses identified will be recorded as reductions to operating income,
which could have a material adverse effect on our results of operations. Our
ability to realize the value of the goodwill that we have recorded will depend
on the future cash flows of these businesses. These cash flows depend, in part,
on how well we have integrated these businesses.
Our inability to successfully complete the proposed restructuring of our Kadant
Lamort subsidiary would have a negative effect on our future operating results.
In an effort to improve operating performance at our Kadant Lamort
subsidiary in France, we approved a proposed restructuring of that subsidiary on
November 18, 2004. This restructuring is intended to strengthen Kadant Lamort's
competitive position in the European paper industry. Under French law, the
proposed restructuring required consultation with Kadant Lamort's workers'
council, which represents the employees, before implementation. The
restructuring originally proposed the reduction of up to 136 full-time positions
in France. Kadant Lamort experienced intermittent work stoppages by employees
protesting the proposed restructuring while the consultations with the workers'
council were in process. We recently completed the necessary consultations with
the workers' council and expect the restructuring to be fully implemented by the
fourth quarter of 2005. We expect that this subsidiary will continue to
experience operating losses until these restructuring actions are completed. If
we were unable to complete this restructuring, our future operating results
would be negatively impacted.
We may not be successful in selling our composite building products business.
On October 27, 2004, our board of directors approved a plan to sell our
composite building products business (the "composites business"). We cannot
predict on what terms we may sell the business or if we will be successful in
selling this business at all. There are certain liabilities associated with our
composites business, such as warranty obligations, which we will likely not be
able to transfer to a future buyer. If we are not able to transfer these
liabilities with the sale, it could have a material adverse effect on our future
results of operations. Under applicable accounting rules, the results of the
composites business will be reported as a discontinued operation; however, we
will continue to report these results in our consolidated financial statements.
For as long as we continue to own the composite building products business, our
consolidated performance will continue to be subject to the risks and
uncertainties related to that business, including the risks identified in the
following Risk Factors.
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KADANT INC.
Risk Factors (continued)
Our performance in the market for composite building products will depend on our
ability to manufacture and distribute our composite building products.
Development, formulation, manufacturing, and commercialization of our
composite building products require significant testing and technical expertise
and our efforts may not be successful. Growth of our composites business
requires ongoing market acceptance. Our composites business is subject to
intense competition, particularly in the decking market, from traditional wood
products and other composite lumber manufacturers, many of whom have greater
financial, technical, and marketing resources than we do. As a result, we may be
unable to compete successfully in this market. We have limited experience
manufacturing these products at volume, cost, and quality levels sufficient to
satisfy expected demand, and we have in the past and may continue to encounter
difficulties in connection with any large-scale manufacturing or
commercialization of these products. Our capacity may not be sufficient to meet
demand without significant additional investment. In addition, the majority of
our production is dependent upon a single piece of equipment. If that equipment
were to fail for an extended period of time, it would have a material adverse
effect on our revenues from this business in that period. We rely on
distributors in the building products industry to market, distribute, and sell
our products. We may be unable to produce our products in sufficient quantity to
interest or retain these distributors or to add new distributors. In addition,
the announcement of our proposed sale of the composites business and warranty
issues may impact our relationships with our existing and proposed new
distributors and may cause them to reduce or curtail their purchases of our
products. If we are unable to distribute our products effectively, our revenues
will decline and we will have to incur additional expenses to market these
products directly.
The failure of our composite building products to perform over long periods of
time could result in potential liabilities.
Our composite building products are relatively new, have not been on the
market for long periods of time, and may be used in applications about which we
may have little knowledge or limited experience. Because we have limited
historical experience, we may be unable to predict the potential liabilities
related to product warranty or product liability issues. If our products fail to
perform over their warranty periods, we may not have the ability to protect
ourselves adequately against this potential liability, which could adversely
affect our operating results. In 2003 and 2004, we experienced a significant
increase in warranty claims and warranty expense related to our composite
decking products including, but not limited to, contraction of certain deck
boards and excessive oxidation that affects the integrity of the plastic used in
some of our decking products. Included in the increased warranty expense was the
cost of exchanging material held by our distributors with new material that, we
believe, is not susceptible to this oxidation issue, and our best estimate of
costs related to future potential valid claims arising from installed product.
Although we increased the warranty provisions accordingly, we cannot guarantee
that the reserves established will be sufficient if we incur warranty claims
higher than anticipated. In addition, there can be no assurance that other
problems will not develop. A continued high level of warranty claims or expenses
and/or failure of our products to perform or to be accepted in the marketplace
would have an adverse impact on the profitability of our business and our
ability to sell the composites business on favorable terms.
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KADANT INC.
Risk Factors (continued)
Economic conditions could adversely affect demand for our composite building
products.
Demand for our composite building products is affected by several factors
beyond our control, including economic conditions. Recent demand for our
products has been driven, in part, by the availability of low-interest mortgage
and home equity loans. A further increase in interest rates or tightened credit
could adversely affect demand for home remodeling projects, including demand for
our products.
Seasonality and weather conditions could adversely affect our business.
In general, the building products industry experiences seasonal
fluctuations in sales, particularly in the fourth and first quarters, when
holidays and adverse weather conditions in some regions usually reduce the level
of home improvement and new construction activity. In addition, our composite
building products are used or installed in outdoor construction applications,
and our sales volume, bookings, gross margins, and operating income can be
negatively affected by adverse weather. Operating results will tend to be lower
in quarters with lower sales, which are not entirely offset by a corresponding
reduction in operating costs. In addition, we may also experience lower gross
profit margins in the fourth and first quarters due to seasonal incentive
discounts offered to our distributors. As a result of these factors, we believe
sequential period-to-period comparisons of our operating results are not
reliable indicators of future performance, and the operating results for any one
quarterly period may not be indicative of operating results to be expected for a
full year.
We are dependent on a single mill for the raw material used in our fiber-based
granules, and we may not be able to obtain raw material on commercially
reasonable terms. In addition, the manufacture of our composite building
products and fiber-based granules is subject to commodity price risks.
We are dependent on a single paper mill for the fiber used in the
manufacture of our fiber-based granules and composite building products. This
mill has the exclusive right to supply the papermaking byproducts used in the
manufacturing process. Although we believe our relationship with the mill is
good, the mill could decide not to renew its contract with us at the end of
2005, or may not agree to renew on commercially reasonable terms. If this were
to occur, we would be forced to find an alternative supply for this raw
material. We may be unable to find an alternative supply on commercially
reasonable terms or could incur excessive transportation costs if an alternative
supplier were found, which would increase our manufacturing costs and might
prevent prices for our products from being competitive.
In addition, we use natural gas in the production of our fiber-based
granular products. We seek to manage our exposure to natural gas price
fluctuations by entering into short-term forward contracts to purchase specified
quantities of natural gas from a supplier. We may not be able to effectively
manage our exposure to natural gas price fluctuations.
Our composite building products also contain plastics, which are subject
to wide fluctuations in pricing and availability. Higher energy costs can
increase the price of plastic significantly and rapidly. We may be unable to
obtain sufficient quantities at reasonable prices, which would adversely affect
our profitability and ability to produce a sufficient quantity of our products
or to produce our products at competitive prices.
Our inability to protect our intellectual property could have a material adverse
effect on our business. In addition, third parties may claim that we infringe
their intellectual property, and we could suffer significant litigation or
licensing expense as a result.
We place considerable emphasis on obtaining patent and trade secret
protection for significant new technologies, products, and processes because of
the length of time and expense associated with bringing new products through the
development process and into the marketplace. Our success depends in part on our
ability to develop patentable products and obtain and enforce patent protection
for our products both in the United States and in other countries. We
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KADANT INC.
Risk Factors (continued)
own numerous U.S. and foreign patents, and we intend to file additional
applications, as appropriate, for patents covering our products. Patents may not
be issued for any pending or future patent applications owned by or licensed to
us, and the claims allowed under any issued patents may not be sufficiently
broad to protect our technology. Any issued patents owned by or licensed to us
may be challenged, invalidated, or circumvented, and the rights under these
patents may not provide us with competitive advantages. A patent relating to our
fiber-based granular products expired in the second quarter of 2004. As a
result, we could be subject to increased competition in this market, which could
have an adverse effect on this business. In addition, competitors may design
around our technology or develop competing technologies. Intellectual property
rights may also be unavailable or limited in some foreign countries, which could
make it easier for competitors to capture increased market position. We could
incur substantial costs to defend ourselves in suits brought against us or in
suits in which we may assert our patent rights against others. An unfavorable
outcome of any such litigation could have a material adverse effect on our
business and results of operations. In addition, as our patents expire, we rely
on trade secrets and proprietary know-how to protect our products. We cannot be
sure the steps we have taken or will take in the future will be adequate to
deter misappropriation of our proprietary information and intellectual property.
We seek to protect trade secrets and proprietary know-how, in part,
through confidentiality agreements with our collaborators, employees, and
consultants. These agreements may be breached, we may not have adequate remedies
for any breach, and our trade secrets may otherwise become known or be
independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge of the
patents may be unsuccessful. Our failure to obtain the necessary licenses or
other rights could prohibit the sale, manufacture, or distribution of our
products and, therefore, could have a material adverse effect on our business,
financial condition, and results of operations.
Fluctuations in our quarterly operating results may cause our stock price to
decline.
Given the nature of the markets in which we participate and the effect of
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," we may not be
able to reliably predict future revenues and profitability, and unexpected
changes may cause us to adjust our operations. A large proportion of our costs
are fixed, due in part to our significant selling, research and development, and
manufacturing costs. Thus, small declines in revenues could disproportionately
affect our operating results. Other factors that could affect our quarterly
operating results include:
- failure of our products to pass contractually agreed upon acceptance
tests, which would delay or prohibit recognition of revenues under
SAB No. 104;
- adverse changes in demand for and market acceptance of our products;
- competitive pressures resulting in lower sales prices of our products;
- adverse changes in the pulp and paper industry;
- delays or problems in our introduction of new products;
- our competitors' announcements of new products, services, or
technological innovations;
- contractual liabilities incurred by us related to guarantees of our
product performance;
- increased costs of raw materials or supplies, including the cost of
energy; and
- changes in the timing of product orders.
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KADANT INC.
Risk Factors (continued)
Anti-takeover provisions in our charter documents, under Delaware law, and in
our shareholder rights plan could prevent or delay transactions that our
shareholders may favor.
Provisions of our charter and bylaws may discourage, delay, or prevent a
merger or acquisition that our shareholders may consider favorable, including
transactions in which shareholders might otherwise receive a premium for their
shares. For example, these provisions:
- authorize the issuance of "blank check" preferred stock without any
need for action by shareholders;
- provide for a classified board of directors with staggered three-year
terms;
- require supermajority shareholder voting to effect various amendments
to our charter and bylaws;
- eliminate the ability of our shareholders to call special meetings of
shareholders;
- prohibit shareholder action by written consent; and
- establish advance notice requirements for nominations for election to
our board of directors or for proposing matters that can be acted on
by shareholders at shareholder meetings.
In addition, our board of directors has adopted a shareholder rights plan
intended to protect shareholders in the event of an unfair or coercive offer to
acquire our company and to provide our board of directors with adequate time to
evaluate unsolicited offers. Preferred stock purchase rights have been
distributed to our common shareholders pursuant to the rights plan. This rights
plan may have anti-takeover effects. The rights plan will cause substantial
dilution to a person or group that attempts to acquire us on terms that our
board of directors does not believe are in our best interests and those of our
shareholders and may discourage, delay, or prevent a merger or acquisition that
shareholders may consider favorable, including transactions in which
shareholders might otherwise receive a premium for their shares.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
We are exposed to market risk from changes in interest rates and foreign
currency exchange rates, which could affect our results of operations and
financial condition.
We borrowed $60 million in May 2005 to fund a portion of the Kadant
Johnson acquisition. Through an interest rate swap $36 million, or 60%, of the
borrowing has been converted to a fixed rate of interest. The remaining portion
of the borrowing bears a variable rate of interest based on LIBOR. A
100-basis-point increase in LIBOR rates at July 2, 2005, would increase our
annual pre-tax interest expense by $0.2 million.
Except as described above, our exposure to market risk from interest
rates and foreign currency exchange rates has not changed materially from our
exposure at year-end 2004.
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KADANT INC.
Item 4 - Controls and Procedures
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures
In May 2005 we acquired Kadant Johnson, a private company with internal
control procedures that had not been designed for public company reporting.
Prior to our acquisition, Kadant Johnson's independent certified public
accountants identified material weaknesses in Kadant Johnson's controls over the
inventory reserve calculation and financial close procedures. Kadant Johnson
adjusted their inventory obsolescence reserve before the acquisition date by
restating prior periods to increase their reserve in compliance with our policy
and generally accepted accounting principles. In addition, we added internal
control procedures to ensure that Kadant Johnson's disclosure controls, as they
relate to Kadant's consolidated financial reporting, were adequate and in
compliance with our policies and procedures. As a result, we made a number of
changes to internal controls over financial reporting (as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended) during the second quarter of 2005 including:
- reviewing and strengthening Kadant Johnson's tax accounting process,
- reviewing and strengthening Kadant Johnson's intercompany
reconciliation process,
- enhancing the documentation relating to Kadant Johnson's reserve
calculations for accounts receivable and warranty to comply with its
policies, and
- accelerating and improving Kadant Johnson's financial close
procedures.
We are continuing the process of evaluating Kadant Johnson's internal
controls and, as of the date of this quarterly report, have not yet completed
our evaluation. We do not anticipate that our evaluation of the internal
controls of Kadant Johnson will be complete by December 31, 2005 and, as
permitted, we will be excluding this acquisition from our reporting under
Section 404 of the Sarbanes-Oxley Act of 2002 at December 31, 2005.
Our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of July 2, 2005. The term
"disclosure controls and procedures," as defined in Securities Exchange Act
Rules 13a-15(e) and 15d-15(e), means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by the
company in the reports that it files or submits under the Securities Exchange
Act is recorded, processed, summarized, and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act is accumulated and communicated to
the company's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based upon the evaluation of our disclosure controls and procedures as of July
2, 2005, our Chief Executive Officer and Chief Financial Officer concluded that
as of July 2, 2005, our disclosure controls and procedures were effective at the
reasonable assurance level.
(b) Changes in Internal Control Over Financial Reporting
Other than the changes resulting from our acquisition of Kadant Johnson
outlined above, there have not been any changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) during the fiscal quarter ended
July 2, 2005 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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KADANT INC.
PART II - OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
The following table provides information about purchases by us of our
common stock during the three months ended July 2, 2005:
Issuer Purchases of Equity Securities
-------------------------------------
Approximate Dollar
Total Number of Value of Shares that
Shares Purchased as May Yet Be
Total Number of Average Price Paid Part of Publicly Purchased
Period Shares Purchased (1) per Share Announced Plans Under the Plans
- --------------------------------------------------------------------------------------------------------------------------
4/3/05 - 4/30/05 - - - $ 20,650,526
5/1/05 - 5/31/05 110,900 $18.80 110,900 $ 14,975,285
6/1/05 - 7/2/05 - - - $ 14,975,285
Total: - - -
(1) On May 6, 2005, our board of directors authorized the repurchase of up to
$15 million of our equity securities in the open market or in negotiated
transactions for the period from May 18, 2005 through May 18, 2006. As of
July 2, 2005, we had repurchased 1,200 shares of our common stock for $25
thousand under this authorization. In addition, in May 2005 we repurchased
109,700 shares of common stock for $2.1 million under a previous
authorization, which expired on May 18, 2005.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On June 7, 2005, at the annual meeting of shareholders, the shareholders
elected two directors, John M. Albertine and Thomas C. Leonard, to the class of
directors whose three-year term expires at Kadant's annual meeting of
shareholders in 2008. Mr. Albertine received 11,193,179 shares voted in favor
of his election and 211,878 shares voted against. Mr. Leonard received
11,299,774 shares voted in favor of his election and 105,283 shares voted
against.
Item 6 - Exhibits
- -----------------
See Exhibit Index on the page immediately preceding exhibits.
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KADANT INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 11th day of August, 2005.
KADANT INC.
/s/ Thomas M. O'Brien
----------------------------------------------------
Thomas M. O'Brien
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.1 International Swap Dealers Association, Inc. Master Agreement dated
May 25, 2005 between Kadant Inc. and Citizens Bank of Massachusetts
and Swap Confirmation dated May 18, 2005.
31.1 Certification of the Principal Executive Officer of the Registrant
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
31.2 Certification of the Principal Financial Officer of the Registrant
Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.
32 Certification of the Chief Executive Officer and the Chief Financial
Officer of the Registrant Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
45
EXHIBIT 10.1
ISDA(R)
International Swap Dealers Association, Inc.
MASTER AGREEMENT
dated as of ............................
........................................and......................................
have entered and/or anticipate entering into one or more transactions (each a
"Transaction") that are or will be governed by this Master Agreement, which
includes the schedule (the "Schedule"), and the documents and other
confirming evidence (each a "Confirmation") exchanged between the parties
confirming those Transactions.
Accordingly, the parties agree as follows: -
1. Interpretation
(a) Definitions. The terms defined in Section 14 and in the Schedule will
have the meanings therein specified for the purpose of this Master Agreement.
(b) Inconsistency. In the event of any inconsistency between the provisions
of the Schedule and the other provisions of this Master Agreement, the Schedule
will prevail. In the event of any inconsistency between the provisions of any
Confirmation and this Master Agreement (including the Schedule), such
Confirmation will prevail for the purpose of the relevant Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the
fact that this Master Agreement and all Confirmations form a single agreement
between the parties (collectively referred to as this "Agreement"), and the
parties would not otherwise enter into any Transactions.
2. Obligations
(a) General Conditions.
(i) Each party will make each payment or delivery specified in each
Confirmation to be made by it, subject to the other provisions of this
Agreement.
(ii) Payments under this Agreement will be made on the due date for
value on that date in the place of the account specified in the
relevant Confirmation or otherwise pursuant to this Agreement, in
freely transferable funds and in the manner customary for payments in
the required currency. Where settlement is by delivery (that is,
other than by payment), such delivery will be made for receipt on the
due date in the manner customary for the relevant obligation unless
otherwise specified in the relevant Confirmation or elsewhere in this
Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject
to (1) the condition precedent that no Event of Default or Potential
Event of Default with respect to the other party has occurred and is
continuing, (2) the condition precedent that no Early Termination
Date in respect of the relevant Transaction has occurred or been
effectively designated and (3) each other applicable condition
precedent specified in this Agreement.
(b) Change of Account. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five Local
Business Days prior to the scheduled date for the payment or delivery to which
such change applies unless such other party gives timely notice of a reasonable
objection to such change.
(c) Netting. If on any date amounts would otherwise be payable:-
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to make
payment of any such amount will be automatically satisfied and discharged and,
if the aggregate amount that would otherwise have been payable by one party
exceeds the aggregate amount that would otherwise have been payable by the other
party, replaced by an obligation upon the party by whom the larger aggregate
amount would have been payable to pay to the other party the excess of the
larger aggregate amount over the smaller aggregate amount.
The parties may elect in respect of two or more Transactions that a net amount
will be determined in respect of all amounts payable on the same date in the
same currency in respect of such Transactions, regardless of whether such
amounts are payable in respect of the same Transaction. The election may be made
in the Schedule or a Confirmation by specifying that subparagraph (ii) above
will not apply to the Transactions identified as being subject to the election,
together with the starting date (in which case subparagraph (ii) above will not,
or will cease to, apply to such Transactions from such date). This election may
be made separately for different groups of Transactions and will apply
separately to each pairing of Offices through which the parties make and receive
payments or deliveries.
(d) Deduction or Withholding for Tax.
(i) Gross-Up. All payments under this Agreement will be made without
any deduction or withholding for or on account of any Tax unless such
deduction or withholding is required by any applicable law, as modified
by the practice of any relevant governmental revenue authority, then in
effect. If a party is so required to deduct or withhold, then that
party ("X") will:-
(1) promptly notify the other party ("Y") of such requirement;
(2) pay to the relevant authorities the full amount required to
be deducted or withheld (including the full amount required to
be deducted or withheld from any additional amount paid by X to
Y under this Section 2(d)) promptly upon the earlier of
determining that such deduction or withholding is required or
receiving notice that such amount has been assessed against Y;
(3) promptly forward to Y an official receipt (or a certified
copy), or other documentation reasonably acceptable to Y,
evidencing such payment to such authorities; and
(4) if such Tax is an Indemnifiable Tax, pay to Y, in addition to
the payment to which Y is otherwise entitled under this
Agreement, such additional amount as is necessary to ensure
that the net amount actually received by Y (free and clear of
Indemnifiable Taxes, whether assessed against X or Y) will equal
the full amount Y would have received had no such deduction or
withholding been required. However, X will not be required to
pay any additional amount to Y to the extent that it would not be
required to be paid but for:-
(A) the failure by Y to comply with or perform any
agreement contained in Section 4(a)(i), 4(a)(iii) or
4(d); or
(B) the failure of a representation made by Y pursuant
to Section 3(f) to be accurate and true unless such
failure would not have occurred but for (I) any action
taken by a
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taxing authority, or brought in a court of competent
jurisdiction, on or after the date on which a Transaction
is entered into (regardless of whether such action is
taken or brought with respect to a party to this
Agreement) or (II) a Change in Tax Law.
(ii) Liability. If:-
(1) X is required by any applicable law, as modified by the
practice of any relevant governmental revenue authority, to make
any deduction or withholding in respect of which X would not be
required to pay an additional amount to Y under Section
2(d)(i)(4);
(2) X does not so deduct or withhold; and
(3) a liability resulting from such Tax is assessed directly
against X,
then, except to the extent Y has satisfied or then satisfies the
liability resulting from such Tax, Y will promptly pay to X the amount
of such liability (including any related liability for interest, but
including any related liability for penalties only if Y has failed to
comply with or perform any agreement contained in Section 4(a)(i),
4(a)(iii) or 4(d)).
(e) Default Interest; Other Amounts. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant Transaction,
a party that defaults in the performance of any payment obligation will, to the
extent permitted by law and subject to Section 6(c), be required to pay interest
(before as well as after judgment) on the overdue amount to the other party on
demand in the same currency as such overdue amount, for the period from (and
including) the original due date for payment to (but excluding) the date of
actual payment, at the Default Rate. Such interest will be calculated on the
basis of daily compounding and the actual number of days elapsed. If, prior to
the occurrence or effective designation of an Early Termination Date in respect
of the relevant Transaction, a party defaults in the performance of any
obligation required to be settled by delivery, it will compensate the other
party on demand if and to the extent provided for in the relevant Confirmation
or elsewhere in this Agreement.
3. Representations
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is entered
into and, in the case of the representations in Section 3(f), at all times
until the termination of this Agreement) that:-
(a) Basic Representations.
(i) Status. It is duly organised and validly existing under the laws
of the jurisdiction of its organisation or incorporation and, if relevant
under such laws, in good standing;
(ii) Powers. It has the power to execute this Agreement and any other
documentation relating to this Agreement to which it is a party, to
deliver this Agreement and any other documentation relating to this
Agreement that it is required by this Agreement to deliver and to perform
its obligations under this Agreement and any obligations it has under any
Credit Support Document to which it is a party and has taken all
necessary action to authorise such execution, delivery and performance;
(iii) No Violation or Conflict. Such execution, delivery and
performance do not violate or conflict with any law applicable to it, any
provision of its constitutional documents, any order or judgment of any
court or other agency of government applicable to it or any of its assets
or any contractual restriction binding on or affecting it or any of its
assets;
(iv) Consents. All governmental and other consents that are required
to have been obtained by it with respect to this Agreement or any Credit
Support Document to which it is a party have been obtained and are in
full force and effect and all conditions of any such consents have been
complied with; and
(v) Obligations Binding. Its obligations under this Agreement and any
Credit Support
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Document to which it is a party constitute its legal, valid and binding
obligations, enforceable in accordance with their respective terms
(subject to applicable bankruptcy, reorganisation, insolvency, moratorium
or similar laws affecting creditors' rights generally and subject, as to
enforceability, to equitable principles of general application
(regardless of whether enforcement is sought in a proceeding
in equity or at law)).
(b) Absence of Certain Events. No Event of Default or Potential Event of
Default or, to its knowledge, Termination Event with respect to it has occurred
and is continuing and no such event or circumstance would occur as a result of
its entering into or performing its obligations under this Agreement or any
Credit Support Document to which it is a party.
(c) Absence of Litigation. There is not pending or, to its knowledge,
threatened against it or any of its Affiliates any action, suit or proceeding at
law or in equity or before any court, tribunal, governmental body, agency or
official or any arbitrator that is likely to affect the legality, validity or
enforceability against it of this Agreement or any Credit Support Document to
which it is a party or its ability to perform its obligations under this
Agreement or such Credit Support Document.
(d) Accuracy of Specified Information. All applicable information that is
furnished in writing by or on behalf of it to the other party and is identified
for the purpose of this Section 3(d) in the Schedule is, as of the date of the
information, true, accurate and complete in every material respect.
(e) Payer Tax Representation. Each representation specified in the Schedule
as being made by it for the purpose of this Section 3(e) is accurate and true.
(f) Payee Tax Representations. Each representation specified in the Schedule
as being made by it for the purpose of this Section 3(f) is accurate and true.
4. Agreements
Each party agrees with the other that, so long as either party has or may have
any obligation under this Agreement or under any Credit Support Document to
which it is a party:-
(a) Furnish Specified Information. It will deliver to the other party or, in
certain cases under subparagraph (iii) below, to such government or taxing
authority as the other party reasonably directs:-
(i) any forms, documents or certificates relating to taxation
specified in the Schedule or any Confirmation;
(ii) any other documents specified in the Schedule or any
confirmation; and
(iii) upon reasonable demand by such other party, any form or document
that may be required or reasonably requested in writing in order to
allow such other party or its Credit Support Provider to make a payment
under this Agreement or any applicable Credit Support Document without
any deduction or withholding for or on account of any Tax or with such
deduction or withholding at a reduced rate (so long as the completion,
execution or submission of such form or document would not materially
prejudice the legal or commercial position of the party in receipt of
such demand), with any such form or document to be accurate and
completed in a manner reasonably satisfactory to such other party and
to be executed and to be delivered with any reasonably required
certification,
in each case by the date specified in the Schedule or such Confirmation or, if
none is specified, as soon as reasonably practicable.
(b) Maintain Authorisations. It will use all reasonable efforts to maintain
in full force and effect all consents of any governmental or other authority
that are required to be obtained by it with respect to this Agreement or any
Credit Support Document to which it is a party and will use all reasonable
efforts to obtain any that may become necessary in the future.
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(c) Comply with Laws. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to comply
would materially impair its ability to perform its obligations under this
Agreement or any Credit Support Document to which it is a party.
(d) Tax Agreement. It will give notice of any failure of a representation
made by it under Section 3(f) to be accurate and true promptly upon learning of
such failure.
(e) Payment of Stamp Tax. Subject to Section 11, it will pay any Stamp Tax
levied or imposed upon it or in respect of its execution or performance of this
Agreement by a jurisdiction in which it is incorporated, organised, managed and
controlled, or considered to have its seat, or in which a branch or office
through which it is acting for the purpose of this Agreement is located ("Stamp
Tax Jurisdiction") and will indemnify the other party against any Stamp Tax
levied or imposed upon the other party or in respect of the other party's
execution or performance of this Agreement by any such Stamp Tax Jurisdiction
which is not also a Stamp Tax Jurisdiction with respect to the other party.
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party or,
if applicable, any Credit Support Provider of such party or any Specified
Entity of such party of any of the following events constitutes an event of
default (an "Event of Default") with respect to such party:-
(i) Failure to Pay or Deliver. Failure by the party to make, when
due, any payment under this Agreement or delivery under Section 2(a)(i)
or 2(e) required to be made by it if such failure is not remedied on or
before the third Local Business Day after notice of such failure is
given to the party;
(ii) Breach of Agreement. Failure by the party to comply with or
perform any agreement or obligation (other than an obligation to make any
payment under this Agreement or delivery under Section 2(a)(i) or 2(e) or
to give notice of a Termination Event or any agreement or obligation
under Section 4(a)(i), 4(a)(iii) or 4(d)) to be complied with or
performed by the party in accordance with this Agreement if such failure
is not remedied on or before the thirtieth day after notice of such
failure is given to the party;
(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of
such party to comply with or perform any agreement or obligation
to be complied with or performed by it in accordance with any
Credit Support Document if such failure is continuing after any
applicable grace period has elapsed;
(2) the expiration or termination of such Credit Support
Document or the failing or ceasing of such Credit Support
Document to be in full force and effect for the purpose of this
Agreement (in either case other than in accordance with its
terms) prior to the satisfaction of all obligations of such party
under each Transaction to which such Credit Support Document
relates without the written consent of the other party; or
(3) the party or such Credit Support Provider disaffirms,
disclaims, repudiates or rejects, in whole or in part, or
challenges the validity of, such Credit Support Document;
(iv) Misrepresentation. A representation (other than a representation
under Section 3(e) or (f)) made or repeated or deemed to have been made
or repeated by the party or any Credit Support Provider of such party
in this Agreement or any Credit Support Document proves to have been
incorrect or misleading in any material respect when made or repeated
or deemed to have been made or repeated;
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(v) Default under Specified Transaction. The party, any Credit
Support Provider of such party or any applicable Specified Entity of
such party (1) defaults under a Specified Transaction and, after giving
effect to any applicable notice requirement or grace period, there occurs
a liquidation of, an acceleration of obligations under, or an early
termination of, that Specified Transaction, (2) defaults, after giving
effect to any applicable notice requirement or grace period, in making
any payment or delivery due on the last payment, delivery or exchange
date of, or any payment on early termination of, a Specified Transaction
(or such default continues for at least three Local Business Days if
there is no applicable notice requirement or grace period) or (3)
disaffirms, disclaims, repudiates or rejects, in whole or in part, a
Specified Transaction (or such action is taken by any person or entity
appointed or empowered to operate it or act on its behalf);
(vi) Cross Default. If "Cross Default" is specified in the Schedule as
applying to the party, the occurrence or existence of (1) a default,
event of default or other similar condition or event (however
described) in respect of such party, any Credit Support Provider of
such party or any applicable Specified Entity of such party under one
or more agreements or instruments relating to Specified Indebtedness of
any of them (individually or collectively) in an aggregate amount of
not less than the applicable Threshold Amount (as specified in the
Schedule) which has resulted in such Specified Indebtedness becoming,
or becoming capable at such time of being declared, due and payable
under such agreements or instruments, before it would otherwise have
been due and payable or (2) a default by such party, such Credit
Support Provider or such Specified Entity (individually or
collectively) in making one or more payments on the due date thereof in
an aggregate amount of not less than the applicable Threshold Amount
under such agreements or instruments (after giving effect to any
applicable notice requirement or grace period);
(vii) Bankruptcy. The party, any Credit Support Provider of such party
or any applicable Specified Entity of such party:-
(1) is dissolved (other than pursuant to a consolidation,
amalgamation or merger); (2) becomes insolvent or is unable to
pay its debts or fails or admits in writing its inability
generally to pay its debts as they become due; (3) makes a
general assignment, arrangement or composition with or for the
benefit of its creditors; (4) institutes or has instituted
against it a proceeding seeking a judgment of insolvency or
bankruptcy or any other relief under any bankruptcy or insolvency
law or other similar law affecting creditors' rights, or a
petition is presented for its winding-up or liquidation, and, in
the case of any such proceeding or petition instituted or
presented against it, such proceeding or petition (A) results in
a judgment of insolvency or bankruptcy or the entry of an order
for relief or the making of an order for its winding-up or
liquidation or (B) is not dismissed, discharged, stayed or
restrained in each case within 30 days of the institution or
presentation thereof; (5) has a resolution passed for its
winding-up, official management or liquidation (other than
pursuant to a consolidation, amalgamation or merger); (6) seeks
or becomes subject to the appointment of an administrator,
provisional liquidator, conservator, receiver, trustee, custodian
or other similar official for it or for all or substantially all
its assets; (7) has a secured party take possession of all or
substantially all its assets or has a distress, execution,
attachment, sequestration or other legal process levied, enforced
or sued on or against all or substantially all its assets and
such secured party maintains possession, or any such process is
not dismissed, discharged, stayed or restrained, in each case
within 30 days thereafter; (8) causes or is subject to any event
with respect to it which, under the applicable laws of any
jurisdiction, has an analogous effect to any of the events
specified in clauses (1) to (7) (inclusive); or (9) takes any
action in furtherance of, or indicating its consent to, approval
of, or acquiescence in, any of the foregoing acts; or
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(viii) Merger Without Assumption. The party or any Credit Support
Provider of such party consolidates or amalgamates with, or merges with
or into, or transfers all or substantially all its assets to, another
entity and, at the time of such consolidation, amalgamation, merger or
transfer:
(1) the resulting, surviving or transferee entity fails to
assume all the obligations of such party or such Credit Support
Provider under this Agreement or any Credit Support Document to
which it or its predecessor was a party by operation of law or
pursuant to an agreement reasonably satisfactory to the other
party to this Agreement; or
(2) the benefits of any Credit Support Document fail to extend
(without the consent of the other party) to the performance by
such resulting, surviving or transferee entity of its obligations
under this Agreement.
(b) Termination Events. The occurrence at any time with respect to a party
or, if applicable, any Credit Support Provider of such party or any Specified
Entity of such party of any event specified below constitutes an Illegality if
the event is specified in (i) below, a Tax Event if the event is specified in
(ii) below or a Tax Event Upon Merger if the event is specified in (iii) below,
and, if specified to be applicable, a Credit Event Upon Merger if the event is
specified pursuant to (iv) below or an Additional Termination Event if the event
is specified pursuant to (v) below:-
(i) Illegality. Due to the adoption of, or any change in, any
applicable law after the date on which a Transaction is entered into, or
due to the promulgation of, or any change in, the interpretation by any
court, tribunal or regulatory authority with competent jurisdiction of
any applicable law after such date, it becomes unlawful (other than as a
result of a breach by the party of Section 4(b)) for such party (which
will be the Affected Party):-
(1) to perform any absolute or contingent obligation to make
a payment or delivery or to receive a payment or delivery in
respect of such Transaction or to comply with any other material
provision of this Agreement relating to such Transaction; or
(2) to perform, or for any Credit Support Provider of such
party to perform, any contingent or other obligation which the
party (or such Credit Support Provider) has under any Credit
Support Document relating to such Transaction;
(ii) Tax Event. Due to (x) any action taken by a taxing authority, or
brought in a court of competent jurisdiction, on or after the date on
which a Transaction is entered into (regardless of whether such action
is taken or brought with respect to a party to this Agreement) or (y) a
Change in Tax Law, the party (which will be the Affected Party) will, or
there is a substantial likelihood that it will, on the next succeeding
Scheduled Payment Date (1) be required to pay to the other party an
additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii)
or 6(e)) or (2) receive a payment from which an amount is required to be
deducted or withheld for or on account of a Tax (except in respect of
interest under Section 2(e), 6(d)(ii) or 6(e)) and no additional amount
is required to be paid in respect of such Tax under Section 2(d)(i)(4)
(other than by reason of Section 2(d)(i)(4)(A) or (B));
(iii) Tax Event Upon Merger. The party (the "Burdened Party") on the
next succeeding Scheduled Payment Date will either (1) be required to pay
an additional amount in respect of an Indemnifiable Tax under Section
2(d)(i)(4) (except in respect of interest under Section 2(e), 6(d)(ii) or
6(e)) or (2) receive a payment from which an amount has been deducted or
withheld for or on account of any Indemnifiable Tax in respect of which
the other party is not required to pay an additional amount (other than
by reason of Section 2(d)(i)(4)(A) or (B)), in either case as a result of
a party consolidating or amalgamating with, or merging with or into, or
transferring all or substantially all its assets to, another entity
(which will be the Affected Party) where such action does not constitute
an event described in Section 5(a)(viii);
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(iv) Credit Event Upon Merger. If "Credit Event Upon Merger" is
specified in the Schedule as applying to the party, such party ("X"),
any Credit Support Provider of X or any applicable Specified Entity of X
consolidates or amalgamates with, or merges with or into, or transfers
all or substantially all its assets to, another entity and such action
does not constitute an event described in Section 5(a)(viii) but the
creditworthiness of the resulting, surviving or transferee entity is
materially weaker than that of X, such Credit Support Provider or such
Specified Entity, as the case may be, immediately prior to such action
(and, in such event, X or its successor or transferee, as appropriate,
will be the Affected Party); or
(v) Additional Termination Event. If any "Additional Termination
Event" is specified in the Schedule or any Confirmation as applying, the
occurrence of such event (and, in such event, the Affected Party or
Affected Parties shall be as specified for such Additional Termination
Event in the Schedule or such Confirmation).
(c) Event of Default and Illegality. If an event or circumstance which would
otherwise constitute or give rise to an Event of Default also constitutes an
Illegality, it will be treated as an Illegality and will not constitute an
Event of Default.
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of
Default with respect to a party (the "Defaulting Party") has occurred and is
then continuing, the other party (the "Non-defaulting Party") may, by not more
than 20 days notice to the Defaulting Party specifying the relevant Event of
Default, designate a day not earlier than the day such notice is effective as an
Early Termination Date in respect of all outstanding Transactions. If, however,
"Automatic Early Termination" is specified in the Schedule as applying to a
party, then an Early Termination Date in respect of all outstanding Transactions
will occur immediately upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the
extent analogous thereto, (8), and as of the time immediately preceding the
institution of the relevant proceeding or the presentation of the relevant
petition upon the occurrence with respect to such party of an Event of Default
specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(b) Right to Terminate Following Termination Event.
(i) Notice. If a Termination Event occurs, an Affected Party will,
promptly upon becoming aware of it, notify the other party, specifying
the nature of that Termination Event and each Affected Transaction and
will also give such other information about that Termination Event as
the other party may reasonably require.
(ii) Transfer to Avoid Termination Event. If either an Illegality
under Section 5(b)(i)(1) or a Tax Event occurs and there is only one
Affected Party, or if a Tax Event Upon Merger occurs and the Burdened
Party is the Affected Party, the Affected Party will, as a condition to
its right to designate an Early Termination Date under Section 6(b)(iv),
use all reasonable efforts (which will not require such party to incur a
loss, excluding immaterial, incidental expenses) to transfer within 20
days after it gives notice under Section 6(b)(i) all its rights and
obligations under this Agreement in respect of the Affected Transactions
to another of its Offices or Affiliates so that such Termination Event
ceases to exist.
If the Affected Party is not able to make such a transfer it will give
notice to the other party to that effect within such 20 day period,
whereupon the other party may effect such a transfer within 30 days
after the notice is given under Section 6(b)(i).
Any such transfer by a party under this Section 6(b)(ii) will be subject
to and conditional upon the prior written consent of the other party,
which consent will not be withheld if such other party's policies in
effect at such time would permit it to enter into transactions with the
transferee on the terms proposed.
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(iii) Two Affected Parties. If an Illegality under Section 5(b)(i)(1)
or a Tax Event occurs and there are two Affected Parties, each party will
use all reasonable efforts to reach agreement within 30 days after
notice thereof is given under Section 6(b)(i) on action to avoid that
Termination Event.
(iv) Right to Terminate. If:-
(1) a transfer under Section 6(b)(ii) or an agreement under
Section 6(b)(iii), as the case may be, has not been effected with
respect to all Affected Transactions within 30 days after an
Affected Party gives notice under Section 6(b)(i); or
(2) an Illegality under Section 5(b)(i)(2), a Credit Event
Upon Merger or an Additional Termination Event occurs, or a Tax
Event Upon Merger occurs and the Burdened Party is not the
Affected Party,
either party in the case of an Illegality, the Burdened Party in the
case of a Tax Event Upon Merger, any Affected Party in the case of a Tax
Event or an Additional Termination Event if there is more than one
Affected Party, or the party which is not the Affected Party in the case
of a Credit Event Upon Merger or an Additional Termination Event if
there is only one Affected Party may, by not more than 20 days notice to
the other party and provided that the relevant Termination Event is then
continuing, designate a day not earlier than the day such notice is
effective as an Early Termination Date in respect of all Affected
Transactions.
(c) Effect of Designation.
(i) If notice designating an Early Termination Date is given under
Section 6(a) or (b), the Early Termination Date will occur on the date so
designated, whether or not the relevant Event of Default or Termination
Event is then continuing.
(ii) Upon the occurrence or effective designation of an Early
Termination Date, no further payments or deliveries under Section 2(a)(i)
or 2(e) in respect of the Terminated Transactions will be required to be
made, but without prejudice to the other provisions of this Agreement.
The amount, if any, payable in respect of an Early Termination Date shall
be determined pursuant to Section 6(e).
(d) Calculations.
(i) Statement. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party will make the
calculations on its part, if any, contemplated by Section 6(e) and will
provide to the other party a statement (1) showing, in reasonable detail,
such calculations (including all relevant quotations and specifying any
amount payable under Section 6(e)) and (2) giving details of the relevant
account to which any amount payable to it is to be paid. In the absence
of written confirmation from the source of a quotation obtained in
determining a Market Quotation, the records of the party obtaining such
quotation will be conclusive evidence of the existence and accuracy of
such quotation.
(ii) Payment Date. An amount calculated as being due in respect of any
Early Termination Date under Section 6(e) will be payable on the day that
notice of the amount payable is effective (in the case of an Early
Termination Date which is designated or occurs as a result of an Event of
Default) and on the day which is two Local Business Days after the day on
which notice of the amount payable is effective (in the case of an Early
Termination Date which is designated as a result of a Termination Event).
Such amount will be paid together with (to the extent permitted under
applicable law) interest thereon (before as well as after judgment) in
the Termination Currency, from (and including) the relevant Early
Termination Date to (but excluding) the date such amount is paid, at the
Applicable Rate. Such interest will be calculated on the basis of daily
compounding and the actual number of days elapsed.
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(e) Payments on Early Termination. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the Schedule
of a payment measure, either "Market Quotation" or "Loss", and a payment method,
either the "First Method" or the "Second Method". If the parties fail to
designate a payment measure or payment method in the Schedule, it will be deemed
that "Market Quotation" or the "Second Method", as the case may be, shall apply.
The amount, if any, payable in respect of an Early Termination Date and
determined pursuant to this Section will be subject to any Set-off.
(i) Events of Default. If the Early Termination Date results from an
Event of Default:-
(1) First Method and Market Quotation. If the First Method and
Market Quotation apply, the Defaulting Party will pay to the
Non-defaulting Party the excess, if a positive number, of (A) the
sum of the Settlement Amount (determined by the Non-defaulting
Party) in respect of the Terminated Transactions and the
Termination Currency Equivalent of the Unpaid Amounts owing to
the Non-defaulting Party over (B) the Termination Currency
Equivalent of the Unpaid Amounts owing to the Defaulting Party.
(2) First Method and Loss. If the First Method and Loss apply,
the Defaulting Party will pay to the Non-defaulting Party, if a
positive number, the Non-defaulting Party's Loss in respect of
this Agreement.
(3) Second Method and Market Quotation. If the Second Method
and Market Quotation apply, an amount will be payable equal to
(A) the sum of the Settlement Amount (determined by the Non-
defaulting Party) in respect of the Terminated Transactions and
the Termination Currency Equivalent of the Unpaid Amounts owing
to the Non-defaulting Party less (B) the Termination Currency
Equivalent of the Unpaid Amounts owing to the Defaulting Party.
If that amount is a positive number, the Defaulting Party will
pay it to the Non-defaulting Party; if it is a negative number,
the Non-defaulting Party will pay the absolute value of that
amount to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply,
an amount will be payable equal to the Non-defaulting Party's
Loss in respect of this Agreement. If that amount is a positive
number, the Defaulting Party will pay it to the Non-defaulting
Party; if it is a negative number, the Non-defaulting Party will
pay the absolute value of that amount to the Defaulting Party.
(ii) Termination Events. If the Early Termination Date results from a
Termination Event:-
(1) One Affected Party. If there is one Affected Party, the
amount payable will be determined in accordance with Section
6(e)(i)(3), if Market Quotation applies, or Section 6(e)(i)(4),
if Loss applies, except that, in either case, references to the
Defaulting Party and to the Non-defaulting Party will be deemed
to be references to the Affected Party and the party which is not
the Affected Party, respectively, and, if Loss applies and fewer
than all the Transactions are being terminated, Loss shall be
calculated in respect of all Terminated Transactions.
(2) Two Affected Parties. If there are two Affected Parties:-
(A) if Market Quotation applies, each party will determine a
Settlement Amount in respect of the Terminated Transactions,
and an amount will be payable equal to (I) the sum of (a)
one-half of the difference between the Settlement Amount of
the party with the higher Settlement Amount ("X") and the
Settlement Amount of the party with the lower Settlement
Amount ("Y") and (b) the Termination Currency Equivalent of
the Unpaid Amounts owing to X less (II) the Termination
Currency Equivalent of the Unpaid Amounts owing to Y; and
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(B) if Loss applies, each party will determine its Loss in
respect of this Agreement (or, if fewer than all the
Transactions are being terminated, in respect of all
Terminated Transactions) and an amount will be payable equal
to one-half of the difference between the Loss of the party
with the higher Loss ("X") and the Loss of the party with the
lower Loss ("Y").
If the amount payable is a positive number, Y will pay it to X;
if it is a negative number, X will pay the absolute value of that
amount to Y.
(iii) Adjustment for Bankruptcy. In circumstances where an Early
Termination Date occurs because "Automatic Early Termination" applies in
respect of a party, the amount determined under this Section 6(e) will be
subject to such adjustments as are appropriate and permitted by law to
reflect any payments or deliveries made by one party to the other under
this Agreement (and retained by such other party) during the period from
the relevant Early Termination Date to the date for payment determined
under Section 6(d)(ii).
(iv) Pre-Estimate. The parties agree that if Market Quotation applies
an amount recoverable under this Section 6(e) is a reasonable pre-
estimate of loss and not a penalty. Such amount is payable for the loss
of bargain and the loss of protection against future risks and except as
otherwise provided in this Agreement neither party will be entitled to
recover any additional damages as a consequence of such losses.
7. Transfer
Subject to Section 6(b)(ii), neither this Agreement nor any interest or
obligation in or under this Agreement may be transferred (whether by way of
security or otherwise) by either party without the prior written consent of the
other party, except that:-
(a) a party may make such a transfer of this agreement pursuant to a
consolidation or amalgamation with, or merger with or into, or transfer of all
or substantially all its assets to, another entity (but without prejudice to any
other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest in
any amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section will be void.
8. Contractual Currency
(a) Payment in the Contractual Currency. Each payment under this Agreement
will be made in the relevant currency specified in this Agreement for that
payment (the "Contractual Currency"). To the extent permitted by applicable
law, any obligation to make payments under this Agreement in the Contractual
Currency will not be discharged or satisfied by any tender in any currency other
than the Contractual Currency, except to the extent such tender results in the
actual receipt by the party to which payment is owed, acting in a reasonable
manner and in good faith in converting the currency so tendered into the
Contractual Currency, of the full amount in the Contractual Currency of all
amounts payable in respect of this Agreement. If for any reason the amount in
the Contractual Currency so received falls short of the amount in the
Contractual Currency payable in respect of this Agreement, the party required to
make the payment will, to the extent permitted by applicable law, immediately
pay such additional amount in the Contractual Currency as may be necessary to
compensate for the shortfall. If for any reason the amount in the Contractual
Currency so received exceeds the amount in the Contractual Currency payable in
respect of this Agreement, the party receiving the payment will refund promptly
the amount of such excess.
(b) Judgments. To the extent permitted by applicable law, if any judgment or
order expressed in a currency other than the Contractual Currency is rendered
(i) for the payment of any amount owing in
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respect of this Agreement, (ii) for the payment of any amount relating to any
early termination in respect of this Agreement or (iii) in respect of a judgment
or order of another court for the payment of any amount described in (i) or (ii)
above, the party seeking recovery, after recovery in full of the aggregate
amount to which such party is entitled pursuant to the judgment or order, will
be entitled to receive immediately from the other party the amount of any
shortfall of the Contractual Currency received by such party as a consequence of
sums paid in such other currency and will refund promptly to the other party any
excess of the Contractual Currency received by such party as a consequence of
sums paid in such other currency if such shortfall or such excess arises or
results from any variation between the rate of exchange at which the Contractual
Currency is converted into the currency of the judgment or order for the
purposes of such judgment or order and the rate of exchange at which such party
is able, acting in a reasonable manner and in good faith in converting the
currency received into the Contractual Currency, to purchase the Contractual
Currency with the amount of the currency of the judgment or order actually
received by such party. The term "rate of exchange" includes, without
limitation, any premiums and costs of exchange payable in connection with the
purchase of or conversion into the Contractual Currency.
(c) Separate Indemnities. To the extent permitted by applicable law, these
indemnities constitute separate and independent obligations from the other
obligations in this Agreement, will be enforceable as separate and independent
causes of action, will apply notwithstanding any indulgence granted by the party
to which any payment is owed and will not be affected by judgment being obtained
or claim or proof being made for any other sums payable in respect of this
Agreement.
(d) Evidence of Loss. For the purpose of this Section 8, it will be
sufficient for a party to demonstrate that it would have suffered a loss had an
actual exchange or purchase been made.
9. Miscellaneous
(a) Entire Agreement. This Agreement constitutes the entire agreement and
understanding of the parties with respect to its subject matter and supersedes
all oral communication and prior writings with respect thereto.
(b) Amendments. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced by
a facsimile transmission) and executed by each of the parties or confirmed by an
exchange of telexes or electronic messages on an electronic messaging system.
(c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive the
termination of any Transaction.
(d) Remedies Cumulative. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative and
not exclusive of any rights, powers, remedies and privileges provided by law.
(e) Counterparts and Confirmations.
(i) This Agreement (and each amendment, modification and waiver in
respect of it) may be executed and delivered in counterparts (including
by facsimile transmission), each of which will be deemed an original.
(ii) The parties intend that they are legally bound by the terms of
each Transaction from the moment they agree to those terms (whether
orally or otherwise). A Confirmation shall he entered into as soon as
practicable and may he executed and delivered in counterparts
(including by facsimile transmission) or be created by an exchange of
telexes or by an exchange of electronic messages on an electronic
messaging system, which in each case will be sufficient for all
purposes to evidence a binding supplement to this Agreement. The
parties will specify therein or through another effective means that
any such counterpart, telex or electronic message constitutes a
Confirmation.
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(f) No Waiver of Rights. A failure or delay in exercising any right, power or
privilege in respect of this Agreement will not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege will
not be presumed to preclude any subsequent or further exercise, of that right,
power or privilege or the exercise of any other right, power or privilege.
(g) Headings. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
10. Offices; Multibranch Parties
(a) If Section 10(a) is specified in the Schedule as applying, each party
that enters into a Transaction through an Office other than its head or home
office represents to the other party that, notwithstanding the place of booking
office or jurisdiction of incorporation or organisation of such party, the
obligations of such party are the same as if it had entered into the
Transaction through its head or home office. This representation will be deemed
to be repeated by such party on each date on which a Transaction is entered
into.
(b) Neither party may change the Office through which it makes and receives
payments or deliveries for the purpose of a Transaction without the prior
written consent of the other party.
(c) If a party is specified as a Multibranch Party in the Schedule, such
Multibranch Party may make and receive payments or deliveries under any
Transaction through any Office listed in the Schedule, and the Office through
which it makes and receives payments or deliveries with respect to a Transaction
will be specified in the relevant Confirmation.
11. Expenses
A Defaulting Party will, on demand, indemnify and hold harmless the other party
for and against all reasonable out-of-pocket expenses, including legal fees and
Stamp Tax, incurred by such other party by reason of the enforcement and
protection of its rights under this Agreement or any Credit Support Document to
which the Defaulting Party is a party or by reason of the early termination of
any Transaction, including, but not limited to, costs of collection.
12. Notices
(a) Effectiveness. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except that a notice or
other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicated:-
(i) if in writing and delivered in person or by courier, on the date it
is delivered;
(ii) if sent by telex, on the date the recipient's answerback is
received;
(iii) if sent by facsimile transmission, on the date that transmission
is received by a responsible employee of the recipient in legible form
(it being agreed that the burden of proving receipt will be on the
sender and will not be met by a transmission report generated by the
sender's facsimile machine);
(iv) if sent by certified or registered mail (airmail, if overseas) or
the equivalent (return receipt requested), on the date that mail is
delivered or its delivery is attempted; or
(v) if sent by electronic messaging system, on the date that electronic
message is received,
unless the date of that delivery (or attempted delivery) or that receipt, as
applicable, is not a Local Business Day or that communication is delivered (or
attempted) or received, as applicable, after the close of business on a Local
Business Day, in which case that communication shall be deemed given and
effective on the first following day that is a Local Business Day.
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(b) Change of Addresses. Either party may by notice to the other change the
address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
13. Governing Law and Jurisdiction
(a) Governing Law. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(b) Jurisdiction. With respect to any suit, action or proceedings relating to
this Agreement ("Proceedings"), each party irrevocably:-
(i) submits to the jurisdiction of the English courts, if this
Agreement is expressed to be governed by English law, or to the
non-exclusive jurisdiction of the courts of the State of New York and
the United States District Court located in the Borough of Manhattan
in New York City, if this Agreement is expressed to be governed by the
laws of the State of New York; and
(ii) waives any objection which it may have at any time to the laying
of venue of any Proceedings brought in any such court, waives any claim
that such Proceedings have been brought in an inconvenient forum and
further waives the right to object, with respect to such Proceedings,
that such court does not have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in
any other jurisdiction (outside, if this Agreement is expressed to be governed
by English law, the Contracting States, as defined in Section 1(3) of the Civil
Jurisdiction and Judgments Act 1982 or any modification, extension or
re-enactment thereof for the time being in force) nor will the bringing of
Proceedings in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
(c) Service of Process. Each party irrevocably appoints the Process Agent (if
any) specified opposite its name in the Schedule to receive, for it and on its
behalf, service of process in any Proceedings. If for any reason any party's
Process Agent is unable to act as such, such party will promptly notify the
other party and within 30 days appoint a substitute process agent acceptable to
the other party. The parties irrevocably consent to service of process given in
the manner provided for notices in Section 12. Nothing in this Agreement will
affect the right of either party to serve process in any other manner permitted
by law.
(d) Waiver of Immunities. Each party irrevocably waives, to the fullest
extent permitted by applicable law, with respect to itself and its revenues and
assets (irrespective of their use or intended use), all immunity on the grounds
of sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any
court, (iii) relief by way of injunction, order for specific performance or for
recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its
revenues or assets might otherwise be entitled in any Proceedings in the courts
of any jurisdiction and irrevocably agrees, to the extent permitted by
applicable law, that it will not claim any such immunity in any Proceedings.
14. Definitions
As used in this Agreement:-
"Additional Termination Event" has the meaning specified in Section 5(b).
"Affected Party" has the meaning specified in Section 5(b).
"Affected Transactions" means (a) with respect to any Termination Event
consisting of an Illegality, Tax Event or Tax Event Upon Merger, all
Transactions affected by the occurrence of such Termination Event and (b) with
respect to any other Termination Event, all Transactions.
"Affiliate" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
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controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control" of
any entity or person means ownership of a majority of the voting power of the
entity or person.
"Applicable Rate" means:-
(a) in respect of obligations payable or deliverable (or which would have
been but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of either
party from and after the date (determined in accordance with Section 6(d)(ii))
on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which
would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the
Non-default Rate; and
(d) in all other cases, the Termination Rate.
"Burdened Party" has the meaning specified in Section 5(b).
"Change in Tax Law" means the enactment, promulgation, execution or
ratification of, or any change in or amendment to, any law (or in the
application or official interpretation of any law) that occurs on or after the
date on which the relevant Transaction is entered into.
"consent" includes a consent, approval, action, authorisation, exemption,
notice, filing, registration or exchange control consent. "Credit Event Upon
Merger" has the meaning specified in Section 5(b).
"Credit Support Document" means any agreement or instrument that is specified
as such in this Agreement. "Credit Support Provider" has the meaning specified
in the Schedule.
"Default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the relevant payee (as certified by it) if it
were to fund or of funding the relevant amount plus 1% per annum.
"Defaulting Party" has the meaning specified in Section 6(a).
"Early Termination Date" means the date determined in accordance with Section
6(a) or 6(b)(iv).
"Event of Default" has the meaning specified in Section 5(a) and, if applicable,
in the Schedule.
"Illegality" has the meaning specified in Section 5(b).
"Indemnifiable Tax" means any Tax other than a Tax that would not be imposed in
respect of a payment under this Agreement but for a present or former connection
between the jurisdiction of the government or taxation authority imposing such
Tax and the recipient of such payment or a person related to such recipient
(including, without limitation, a connection arising from such recipient or
related person being or having been a citizen or resident of such jurisdiction,
or being or having been organised, present or engaged in a trade or business in
such jurisdiction, or having or having had a permanent establishment or fixed
place of business in such jurisdiction, but excluding a connection arising
solely from such recipient or related person having executed, delivered,
performed its obligations or received a payment under, or enforced, this
Agreement or a Credit Support Document).
"law" includes any treaty, law, rule or regulation (as modified, in the case of
tax matters, by the practice of any relevant governmental revenue authority)
and "lawful" and "unlawful" will be construed accordingly.
"Local Business Day" means, subject to the Schedule, a day on which commercial
banks are open for business (including dealings in foreign exchange and foreign
currency deposits) (a) in relation to any obligation under Section 2(a)(i), in
the place(s) specified in the relevant Confirmation or, if not so
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specified, as otherwise agreed by the parties in writing or determined pursuant
to provisions contained, or incorporated by reference, in this Agreement, (b) in
relation to any other payment, in the place where the relevant account is
located and, if different, in the principal financial centre, if any, of the
currency of such payment, (c) in relation to any notice or other communication,
including notice contemplated under Section 5(a)(i), in the city specified in
the address for notice provided by the recipient and, in the case of a notice
contemplated by Section 2(b), in the place where the relevant new account is to
be located and (d) in relation to Section 5(a)(v)(2), in the relevant locations
for performance with respect to such Specified Transaction.
"Loss" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, the Termination Currency
Equivalent of an amount that party reasonably determines in good faith to be its
total losses and costs (or gain, in which case expressed as a negative number)
in connection with this Agreement or that Terminated Transaction or group of
Terminated Transactions, as the case may be, including any loss of bargain, cost
of funding or, at the election of such party but without duplication, loss or
cost incurred as a result of its terminating, liquidating, obtaining or
reestablishing any hedge or related trading position (or any gain resulting from
any of them). Loss includes losses and costs (or gains) in respect of any
payment or delivery required to have been made (assuming satisfaction of each
applicable condition precedent) on or before the relevant Early Termination Date
and not made, except, so as to avoid duplication, if Section 6(e)(i)(1) or (3)
or 6(e)(ii)(2)(A) applies. Loss does not include a party's legal fees and
out-of-pocket expenses referred to under Section 11. A party will determine its
Loss as of the relevant Early Termination Date, or, if that is not reasonably
practicable, as of the earliest date thereafter as is reasonably practicable. A
party may (but need not) determine its Loss by reference to quotations of
relevant rates or prices from one or more leading dealers in the relevant
markets.
"Market Quotation" means, with respect to one or more Terminated Transactions
and a party making the determination, an amount determined on the basis of
quotations from Reference Market-makers. Each quotation will be for an amount,
if any, that would be paid to such party (expressed as a negative number) or by
such party (expressed as a positive number) in consideration of an agreement
between such party (taking into account any existing Credit Support Document
with respect to the obligations of such party) and the quoting Reference
Market-maker to enter into a transaction (the "Replacement Transaction") that
would have the effect of preserving for such party the economic equivalent of
any payment or delivery (whether the underlying obligation was absolute or
contingent and assuming the satisfaction of each applicable condition precedent)
by the parties under Section 2(a)(i) in respect of such Terminated Transaction
or group of Terminated Transactions that would, but for the occurrence of the
relevant Early Termination Date, have been required after that date. For this
purpose, Unpaid Amounts in respect of the Terminated Transaction or group of
Terminated Transactions are to be excluded but, without limitation, any payment
or delivery that would, but for the relevant Early Termination Date, have been
required (assuming satisfaction of each applicable condition precedent) after
that Early Termination Date is to be included. The Replacement Transaction would
be subject to such documentation as such party and the Reference Market-maker
may, in good faith, agree. The party making the determination (or its agent)
will request each Reference Market-maker to provide its quotation to the extent
reasonably practicable as of the same day and time (without regard to different
time zones) on or as soon as reasonably practicable after the relevant Early
Termination Date. The day and time as of which those quotations are to be
obtained will be selected in good faith by the party obliged to make a
determination under Section 6(e), and, if each party is so obliged, after
consultation with the other. If more than three quotations are provided, the
Market Quotation will be the arithmetic mean of the quotations, without regard
to the quotations having the highest and lowest values. If exactly three such
quotations are provided, the Market Quotation will be the quotation remaining
after disregarding the highest and lowest quotations. For this purpose, if more
than one quotation has the same highest value or lowest value, then one of such
quotations shall be disregarded. If fewer than three quotations are provided, it
will be deemed that the Market Quotation in respect of such Terminated
Transaction or group of Terminated Transactions cannot be determined.
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"Non-default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the Non-defaulting Party (as certified by it) if
it were to fund the relevant amount.
"Non-defaulting Party" has the meaning specified in Section 6(a).
"Office" means a branch or office of a party, which may be such party's head or
home office.
"Potential Event of Default" means any event which, with the giving of notice or
the lapse of time or both, would constitute an Event of Default.
"Reference Market-makers" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith (a) from
among dealers of the highest credit standing which satisfy all the criteria
that such party applies generally at the time in deciding whether to offer or
to make an extension of credit and (b) to the extent practicable, from among
such dealers having an office in the same city.
"Relevant Jurisdiction" means, with respect to a party, the jurisdictions (a) in
which the party is incorporated, organised, managed and controlled or considered
to have its seat, (b) where an Office through which the party is acting for
purposes of this Agreement is located, (c) in which the party executes this
Agreement and (d) in relation to any payment, from or through which such payment
is made.
"Scheduled Payment Date" means a date on which a payment or delivery is to be
made under Section 2(a)(i) with respect to a Transaction.
"Set-off" means set-off, offset, combination of accounts, right of retention or
withholding or similar right or requirement to which the payer of an amount
under Section 6 is entitled or subject (whether arising under this Agreement,
another contract, applicable law or otherwise) that is exercised by, or imposed
on, such payer.
"Settlement Amount" means, with respect to a party and any Early Termination
Date, the sum of:-
(a) the Termination Currency Equivalent of the Market Quotations (whether
positive or negative) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation is determined; and
(b) such party's Loss (whether positive or negative and without reference to
any Unpaid Amounts) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation cannot be determined or would not (in
the reasonable belief of the party making the determination) produce a
commercially reasonable result.
"Specified Entity" has the meanings specified in the Schedule.
"Specified Indebtedness" means, subject to the Schedule, any obligation
(whether present or future, contingent or otherwise, as principal or surety or
otherwise) in respect of borrowed money.
"Specified Transaction" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter entered
into between one party to this Agreement (or any Credit Support Provider of such
party or any applicable Specified Entity of such party) and the other party to
this Agreement (or any Credit Support Provider of such other party or any
applicable Specified Entity of such other party) which is a rate swap
transaction, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange transaction, cap transaction, floor
transaction, collar transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions), (b) any combination of
these transactions and (c) any other transaction identified as a Specified
Transaction in this Agreement or the relevant confirmation.
"Stamp Tax" means any stamp, registration, documentation or similar tax.
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"Tax" means any present or future tax, levy, impost, duty, charge, assessment or
fee of any nature (including interest, penalties and additions thereto) that is
imposed by any government or other taxing authority in respect of any payment
under this Agreement other than a stamp, registration, documentation or similar
tax.
"Tax Event" has the meaning specified in Section 5(b).
"Tax Event Upon Merger" has the meaning specified in Section 5(b).
"Terminated Transactions" means with respect to any Early Termination Date (a)
if resulting from a Termination Event, all Affected Transactions and (b) if
resulting from an Event of Default, all Transactions (in either case) in effect
immediately before the effectiveness of the notice designating that Early
Termination Date (or, if "Automatic Early Termination" applies, immediately
before that Early Termination Date).
"Termination Currency" has the meaning specified in the Schedule.
"Termination Currency Equivalent" means, in respect of any amount denominated in
the Termination Currency, such Termination Currency amount and, in respect of
any amount denominated in a currency other than the Termination Currency (the
"Other Currency"), the amount in the Termination Currency determined by the
party making the relevant determination as being required to purchase such
amount of such Other Currency as at the relevant Early Termination Date, or, if
the relevant Market Quotation or Loss (as the case may be), is determined as of
a later date, that later date, with the Termination Currency at the rate equal
to the spot exchange rate of the foreign exchange agent (selected as provided
below) for the purchase of such Other Currency with the Termination Currency at
or about 11:00 a.m. (in the city in which such foreign exchange agent is
located) on such date as would be customary for the determination of such a rate
for the purchase of such Other Currency for value on the relevant Early
Termination Date or that later date. The foreign exchange agent will, if only
one party is obliged to make a determination under Section 6(e), be selected in
good faith by that party and otherwise will be agreed by the parties.
"Termination Event" means an Illegality, a Tax Event or a Tax Event Upon Merger
or, if specified to be applicable, a Credit Event Upon Merger or an Additional
Termination Event.
"Termination Rate" means a rate per annum equal to the arithmetic mean of the
cost (without proof or evidence of any actual cost) to each party (as certified
by such party) if it were to fund or of funding such amounts.
"Unpaid Amounts" owing to any party means, with respect to an Early Termination
Date, the aggregate of (a) in respect of all Terminated Transactions, the
amounts that became payable (or that would have become payable but for Section
2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early
Termination Date and which remain unpaid as at such Early Termination Date and
(b) in respect of each Terminated Transaction, for each obligation under Section
2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be
settled by delivery to such party on or prior to such Early Termination Date and
which has not been so settled as at such Early Termination Date, an amount equal
to the fair market value of that which was (or would have been) required to be
delivered as of the originally scheduled date for delivery, in each case
together with (to the extent permitted under applicable law) interest, in the
currency of such amounts, from (and including) the date such amounts or
obligations were or would have been required to have been paid or performed to
(but excluding) such Early Termination Date, at the Applicable Rate. Such
amounts of interest will be calculated on the basis of daily compounding and the
actual number of days elapsed. The fair market value of any obligation referred
to in clause (b) above shall be reasonably determined by the party obliged to
make the determination under Section 6(e) or, if each party is so obliged, it
shall be the average of the Termination Currency Equivalents of the fair market
values reasonably determined by both parties.
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IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified on the first page of
this document.
Citizens Bank of Massachusetts Kadant Inc.
By: s/s Michael Smith By: s/s Daniel J. Walsh
.......................... .......................
Name: Michael Smith Name: Daniel J. Walsh
Title: Vice President Title: Treasurer
Date: 6/30/2005 Date: 5/25/2005
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SCHEDULE
to the Master Agreement
dated as of May 13, 2005
between
CITIZENS BANK OF MASSACHUSETTS, and KADANT INC., a corporation
a bank organized under the laws organized under the laws of
of Massachusetts ("Party A") Massachusetts ("Party B")
Part 1
Termination Provisions
In this Agreement:
(a) "Specified Entity" means in relation to Party A for the purpose of:
Section 5(a)(v), NONE
Section 5(a)(vi), NONE
Section 5(a)(vii), NONE
Section 5(b)(iv), NONE
and in relation to Party B for the purpose of:
Section 5(a)(v), NONE
Section 5(a)(vi), NONE
Section 5(a)(vii), NONE
Section 5(b)(iv), NONE
(b) The definition of "Specified Transaction" in Section 14 is hereby
amended by adding the text "repurchase transaction, reverse repurchase
transaction," after the text "foreign exchange transaction" and before
the text "cap transaction".
(c) "Cross Default". For the purpose of this Agreement:
(i) with respect to Party A, the Cross Default provisions of
Section 5 (a)(vi) will apply and the "Threshold Amount"
means 2% of "Total Capital and Reserves" of Citizens
Financial Group, Inc. as shown on the most recent annual
audited financial statements of Citizens Financial Group,
Inc.; and
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(ii) with respect to Party B, the Cross Default provisions are
not applicable, however the "Additional Event of Default"
provision relating to cross default in Part 5(c) herein
shall be applicable.
(d) The "Credit Event Upon Merger" provisions of Section 5(b)(iv) will not
apply to Party A or Party B.
(e) The "Automatic Early Termination" provision of Section 6(a) will not
apply to Party A or Party B.
(f) "Payments on Early Termination". For the purpose of Section 6(e) of
this Agreement:
(i) Market Quotation will apply.
(ii) The Second Method will apply.
(g) "Termination Currency" means United States Dollars.
(h) "Additional Termination Event" will not apply.
Part 2
Tax Representations
(a) Payer Tax Representation. For the purpose of Section 3(e), Party A and
Party B hereby make the following representation:
It is not required by any applicable law, as modified by the practice
of any relevant governmental revenue authority, of any Relevant
Jurisdiction to make any deduction or withholding for or on account of
any Tax from any payment (other than interest under Section 2(e),
6(d)(ii) or 6(e)) to be made by it to the other party under this
Agreement. In making this representation, it may rely on:
(i) the accuracy of any representation made by the other party
pursuant to Section 3(f);
(ii) the satisfaction of the agreement of the other party
contained in Section 4(a)(i) or 4(a)(iii) and the accuracy
and effectiveness of any document provided by the other
party pursuant to Section 4(a)(i) or 4(a)(iii); and
(iii) the satisfaction of the agreement of the other party
contained in Section 4(d);
provided that it shall not be a breach of this representation where
reliance is placed on clause (ii) and the other party does not deliver
a form or document under Section 4(a)(iii) by reason of material
prejudice to its legal or commercial position.
(b) Payee Tax Representations. For the purpose of Section 3(f), Party A and
Party B make the representation(s) specified below:
(i) The following representation applies to Party A:
Party A is a bank organized under the laws of Massachusetts.
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(ii) The following representation applies to Party B:
Party B is a corporation organized under the laws of
Massachusetts.
Part 3
Agreement to Deliver Documents
For the purpose of Sections 4(a) (i) and (ii) of this Agreement, each party
agrees to deliver the following documents, as applicable:
(a) Tax forms, documents or certificates to be delivered are:
Party required to Form/Document/Certificate Date by which to
deliver document be delivered
- ------------------- ----------------------------------- ------------------------------
Party A and Party B Department of the Treasury Internal On or before execution of this
Revenue Service Form W-9 Agreement
(b) Other documents to be delivered are:
Party required
to deliver Date by which to Covered by Section 3(d)
document Form/Document/Certificate be delivered Representation
- -------------- --------------------------- ---------------------- -----------------------
Party A and Signature authentication On or before execution YES
Party B satisfactory to the other of this Agreement
party hereto substantially
in the form attached
hereto as Exhibit A
Party B Copy (certified by an On or before execution YES
officer) of the board of this Agreement
resolution (or equivalent
authorizing documentation)
permitting the entering
into of this Agreement
and Transactions hereunder
substantially in the form
attached hereto as Exhibit B
Part 4
Miscellaneous
(a) Addresses for Notices. For the purposes of Section 12(a) of this
Agreement:
(i) All notices or communications to Party A shall, with respect
to a particular Transaction, be sent to the address, telex
number, or facsimile number reflected in the Confirmation of
that Transaction, and any notice for purposes of Sections 5
or 6 shall be sent to:
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Address: Citizens Bank of Massachusetts
One Citizens Plaza
Providence, RI 02903
Attention: Mr. Michael Smith
Treasury Operations
Telephone: (401) 282-7250
Facsimile: (401) 282-5219
E-Mail: michael.smith@citizensbank.com
with a mandatory copy to:
Address: Citizens Bank of Massachusetts
One Citizens Plaza
Providence, RI 02903
Attention: William Lingard
Telephone: (617) 994-7114
Facsimile: (617) 723-9371
(ii) All notices or communications to Party B shall be sent to
the address, telex number, or facsimile number reflected
below:
Address: Kadant Inc.
1 Acton Place, Suite 202
Acton, MA 01720
Attention: Daniel J. Walsh
Telephone: (978) 776-2020
Facsimile: (978) 635-1593
(b) Process Agent. For the purpose of Section 13 (c) of this Agreement:
Party A appoints as its Process Agent: Not applicable.
Party B appoints as its Process Agent: Not applicable.
(c) Offices. Section 10(c) will apply to this Agreement.
(d) Multibranch Party. For the purpose of Section 10(c) of this Agreement:
(i) Party A is not a Multibranch Party.
(ii) Party B is not a Multibranch Party.
(e) Calculation Agent. The Calculation Agent is Party A.
(f) Credit Support Document. NOT APPLICABLE
(g) Credit Support Provider. Credit Support Provider means: NOT APPLICABLE
(h) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York (without reference to
choice of law doctrine).
(i) Netting of Payments. Subparagraph (ii) of Section 2 (c) of this
Agreement will apply.
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(j) "Affiliate" will have the meaning specified in Section 14 of this
Agreement.
Part 5
Other Provisions
(a) Definitions. The definitions and provisions contained in the 2000 ISDA
-----------
Definitions (the "2000 ISDA Definitions") as published by the
International Swaps and Derivatives Association, Inc. are hereby
incorporated into this Agreement by reference. For these purposes, all
references in the 2000 ISDA Definitions to a "Swap Transaction" shall
be deemed to apply to each Transaction entered into hereunder.
(b) Set-off. Without affecting the provisions of the Agreement requiring
-------
the calculation of certain net payment amounts, all payments under this
Agreement will be made without set-off or counterclaim; provided,
however, that upon the designation of any Early Termination Date, in
addition to and not in limitation of any other right or remedy
(including any right to set off, counterclaim, or otherwise withhold
payment or any recourse to any Credit Support Document) under
applicable law the Non-defaulting Party or Non-affected Party (in
either case, "X") may without prior notice to any person set off any
sum or obligation (whether or not arising under this Agreement and
whether matured or unmatured, whether or not contingent and
irrespective of the currency, place of payment or booking office of the
sum or obligation) owed by the Defaulting Party or Affected Party (in
either case, "Y") to X against any sum or obligation (whether or not
arising under this Agreement, whether matured or unmatured, whether or
not contingent and irrespective of the currency, place of payment or
booking office of the sum or obligation) owed by X to Y and, for
this purpose, may convert one currency into another at a market rate
determined by X. If any sum or obligation is unascertained, X may in
good faith estimate that sum or obligation and set-off in respect of
that estimate, subject to X or Y, as the case may be, accounting to the
other party when such sum or obligation is ascertained.
(c) Additional Event of Default. It shall constitute an Event of Default
---------------------------
under this Agreement if there should occur and be continuing, unwaived
and uncured, an Event of Default under the Credit Agreement. As used
herein, "Credit Agreement" shall mean the Credit Agreement, dated as of
May 9, 2005, by and among Party B as Borrower, JPMorgan Chase Bank,
N.A., as Administrative Agent, and the several lenders from time to
time party thereto, as such agreement may be amended, restated,
modified, or extended from time to time hereafter (the "JPM Credit
Agreement") and any credit agreement that in whole or substantial
part replaces the JPM Credit Agreement, as such replacement agreement
shall be amended, restated, modified or replaced from time to time,
provided, however, that if there is no Credit Agreement in effect or if
Party A shall cease to be a party to any Credit Agreement, "Credit
Agreement" shall mean the Credit Agreement as it existed immediately
prior to such event.
(d) Representations and Warranties. Section 3(a) is amended by adding the
------------------------------
following paragraphs (vi) and (vii):
(vi) No Agency. It is entering into this Agreement and each
Transaction as principal (and not as agent or in any other
capacity, fiduciary or otherwise).
(vii) Eligible Contract Participant. It is an "eligible contract
participant" as defined in the U.S. Commodity Exchange Act.
(e) Relationship Between Parties. Each party will be deemed to represent to
----------------------------
the other party on the date on which it enters into a Transaction that
(absent a written agreement between the parties that expressly imposes
affirmative obligations to the contrary for that Transaction):
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(i) Non-Reliance. It is acting for its own account, and it has
made its own independent decisions to enter into that
Transaction and as to whether that Transaction is
appropriate or proper for it based upon its own judgment and
upon advice from such advisers as it has deemed necessary.
It is not relying on any communication (written or oral) of
the other party as investment advice or as a recommendation
to enter into that Transaction; it being understood that
information and explanations related to the terms and
conditions of a Transaction shall not be considered
investment advice or a recommendation to enter into that
Transaction. No communication (written or oral) received
from the other party shall be deemed to be an assurance or
guarantee as to the expected results of that Transaction.
(ii) Assessment and Understanding. It is capable of assessing the
merits of and understanding (on its own behalf or through
independent professional advice), and understands and
accepts the terms, conditions and risks of that Transaction.
It is also capable of assuming, and assumes, the risks of
that Transaction.
(iii) Status of Parties. The other party is not acting as a
fiduciary for or an adviser to it in respect of that
Transaction.
(f) Waiver of Jury Trial. Each party hereby irrevocably waives any and all
--------------------
right to trial by jury in any suit, action or proceeding arising out of
or relating to this Agreement or any Transaction and acknowledges that
this waiver is a material inducement to the other party's entering into
this Agreement.
(g) Consent to Recording. The parties agree that each may electronically
--------------------
record all telephonic conversations between them and that any such
recordings may be submitted in evidence to any court or in any
Proceedings for the purpose of establishing any matters pertinent to
any Transaction.
(h) Outstanding Specified Transactions. Upon the effectiveness of this
----------------------------------
Agreement, unless otherwise agreed to in writing by the parties to this
Agreement with respect to specific Specified Transactions, all
Specified Transactions then outstanding between Offices of the parties
listed in Section 4(d) shall be subject to the terms hereof.
(i) Severance. In the event any one or more of the provisions contained in
---------
this Agreement should be held invalid, illegal or unenforceable in any
respect, such provisions shall be severed from this Agreement to the
extent of such invalidity, illegality or unenforceability, unless such
severance shall substantially impair the benefits of the remaining
portions of this Agreement. The Agreement after such severance shall
remain the valid, binding and enforceable obligation of the parties
hereto.
(j) Payment Instructions. All payments to be made hereunder in respect of
--------------------
Transactions shall be made in accordance with standing payment
instructions provided by the parties (or as otherwise specified in a
Confirmation).
25
CITIZENS BANK
Date: 18 May 2005
Kadant, Inc.
1 Acton Place, Suite 202
Acton, Massachusetts 01720
Dear Sirs:
Our Reference: CBD12594
Re: USD Amortizing Interest Rate Swap
The purpose of this document is to set forth the terms and conditions of the
transaction entered into between Citizens Bank of Massachusetts ("CBMA") and
yourselves ("Counterparty") on the trade date specified below (the
"Transaction"). This document will constitute a "Confirmation" as referred to
in the ISDA Master Agreement specified below.
The definitions and provisions contained in the 2000 ISDA Definitions, (the
"Definitions"), as published by the International Swaps and Derivatives
Association, Inc. ("ISDA") are incorporated into this Confirmation. In the
event of any inconsistency between the Definitions and provisions and this
Confirmation, this Confirmation will govern.
This Confirmation evidences a complete and binding agreement between
Counterparty and CBMA as to the terms of the Transaction to which this
Confirmation relates. In addition, Counterparty and CBMA agree to use all
reasonable efforts promptly to negotiate, execute and deliver an agreement in
the form of the ISDA Master Agreement (Multicurrency-Cross Border) (the "ISDA
Form") published by the ISDA, with such modifications as Counterparty and CBMA
shall in good faith agree (the "Agreement"). Upon the execution by Counterparty
and CBMA of such Agreement, this Confirmation will supplement, form part of, and
be subject to the Agreement. Until we execute and deliver that Agreement, this
Confirmation, together with all other documents referring to the ISDA Form (each
a "Confirmation") confirming transactions (each a "Transaction") entered into
between us (notwithstanding anything to the contrary in a Confirmation), shall
supplement, form part of, and be subject to an agreement in the form of the ISDA
Form as if we had executed an agreement in such form (but without any Schedule)
on the Trade Date of the first such Transaction between us. For purposes
thereof, the Second Method and market quotation shall apply. All provisions
contained in the Agreement shall govern this Confirmation except as expressly
modified below. In the event of any inconsistency between this Confirmation and
either the ISDA Form or the Agreement, this Confirmation will govern for the
purpose of this transaction.
The terms of the particular transaction to which this confirmation relates are
as follows:
Notional Amount See Schedule A
Trade Date 13 May 2005
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CITIZENS BANK
Effective Date 17 May 2005
Termination Date 11 May 2010, subject to
adjustment in accordance with
the Modified Following
Business Day Convention.
Fixed Amounts
- -------------
Fixed Rate Payer Kadant, Inc.
Fixed Rate Payer Payment Dates The last of each March, June,
September and December from and
including 30 June 2005 to and
including the Termination Date
subject to adjustment in
accordance with the Modified
Following Business Day
Convention.
Fixed Rate 4.125 pct
Fixed Rate Day Count Fraction Actual/360
Floating Amounts
- ----------------
Floating Rate Payer CBMA
Floating Rate Payer Payments Dates The last day of each March,
June, September and December
from and including 30 June 2005
to and including the
Termination Date subject to
adjustment in accordance with
the Modified Following Business
Date Convention.
Floating Rate for initial Calculation 3.131940 (exclusive of Spread
Period where applicable)
Floating Rate Option USD-LIBOR-BBA
Designated Maturity 3 Months
Spread None
Floating Rate Day Count Fraction Actual/360
Reset Dates The first day of each
Calculation Period.
Business Days New York and London
Calculation Agent CBMA
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CITIZENS BANK
Payments to Counterparty:
Account Number: To be advised
Account Name: To be advised
Bank: To be advised
So long as no Event of Default or Termination Event shall have occurred and then
be continuing with respect to Counterparty, the parties hereto agree that
Counterparty may terminate this Transaction by at least [5] Business days prior
notice to CBMA of its intention to do so, whereupon (a) the obligations of the
parties to make any further payments under Section 2(a)(i) of the Agreement in
respect of such Transaction shall terminate, (b) the Calculation Agent shall
determine a Settlement Amount in accordance with the provisions of the ISDA
Master Agreement and provide a statement with respect thereto and (c) a
termination payment shall be made on the Early Termination Date as if such
Transaction were a Terminated Transaction and Counterparty was the Affected
Party.
Counterparty and CBMA represent that each party is acting for its own account
and, that each party has made its own independent decisions to enter into this
Transaction and as to whether this transaction is appropriate or proper for it
based on its own judgment and upon advice from such advisors as it has deemed
necessary. Neither party is relying upon any communication (written or oral)
from the other party as investment advice or as a recommendation to enter into
this Transaction. Information and explanations related to the terms and
conditions of this Transaction shall not be considered investment advice or a
recommendation to enter into this Transaction. No assurances or guarantees
(written or oral) as to the expected results of this Transaction have been
received by either party. Each party is capable of evaluating and understanding
the terms, risks and conditions of this Transaction. Each party is capable of
assuming, and assumes, the financial and other risks of this Transaction.
Counterparty understands that the Transaction entered into under this agreement
does not constitute a deposit and is not insured by the Federal Deposit
Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the
Currency or any state or federal banking agency.
All inquiries regarding payments and/or rate re-settings should be sent to:
CBMA:
Citizens Bank of Massachusetts
One Citizens Plaza
Providence, RI 02903
Attn: Treasury
Michael Liberatore Phone 401-282-1126
Fax 401-282-7718
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CITIZENS BANK
Counterparty:
Kadant, Inc.
1 Acton Place, Suite 202
Acton, Massachusetts 01720
Please confirm that the foregoing correctly sets forth the terms of our
agreement by executing a copy of this Confirmation enclosed for that purpose and
returning it to us via mail at the address listed above.
For and on behalf of Citizens Bank of Massachusetts
By: /s/ Kristen Silva
-----------------------------------------------
Name: Kristen Silva
Title: Authorized Signatory
Kadant, Inc.
By: /s/ Daniel J. Walsh
---------------------------------------------
Name: Daniel J. Walsh
Title: Treasurer
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CITIZENS BANK
SCHEDULE A - CBD12594
Calculation Period Notional Amount (USD)
17 May 2005 to 30 June 2005 36,000,000.00
30 June 2005 to 30 September 2005 36,000,000.00
30 September 2005 to 30 December 2005 34,650,000.00
30 December 2005 to 31 March 2006 33,300,000.00
31 March 2006 to 30 June 2006 31,950,000.00
30 June 2006 to 29 September 2006 30,600,000.00
29 September 2006 to 29 December 2006 29,250,000.00
29 December 2006 to 30 March 2007 27,900,000.00
30 March 2007 to 29 June 2007 26,550,000.00
29 June 2007 to 28 September 2007 25,200,000.00
28 September 2007 to 31 December 2007 23,400,000.00
31 December 2007 to 31 March 2008 21,600,000.00
31 March 2008 to 30 June 2008 19,800,000.00
30 June 2008 to 30 September 2008 18,000,000.00
30 September 2008 to 31 December 2008 15,750,000.00
31 December 2008 to 31 March 2009 13,500,000.00
31 March 2009 to 30 June 2009 11,250,000.00
30 June 2009 to 30 September 2009 9,000,000.00
30 September 2009 to 31 December 2009 6,750,000.00
31 December 2009 to 31 March 2010 4,500,000.00
31 March 2010 to 11 May 2010 2,250,000.00
Please be advised all dates are subject to adjustment in accordance with the
Modified Following Business Day Convention.
30
EXHIBIT 31.1
CERTIFICATION
-------------
I, William A. Rainville, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal
quarter ended July 2, 2005 of Kadant Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 11, 2005 /s/ William A. Rainville
------------------------
William A. Rainville
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
-------------
I, Thomas M. O'Brien, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal
quarter ended July 2, 2005 of Kadant Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles ;
c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: August 11, 2005 /s/ Thomas M. O'Brien
-----------------------
Thomas M. O'Brien
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, the undersigned, William A. Rainville, Chief
Executive Officer, and Thomas M. O'Brien, Chief Financial Officer, of Kadant
Inc., a Delaware corporation (the "Company"), do hereby certify, to our best
knowledge and belief, that:
The Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 2005 of
the Company fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and the information contained in this
Quarterly Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: August 11, 2005 /s/ William A. Rainville
------------------------
William A. Rainville
Chief Executive Officer
/s/ Thomas M. O'Brien
------------------------
Thomas M. O'Brien
Chief Financial Officer