-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWpBlEEp6EYEACzkgzx1//3UXXD29UCr7dKyZGGGYmbGSASDnu+6x9uaYopj36bI AEQ0s5P08sNJ+WXGXGA8UA== 0000893220-04-001737.txt : 20040816 0000893220-04-001737.hdr.sgml : 20040816 20040816141852 ACCESSION NUMBER: 0000893220-04-001737 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040703 FILED AS OF DATE: 20040816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: K TRON INTERNATIONAL INC CENTRAL INDEX KEY: 0000000020 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 221759452 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09576 FILM NUMBER: 04977831 BUSINESS ADDRESS: STREET 1: ROUTE 55 & 553 STREET 2: BOX 888 CITY: PITMAN STATE: NJ ZIP: 08071-0888 BUSINESS PHONE: 8562563318 MAIL ADDRESS: STREET 1: ROUTE 55 & 553 STREET 2: P O BOX 888 CITY: PITMAN STATE: NJ ZIP: 08071-0888 10-Q 1 w00582e10vq.txt FORM 10-Q FOR THE QUARTER ENDED JULY 3, 2004 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 3, 2004 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 0-9576 K-TRON INTERNATIONAL, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) New Jersey 22-1759452 - ------------------------------- ---------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification #) Incorporation or Organization) Routes 55 & 553, P.O. Box 888, Pitman, New Jersey 08071-0888 - ------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (856) 589-0500 Not Applicable - -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) 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 the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The Registrant had 2,515,242 shares of Common Stock outstanding as of August 12, 2004. K-TRON INTERNATIONAL, INC. AND SUBSIDIARIES INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets 1 July 3, 2004 (Unaudited) and January 3, 2004 Consolidated Statements of Income & Retained 2 Earnings (Unaudited) for the Three and Six Months Ended July 3, 2004 and June 28, 2003 Consolidated Statements of Cash Flows (Unaudited) 3 for the Six Months Ended July 3, 2004 and June 28, 2003 Notes to Consolidated Financial Statements 4 - 10 Item 2. Management's Discussion and Analysis 11 - 18 of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures About 18 Market Risk. Item 4. Controls and Procedures. 18 - 19 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. 19 Item 6. Exhibits and Reports on Form 8-K. 19 - 20 SIGNATURES 21
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. K-TRON INTERNATIONAL, INC. & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands except Share Data)
(Unaudited) July 3, January 3, 2004 2004 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 8,510 $ 4,506 Accounts receivable, net of allowance for doubtful accounts of $785 and $820 19,610 19,273 Inventories, net 15,375 13,566 Deferred income taxes 442 442 Prepaid expenses and other current assets 2,166 1,698 -------- -------- Total current assets 46,103 39,485 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net 25,050 26,916 PATENTS, net 1,813 1,893 GOODWILL 2,053 2,053 OTHER INTANGIBLES, net 10,098 10,218 NOTES RECEIVABLE AND OTHER ASSETS 2,394 2,111 DEFERRED INCOME TAXES 375 405 -------- -------- Total assets $ 87,886 $ 83,081 ======== ======== LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable $ 138 $ -- Current portion of long-term debt 3,876 3,541 Accounts payable 6,342 6,361 Accrued expenses and other current liabilities 9,561 8,518 Accrued commissions 1,499 1,393 Customer advances 2,543 1,757 Deferred income taxes 794 794 -------- -------- Total current liabilities 24,753 22,364 -------- -------- LONG-TERM DEBT, net of current portion 23,098 24,574 DEFERRED INCOME TAXES 947 947 OTHER NON-CURRENT LIABILITIES 7 82 SERIES B JUNIOR PARTICIPATING PREFERRED SHARES, $.01 par value - authorized 50,000 shares; none issued -- -- SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value - authorized 950,000 shares; none issued -- -- Common stock, $.01 par value - authorized 50,000,000 shares; issued 4,504,316 shares and 4,449,928 shares 45 44 Paid-in capital 17,792 16,922 Retained earnings 45,302 42,491 Accumulated other comprehensive income 3,456 3,171 -------- -------- 66,595 62,628 Treasury stock, 2,002,574 shares - at cost (27,514) (27,514) -------- -------- Total shareholders' equity 39,081 35,114 -------- -------- Total liabilities and shareholders' equity $ 87,886 $ 83,081 ======== ========
See Notes to Consolidated Financial Statements -1- K-TRON INTERNATIONAL, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME & RETAINED EARNINGS (Dollars in Thousands except Per Share Data) (Unaudited)
Three Months Ended Six Months Ended ----------------------------- ----------------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ----------- ----------- ----------- ----------- REVENUES $ 27,062 $ 22,661 $ 53,383 $ 46,059 COST OF REVENUES 15,712 13,663 30,849 27,620 ----------- ----------- ----------- ----------- Gross Profit 11,350 8,998 22,534 18,439 OPERATING EXPENSES: Selling, general & administrative 8,462 6,682 16,734 13,947 Research and development 588 678 1,237 1,349 ----------- ----------- ----------- ----------- 9,050 7,360 17,971 15,296 ----------- ----------- ----------- ----------- Operating Income 2,300 1,638 4,563 3,143 INTEREST (EXPENSE) (348) (400) (714) (780) GAIN ON SALE OF OFFICE BUILDING -- -- 164 -- ----------- ----------- ----------- ----------- Income before income taxes 1,952 1,238 4,013 2,363 INCOME TAX PROVISION 563 373 1,202 663 ----------- ----------- ----------- ----------- NET INCOME 1,389 865 2,811 1,700 RETAINED EARNINGS Beginning of period 43,913 39,603 42,491 38,768 ----------- ----------- ----------- ----------- End of period $ 45,302 $ 40,468 $ 45,302 $ 40,468 =========== =========== =========== =========== EARNINGS PER SHARE Basic $ 0.56 $ 0.36 $ 1.13 $ 0.70 =========== =========== =========== =========== Diluted $ 0.53 $ 0.35 $ 1.08 $ 0.68 =========== =========== =========== =========== Average common shares outstanding 2,491,000 2,433,000 2,477,000 2,433,000 =========== =========== =========== =========== Average common and common equivalents shares outstanding 2,617,000 2,493,000 2,599,000 2,489,000 =========== =========== =========== ===========
See Notes to Consolidated Financial Statements -2- K-TRON INTERNATIONAL, INC. & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Six Months Ended ----------------------- July 3, June 28, 2004 2003 ---- ---- OPERATING ACTIVITIES: Net income $ 2,811 $ 1,700 Adjustments to reconcile net income to net cash provided by operating activities: Gain on disposition of asset (164) -- Depreciation and amortization 2,021 1,457 Changes in assets and liabilities: Accounts receivable, net (246) 3,338 Inventories (1,773) 367 Prepaid expenses and other current assets (334) 520 Other assets 122 198 Accounts payable 258 (1,037) Accrued expenses and other current liabilities 1,697 (1,340) -------- -------- Net cash provided by operating activities 4,392 5,203 -------- -------- INVESTING ACTIVITIES: Proceeds from disposition of assets 996 -- Business acquired, net of cash acquired -- (18,988) Capital expenditures (712) (1,769) Other (49) (8) -------- -------- Net cash provided by (used in) investing activities 235 (20,765) -------- -------- FINANCING ACTIVITIES: Net borrowings under notes payable to banks 1,856 236 Proceeds from issuance of long-term debt 4,000 20,000 Principal payments on long-term debt (6,873) (1,603) Proceeds from issuance of common stock 352 36 -------- -------- Net cash (used in) provided by financing activities (665) 18,669 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 42 149 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,004 3,256 -------- -------- CASH AND CASH EQUIVALENTS Beginning of period 4,506 2,694 -------- -------- End of period $ 8,510 $ 5,950 ======== ========
See Notes to Consolidated Financial Statements -3- K-TRON INTERNATIONAL, INC. & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 3, 2004 (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The consolidated financial statements include the accounts of K-Tron International, Inc. and its subsidiaries ("K-Tron" or the "Company"). All intercompany transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation of results for interim periods have been made. Certain reclassifications were made to the prior year's consolidated financial statements to conform them to the current period presentation. The unaudited financial statements herein should be read in conjunction with the Company's annual report on Form 10-K for the year ended January 3, 2004 which was previously filed with the Securities and Exchange Commission. 2. New Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46). In general, a variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The adoption of the provisions of FIN 46 effective February 1, 2003 did not have a material impact on the Company's consolidated financial statements since the Company currently does not have any variable interest entities. In December 2003, the FASB issued FIN 46R with respect to variable interest entities created before January 31, 2003 which, among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities ("SPEs"). The consolidation requirements apply to all SPEs in the first fiscal year or interim period ending after December 15, 2003. The Company's adoption of the provisions of FIN 46R effective January 3, 2004 did not have a material impact on the Company's consolidated financial statements since the Company currently does not have any SPEs, nor does it have any variable interest entities. -4- 3. Supplemental Disclosures of Cash Flow Information The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. Cash paid for interest in the six-month periods ended July 3, 2004 and June 28, 2003 was $712,000 and $674,000, respectively, and for income taxes was $568,000 and $228,000, respectively. 4. Inventories Inventories consist of the following:
July 3, January 3, 2004 2004 ---- ---- (in thousands) Components $ 13,769 $ 13,676 Work-in-process 3,225 1,635 Finished goods 57 62 Inventory reserves (1,676) (1,807) -------- -------- $ 15,375 $ 13,566 ======== ========
5. Intangible Assets
July 3, 2004 January 3, 2004 ---------------------- ----------------------- (in thousands) Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ Amortized intangible assets Patents $ 2,790 $ 977 $ 2,780 $ 887 Drawings 3,550 142 3,550 71 Customer Relationships 4,898 98 4,898 49 ------- ------- ------- ------- $11,238 $ 1,217 $11,228 $ 1,007 ======= ======= ======= ======= Unamortized intangible assets Trademarks and tradenames $ 1,890 $ 1,890 ======= =======
The amortized intangible assets are being amortized on the straight-line basis (half-year expense in the year of acquisition) over the expected period of benefits, which is 17 to 50 years. The amortization expense of intangible assets for the six-month periods ended July 3, 2004 and June 28, 2003 was $210,000 and $139,000, respectively. -5- 6. Accrued Warranty The Company offers a one-year product warranty on a majority of its products. Warranty is accrued as a percentage of sales on a monthly basis and is included in accrued expenses and other current liabilities. The following is an analysis of accrued warranty for the six-month periods ended July 3, 2004 and June 28, 2003.
July 3, June 28, 2004 2003 ---- ---- (in thousands) Beginning balance $ 967 $ 687 Accrued warranty of acquired business -- 553 Accrual of warranty expense 753 746 Warranty costs incurred (770) (918) Foreign exchange adjustment 3 13 ------- ------- Ending balance $ 953 $ 1,081 ======= =======
7. Long-Term Debt Long-term debt consists of the following:
July 3, January 3, 2004 2004 ---- ---- (in thousands) U.S. mortgage, interest at 6.45% $ 1,976 $ 2,052 U.S. line of credit, interest at 3.75% 3,655 1,935 U.S. term facilities, interest at 2.94% to 5.75% 20,892 18,317 Unsecured notes payable, interest at 6% -- 4,000 Swiss facilities, interest at 1.7% to 2.1% -- 1,211 Other 451 600 -------- -------- 26,974 28,115 Less current portion (3,876) (3,541) -------- -------- $ 23,098 $ 24,574 ======== ========
8. Earnings Per Share The Company previously adopted SFAS No. 128, "Earnings Per Share", which requires that the Company report Basic and Diluted Earnings Per Share. Basic Earnings Per Share represents net income less preferred dividends divided by the weighted average number of common shares outstanding. Diluted Earnings Per Share is calculated similarly, except that the denominator includes the weighted average number of common shares outstanding plus the dilutive effect of options, warrants, convertible securities and other instruments with dilutive effects if exercised. The Company's Diluted Earnings Per Share shown in the table below are based on the weighted average number of common and common equivalent shares outstanding during a given time period. Such average shares include the weighted average number of -6- common shares outstanding plus the shares issuable upon exercise of stock options after the assumed repurchase of common shares with the related proceeds. The Company's Basic and Diluted Earnings Per Share are calculated as follows:
For the Three Months Ended July 3, 2004 ------------------------------------------------------------- Net Income Available (Dollars and Shares in Thousands To Common Earnings except Per Share Data) Shareholders Shares Per Share ------------ ------ --------- Basic $1,389 2,491 $ 0.56 Common Share Equivalent of Outstanding Options -- 126 (0.03) ------ ------ -------- Diluted $1,389 2,617 $ 0.53 ====== ====== ========
For the Three Months Ended June 28, 2003 ------------------------------------------------------------- Net Income Available (Dollars and Shares in Thousands To Common Earnings except Per Share Data) Shareholders Shares Per Share ------------ ------ --------- Basic $ 865 2,433 $ 0.36 Common Share Equivalent of Outstanding Options -- 60 (0.01) ------ ----- -------- Diluted $ 865 2,493 $ 0.35 ====== ===== ========
For the Six Months Ended July 3, 2004 ------------------------------------------------------------- Net Income Available (Dollars and Shares in Thousands To Common Earnings except Per Share Data) Shareholders Shares Per Share ------------ ------ --------- Basic $2,811 2,477 $ 1.13 Common Share Equivalent of Outstanding Options -- 122 (0.05) ------ ----- -------- Diluted $2,811 2,599 $ 1.08 ====== ===== ========
For the Six Months Ended June 28, 2003 ------------------------------------------------------------- Net Income Available (Dollars and Shares in Thousands To Common Earnings except Per Share Data) Shareholders Shares Per Share ------------ ------ --------- Basic $1,700 2,433 $ 0.70 Common Share Equivalent of Outstanding Options -- 56 (0.02) ------ ----- -------- Diluted $1,700 2,489 $ 0.68 ====== ===== ========
-7- 9. Stock-Based Compensation As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", the Company has elected to continue to account for compensation cost using the intrinsic value-based method of accounting as prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS No. 123 requires the Company to disclose pro forma net income and pro forma earnings per share amounts, as if compensation expense were recognized for options granted after fiscal year 1994. Using this approach, net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table:
Three Months Ended Six Months Ended ------------------------ ------------------------ July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands, except per share) Net income - as reported $ 1,389 $ 865 $ 2,811 $ 1,700 Net income - pro forma 1,337 794 2,728 1,561 Basic earnings per share - as reported 0.56 0.36 1.13 0.70 Basic earnings per share - pro forma 0.54 0.33 1.10 0.64 Diluted earnings per share - as reported 0.53 0.35 1.08 0.68 Diluted earnings per share - pro forma 0.51 0.32 1.05 0.63
This pro forma impact may not be representative of the effects for future years, and could increase if additional options are granted and amortized over the vesting period. For disclosure purposes, the fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: no dividend yield; expected volatility of 31.45% and 30.80%; risk-free interest rate of 4.15% and 2.76%; and expected life of 6.00 years and 6.00 years for grants in 2004 and 2003, respectively. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of subjective assumptions, including the expected stock price volatility. 10. Comprehensive Income Comprehensive income is the total of net income, the change in the unrealized gain or loss on the Company's interest rate swap, net of tax, and the change in foreign currency translation adjustments, all for a given period, which are the Company's only non-owner changes in equity. For the three and six-month periods ending July 3, 2004 and June 28, 2003, the following table sets forth the Company's comprehensive income: -8-
Three Months Ended Six Months Ended -------------------- -------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---- ---- ---- ---- (in thousands) Net income $ 1,389 $ 865 $ 2,811 $ 1,700 Unrealized gain (loss) on interest rate swap, net of tax 61 (80) 45 (178) Foreign currency translation gain 1,266 341 240 674 ------- ------- ------- ------- Comprehensive income $ 2,716 $ 1,126 $ 3,096 $ 2,196 ======= ======= ======= =======
11. Management Segment Information The Company has adopted the provisions of SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS No. 131 introduced a model for segment reporting called the management approach. The management approach is based on the way that the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. The Company is engaged in one business segment, material handling equipment and systems. The Company operates in two primary geographic locations, North and South America (the "Americas") and Europe, the Middle East, Africa and Asia ("EMEA/Asia"). For the three and six months ended July 3, 2004 and June 28, 2003, the following table sets forth the Company's geographic information:
EMEA/ Americas Asia Eliminations Consolidated -------- ---- ------------ ------------ (in thousands) THREE MONTHS ENDED July 3, 2004 Revenues Sales to unaffiliated customers $ 15,098 $ 11,964 $ -- $ 27,062 Sales to affiliates 965 855 (1,820) -- -------- -------- -------- -------- Total sales $ 16,063 $ 12,819 $ (1,820) $ 27,062 ======== ======== ======== ======== Operating income (loss) $ 1,164 $ 1,173 $ (37) $ 2,300 ======== ======== ======== Interest expense (348) -------- Income before income taxes $ 1,952 ========
-9-
EMEA/ Americas Asia Eliminations Consolidated -------- ---- ------------ ------------ (in thousands) THREE MONTHS ENDED June 28, 2003 Revenues Sales to unaffiliated customers $ 13,191 $ 9,470 $ -- $ 22,661 Sales to affiliates 563 450 (1,013) -- -------- -------- -------- -------- Total sales $ 13,754 $ 9,920 $ (1,013) $ 22,661 ======== ======== ======== ======== Operating income (loss) $ 1,135 $ 503 $ -- $ 1,638 ======== ======== ======== Interest expense (400) -------- Income before income taxes $ 1,238 ========
EMEA/ Americas Asia Eliminations Consolidated -------- ---- ------------ ------------ (in thousands) SIX MONTHS ENDED July 3, 2004 Revenues Sales to unaffiliated customers $ 29,891 $ 23,492 $ -- $ 53,383 Sales to affiliates 1,660 1,681 (3,341) -- -------- -------- -------- -------- Total sales $ 31,551 $ 25,173 $ (3,341) $ 53,383 ======== ======== ======== ======== Operating income (loss) $ 2,528 $ 2,106 $ (71) $ 4,563 ======== ======== ======== Interest expense (714) Gain on sale of office building 164 -------- Income before income taxes $ 4,013 ========
EMEA/ Americas Asia Eliminations Consolidated -------- ---- ------------ ------------ (in thousands) SIX MONTHS ENDED June 28, 2003 Revenues Sales to unaffiliated customers $ 26,408 $ 19,651 $ -- $ 46,059 Sales to affiliates 1,312 1,018 (2,330) -- -------- -------- -------- -------- Total sales $ 27,720 $ 20,669 $ (2,330) $ 46,059 ======== ======== ======== ======== Operating income (loss) $ 1,808 $ 1,354 $ (19) $ 3,143 ======== ======== ======== Interest expense (780) -------- Income before income taxes $ 2,363 ========
-10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION We are engaged in one principal business segment - material handling equipment and systems. We operate in two primary geographic locations - North and South America (the "Americas") and Europe, the Middle East, Africa and Asia ("EMEA/Asia"). We have three main business lines within the material handling equipment and systems segment. They are our feeding, size reduction and pneumatic conveying business lines. The following provides information that management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with our consolidated financial statements and accompanying notes. All references in this Item 2 to the second quarter or first six months of 2004 or 2003 mean the fiscal quarter or six-month period ended July 3, 2004 or June 28, 2003, as the case may be. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2003 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended January 3, 2004 (the "2003 Form 10-K"). The preparation of those financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The significant accounting policies of the Company are described in Note 2 to the 2003 consolidated financial statements, and the critical accounting policies and estimates are described in Management's Discussion and Analysis included in our 2003 Form 10-K. Information concerning our implementation and the impact of new accounting standards issued by the Financial Accounting Standards Board (FASB) is included in the notes to the 2003 consolidated financial statements. We did not adopt an accounting policy in the first six months of 2004 that had a material impact on our financial condition, liquidity or results of operations. -11- RESULTS OF OPERATIONS Overview For the second quarter and first six months of 2004, we reported revenues of $27,062,000 and $53,383,000 and net income of $1,389,000 and $2,811,000, respectively, compared to revenues of $22,661,000 and $46,059,000 and net income of $865,000 and $1,700,000 for the same periods in 2003. The increases in second quarter and first six months of 2004 revenues and net income compared with the same periods in 2003 were primarily the result of improved business conditions in all three of our main business lines, and also reflected the positive effect of a weaker U.S. dollar when translating the revenues and profits of our foreign operations into U.S. dollars. First six months of 2004 net income also benefited from the profit contribution from the first quarter sale of an office building by one of our United Kingdom subsidiaries. Foreign Exchange Rates We are an international company, and we derived 44% and 43% of our revenues for the first six months of 2004 and 2003, respectively, from products manufactured in, and services performed from, our facilities located outside the United States, primarily in Europe. Since we operate globally, we are sensitive to changes in foreign currency exchange rates ("foreign exchange rates"), which can affect both the translation of financial statement items into U.S. dollars as well as transactions where the revenues and related expenses may initially be accounted for in different currencies, such as sales made from our Swiss manufacturing facility in currencies other than the Swiss franc. Since we have received substantial revenues in recent years from activities in foreign jurisdictions, our results can be significantly affected by changes in foreign exchange rates, particularly in U.S. dollar exchange rates with respect to the Swiss franc, euro and British pound sterling and, to a lesser degree, the Singapore dollar and other currencies. When the U.S. dollar weakens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales increases. When the U.S. dollar strengthens against these currencies, the U.S. dollar value of non-U.S. dollar-based sales decreases. Correspondingly, the U.S. dollar value of non-U.S. dollar-based costs increases when the U.S. dollar weakens and decreases when the U.S. dollar strengthens. Overall, our revenues in U.S. dollars generally benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide, especially those identified above. In particular, a general weakening of the U.S. dollar against other currencies would positively affect our revenues, gross profit and operating income as expressed in U.S. dollars (provided that the gross profit and operating income numbers from foreign operations are not losses, since in the case of a loss, the effect would be to increase the loss), whereas a general strengthening of the U.S. dollar against such currencies would have the opposite effect. In addition, our revenues and income with respect to particular transactions may be affected by changes in foreign exchange rates where sales are made in currencies other than the functional currency of the facility manufacturing the product subject to the sale. -12- For the second quarter and first six months of 2004 and 2003, the changes in certain key exchange rates affecting the Company were as follows:
Three Months Ended Six Months Ended ---------------------------- ---------------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---- ---- ---- ---- Average U.S. dollar equivalent of one Swiss franc 0.787 0.749 0.790 0.740 % change vs. prior year +5.1% +6.8% Average U.S. dollar equivalent of one euro 1.207 1.138 1.226 1.106 % change vs. prior year +6.1% +10.9% Average U.S. dollar equivalent of one British pound sterling 1.809 1.619 1.823 1.611 % change vs. prior year +11.7% +13.2% Average Swiss franc equivalent of one euro 1.534 1.519 1.552 1.495 % change vs. prior year +1.0% +3.8% Average Swiss franc equivalent of one British pound sterling 2.299 2.162 2.308 2.177 % change vs. prior year +6.3% +6.0%
Presentation of Results and Analysis The following table sets forth our results of operations, expressed as a percentage of total revenues for the periods indicated, as well as our backlog at the end of such periods:
Three Months Ended Six Months Ended ------------------- ------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---- ---- ---- ---- Total revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 58.1 60.3 57.8 60.0 ----- ----- ----- ----- Gross profit 41.9 39.7 42.2 40.0 Selling, general and administrative 31.2 29.5 31.4 30.3 Research and development 2.2 3.0 2.3 2.9 ----- ----- ----- ----- Operating income 8.5 7.2 8.5 6.8 Interest 1.3 1.7 1.3 1.7 Gain on sale of office building -- -- 0.3 -- ----- ----- ----- ----- Income before income taxes 7.2% 5.5% 7.5% 5.1% ===== ===== ===== =====
-13-
July 3, 2004 January 3, 2004 June 28, 2003 ------------ --------------- ------------- Backlog (at July 3, 2004 exchange rates, in thousands of dollars) $21,445 $17,385 $15,763 ======= ======= =======
Total revenues increased by $4,401,000 or 19.4% in the second quarter of 2004 and by $7,324,000 or 15.9% in the first six months of 2004 compared to the same periods in 2003. These increases in revenues were primarily attributable to improved business conditions in all three of our main business lines, feeding, size reduction and pneumatic conveying, and, to a lesser degree, to the positive effect of a weaker U.S. dollar when translating the revenues of foreign operations into U.S. dollars. The favorable impact of foreign currency translation accounted for approximately 15% of the $4,401,000 revenue increase in the second quarter and approximately 23% of the $7,324,000 revenue increase in the first six months of 2004 compared to the same periods in 2003. Gross profit as a percent of total revenues increased to 41.9% in the second quarter of 2004 and 42.2% in the first six months of 2004 from 39.7% and 40.0%, respectively, for the same periods in 2003. These increases in gross profit were primarily due to higher revenues, which led to fixed costs being absorbed over a larger revenue base, and to geographic and product sales mix. Selling, general and administrative (SG&A) expenses increased by $1,780,000 or 26.6% in the second quarter of 2004 and by $2,787,000 or 20.0% in the first six months of 2004 compared to the same periods in 2003. These increases in SG&A were primarily the result of higher sales commissions due to increased revenues, a higher bonus accrual, the effect of a weaker U.S. dollar and an increase in depreciation and amortization expense related to the implementation of software systems within our feeding business line. As a percent of total revenues, SG&A was 31.2% in the second quarter of 2004 and 31.4% in the first six months of 2004 compared to 29.5% and 30.3%, respectively, for the same periods in 2003. Research and development (R&D) expenditures decreased by $90,000 or 13.3% in the second quarter of 2004 and by $112,000 or 8.3% in the first six months of 2004 compared to the same periods in 2003. These decreases were primarily due to lower prototype expenditures and a small reduction in staff partially offset by the effect of a weaker U.S. dollar. R&D expense as a percent of total revenues was 2.2% in the second quarter of 2004 and 2.3% in the first six months of 2004 compared to 3.0% and 2.9%, respectively, for the same periods in 2003. Interest expense decreased by $52,000 or 13.0% in the second quarter of 2004 and by $66,000 or 8.5% in the first six months of 2004 compared to the same periods in 2003. These decreases primarily reflected debt reductions. Interest expense as a percent of total revenues was 1.3% in the second quarter and first six months of 2004 compared to 1.7% for the same periods in 2003. In the first quarter of 2004, one of our United Kingdom subsidiaries sold its office building for $996,000 and realized a pre-tax gain of $164,000. All employees were relocated to a nearby office building that is leased by another United Kingdom subsidiary. -14- Income before income taxes was $1,952,000 in the second quarter of 2004 and $4,013,000 in the first six months of 2004 compared to $1,238,000 and $2,363,000, respectively, for the same periods in 2003. Income before income taxes improved versus the same periods in 2003 as a result of the items discussed above. The effective tax rate for the second quarter and first six months of 2004 was 28.8% and 30.0%, respectively, compared to 30.1% and 28.1% for the same periods in 2003. The decrease in the effective tax rate in the second quarter of 2004 compared to the same period in 2003 was due to a higher percentage of foreign taxable income in the second quarter of 2004, while the increase in the effective tax rate for the first six months of 2004 compared to the same period in 2003 was the result of a higher percentage of U.S. taxable income in the first six months of 2004. Our backlog at constant foreign exchange rates increased by $4,060,000 or 23.4% and $5,682,000 or 36.0% at the end of the second quarter of 2004 compared to the backlog at January 3, 2004 and June 28, 2003, respectively. This increase in our backlog resulted from the improved business conditions previously described. LIQUIDITY AND CAPITAL RESOURCES Capitalization Our capitalization at the end of the second quarter of 2004 and at the end of fiscal years 2003 and 2002 is summarized below:
July 3, January 3, December 28, (Dollars in Thousands) 2004 2004 2002 ------- ------- ------- Short-term debt, including current portion of long-term debt $ 4,014 $ 3,541 $ 2,005 Long-term debt 23,098 24,574 6,499 ------- ------- ------- Total debt 27,112 28,115 8,504 Shareholders' equity 39,081 35,114 28,419 ------- ------- ------- Total debt and shareholders' equity $66,193 $63,229 $36,923 ======= ======= ======= (total capitalization) Percent total debt to total capitalization 41% 44% 23% Percent long-term debt to equity 59% 70% 23% Percent total debt to equity 69% 80% 30%
Total debt decreased by $1,003,000 in the first six months of 2004 ($1,017,000 at constant foreign exchange rates). At July 3, 2004 and subject to certain conditions which may limit the amount that may be borrowed at any particular time, we had $4,845,000 of unused borrowing capacity under our U.S. loan agreements and $10,597,000 of unused borrowing capacity under our foreign loan agreements. -15- In June 2004, we prepaid $4,000,000 of unsecured promissory notes bearing interest at 6% per annum that were payable to the former stockholders of Pennsylvania Crusher Corporation which we acquired in January 2003. These notes were payable in three equal annual installments beginning in January 2005. The payoff was financed with a $4,000,000 term loan from a U.S. bank, repayable over 60 months, with 48 monthly principal payments of $50,000 beginning January 2005, 11 monthly principal payments of $133,333 beginning January 2009 and a final principal payment of $133,337 in December 2009. Interest is payable monthly beginning July 2004 at a fixed rate of 5.75% on principal of $1,600,000 and at a variable rate of one-month LIBOR plus 1.85% (2.94% as of July 3, 2004) on the remaining principal of $2,400,000. The term loan is guaranteed by the U.S. manufacturing subsidiary for our feeder line and contains the same annual consolidated financial covenants that already exist with the lender. In June 2004, the same U.S. bank extended the term of a $5,000,000 secured revolving credit facility with the same U.S. manufacturing subsidiary through July 2006. Other Items At July 3, 2004, working capital was $21,350,000 compared to $17,121,000 at January 3, 2004, and the ratio of current assets to current liabilities at those dates was 1.86 and 1.77, respectively. The working capital increase during the first six months of 2004 was primarily from an increase in cash from operating activities and from the sale of the U.K. office building previously described. In the first six months of 2004 and 2003, we utilized internally generated funds and our lines of credit to meet our working capital needs. Net cash provided by operating activities was $4,392,000 in the first six months of 2004 compared to $5,203,000 in the same period of 2004. The decrease in operating cash flow during the first six months of 2004 compared to the same period in 2003 was primarily due to an increase in accounts receivable, inventories and prepaid expenses resulting from the stronger business conditions and higher revenues discussed above, partially offset by increases in net income, depreciation and amortization, accounts payable and accrued expenses. Net cash provided by investing activities in the first six months of 2004 was primarily from the disposition of the U.K. office building noted above, partially offset by capital additions. Net cash used in investing activities for the first six months of 2003 was for the acquisition of Pennsylvania Crusher Corporation in January 2003 and capital additions. Cash used in financing activities in the first six months of 2004 was for net debt reductions, which were partially offset by the proceeds of stock option exercises, while cash provided by financing activities in the first six months of 2003 was from borrowings related to the acquisition of Pennsylvania Crusher Corporation in January 2003. Of the total increase in shareholders' equity of $3,967,000 in the first six months of 2004, $2,811,000 was from net income, $240,000 was from changes in foreign exchange rates, particularly the strengthening of the Swiss franc and euro versus the U.S. dollar, $871,000 was from the issuance of common stock related to the exercise of stock options, and $45,000 was from an unrealized gain net of taxes on an interest rate swap. -16- Future Payments Under Contractual Obligations We are obligated to make future payments under various contracts such as debt agreements and lease agreements, and we are subject to certain other commitments and contingencies. There have been no material changes to Future Payments Under Contractual Obligations as reflected in the Liquidity and Capital Resources section of Management's Discussion and Analysis in the Company's 2003 Form 10-K except for the $4,000,000 debt refinancing and $5,000,000 revolving credit facility extension, each of which occurred in June 2004 and was described above. Refer to Notes 9 and 16 to the consolidated financial statements in the 2003 Form 10-K for additional information on long-term debt and commitments and contingencies. FORWARD-LOOKING STATEMENTS AND RISK FACTORS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by us or on our behalf. We and our representatives may from time to time make written or oral statements that are "forward-looking," including statements contained in this report and other filings with the Securities and Exchange Commission, reports to our shareholders and news releases. All statements that express expectations, estimates, forecasts or projections are forward-looking statements within the meaning of the Act. In addition, other written or oral statements which constitute forward-looking statements may be made by us or on our behalf. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "projects," "forecasts," "may," "should," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in or suggested by such forward-looking statements. The forward-looking statements contained in this report include but are not limited to statements regarding the effect of changes in foreign exchange rates on our business. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. A wide range of factors could materially affect our future performance and financial and competitive position, including the following: (i) increasing price and product/service competition by domestic and foreign competitors, including new entrants; (ii) the mix of products/services sold by us; (iii) rapid technological changes and developments and our ability to continue to introduce competitive new products on a timely and cost-effective basis; (iv) changes in U.S. and global financial and currency markets, including significant interest rate and foreign currency exchange rate fluctuations; (v) protection and validity of patents and other intellectual property rights held by us and our competitors; (vi) the cyclical nature of our business as an industrial capital goods supplier; (vii) possible future litigation and governmental proceedings; (viii) the availability of financing and financial resources in the amounts, at the times and on the terms required to support our future business, including for debt refinancings, capacity expansions and possible acquisitions; (ix) the loss of key customers, employees or suppliers; (x) the failure to carry out marketing and sales plans; (xi) the failure to integrate acquired businesses without substantial costs, delays or other operational or financial problems; (xii) economic, business and regulatory conditions and changes which may affect the level of new investments and purchases made by our customers, including economic and business -17- conditions that are less favorable than expected; (xiii) domestic and international political and economic conditions; and (xiv) the outcome of any legal proceedings in which we are involved. This list of factors that may affect our future performance and financial and competitive position and also the accuracy of forward-looking statements is illustrative, but it is by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is currently exposed to certain market risks related to (i) fluctuations in foreign exchange rates and (ii) interest rate changes. Foreign Exchange Rate Risk See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Foreign Exchange Rates" in Item 2 of this report. Interest Rate Risk The Company has several credit facilities or loans that require the Company to pay interest at a rate which may change periodically. These variable rate obligations expose the Company to the risk of increased interest expense in the event of increases in short-term interest rates. As of July 3, 2004, approximately $12,336,000 of the Company's total debt of $27,112,000 was subject to variable interest rates. ITEM 4. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report was carried out by us under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Subsequent to the date of the most recent evaluation of our internal controls, there were no significant changes in our internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. -18- (b) Change in Internal Control over Financial Reporting No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The Annual Meeting of Shareholders of the Company was held on May 14, 2004. (b) Not applicable (c) Shareholders of the Company were asked to vote on a proposal to elect two Class III directors. The Board of Directors nominated Norman Cohen and Richard J. Pinola as the Class III directors. There were no other nominations. Messrs. Cohen and Pinola were then elected as the Class III directors, with the result of the vote being as follows:
Number of Votes --------------- For Withheld --- -------- Norman Cohen 2,027,025 54,190 Richard J. Pinola 2,027,345 53,870
Directors are elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker non-votes be recorded. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1 Note dated June 9, 2004 from K-Tron International, Inc. in favor of The Bank 10.2 Loan Modification/Renewal Agreement dated June 9, 2004 between K-Tron America, Inc. and The Bank -19- (b) Reports on Form 8-K. Current Report on Form 8-K dated April 27, 2004 and furnished to the Securities and Exchange Commission on April 29, 2004 reporting first quarter 2004 financial results. -20- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. K-TRON INTERNATIONAL, INC. Date: August 16, 2004 By: RONALD R. REMICK ---------------- Ronald R. Remick Senior Vice President & Chief Financial Officer (Duly authorized officer and principal financial officer of the registrant) By: ALAN R. SUKONECK ---------------- Alan R. Sukoneck Vice President, Chief Accounting & Tax Officer (Duly authorized officer and principal accounting officer of the registrant) -21- EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 31.1 Chief Executive Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Chief Financial Officer Certification pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Chief Executive Officer and Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 10.1 Note dated June 9, 2004 from K-Tron International, Inc. in favor of The Bank 10.2 Loan Modification/Renewal Agreement dated June 9, 2004 between K-Tron America, Inc. and The Bank
-22- EX-10.1 3 w00582exv10w1.txt NOTE DATED JUNE 9 BETWEEN K-TRON AND THE BANK Exhibit 10.1 Prepared by: /s/ JEFFREY G. ALBERTSON ------------------------ Albertson Ward 36 Euclid Street, P.O. Box 685 Woodbury, NJ 08096 (856)853-7770 NOTE $4,000,000.00 WOODBURY, NEW JERSEY JUNE 9, 2004 BETWEEN the Borrower K-TRON INTERNATIONAL, INC., A NEW JERSEY CORPORATION, whose address is Routes 55 and 553, P.O. Box 888, Pitman, New Jersey 08071-0888, referred to as "Borrower". AND the Lender, THE BANK, whose address is 100 Park Avenue, Woodbury, New Jersey 08096, referred to as "THE BANK". The phrase "THE BANK" means the original Lender and anyone else who takes this Note by transfer. BORROWER'S PROMISE TO PAY PRINCIPAL AND INTEREST. In return for a loan to be funded by THE BANK to Borrower on this date, Borrower promises to pay$4,000,000.00 (called "principal"), plus interest, to the order of THE BANK. Of this amount, Borrower will borrow $1,600,000.00 at a per annum fixed interest rate of 5.75%; and shall borrow the balance thereof, being $2,400,000.00, on a floating rate basis equal to the one (1) month LIBOR rate plus 185 basis points. The proceeds of the loan will be used to repay approximately $4,000,000.00 of debt owed by Borrower to the former stockholders of Pennsylvania Crusher Corporation. Interest will be charged on the outstanding principal balance due on this Note from time to time as required herein until all principal has been paid. Interest shall be calculated hereunder for the actual number of days that principal is outstanding based on a year of 360 days. PAYMENTS. All payments made hereunder shall be paid on the sixth (6th) day of each month beginning July 6, 2004. The loan shall be repaid as follows: Interest-only payments shall be made monthly beginning July 6, 2004 through December 6, 2004. Thereafter, forty-eight (48) principal payments of $50,000.00, plus interest, shall be due monthly beginning January 6, 2005 through December 6, 2008 . Thereafter, eleven (11) principal payments of $133,333.00, plus interest, shall be due monthly beginning January 6, 2009 through November 6, 2009, with one final payment of all outstanding principal and interest due December 6, 2009. All scheduled principal and interest payments shall be applied to the variable and fixed interest rate portions of the loan in the same ratio as those floating and fixed rate portions bear to each other (initially 60/40). Borrower will pay all amounts owed under this Note no later than DECEMBER 6, 2009. All payments will be made to THE BANK at the address shown above or to a different place if required by THE BANK. LIBOR RATE. For the floating rate portion of the Note, the variable interest rate will equal the one (1) month LIBOR rate plus 185 basis points. The rate of interest shall be established on the twenty-fifth (25th) day of each calendar month, during the term of this Note, or the next business day thereafter, with such rate of interest to be effective on the first business day of the next calendar month. For purposes of this Note, the one (1) month LIBOR rate shall be defined as the London Interbank Offered Rate (LIBOR) for maturities of one (1) month, expressed as an annual yield, as reported in the Wall Street Journal or a comparable source on the date the quote by THE BANK is given (the "LIBOR Index Rate"). The rate of interest so established shall remain in effect until the first business day of the succeeding calendar month, at which time the rate of interest shall be reestablished as provided herein. The interest rate established at time of funding under the terms of this Note shall be the same as if established on the first of said month. SECURITY. As security for this instrument, Borrower's subsidiary, K-Tron America, Inc., has delivered its Guaranty; a third mortgage bearing even date herewith covering premises designated on the official tax map as Lot 3.01, Block 249, Township of Mantua, Gloucester County, New Jersey, which Mortgage is about to be recorded in the office of the Clerk of Gloucester County; and a third lien security interest, subject only to THE BANK'S first and second lien perfected security interests, in the accounts receivable, inventory, and equipment now owned or hereafter acquired by Guarantor located at Routes 55 - 2 - and 553, Pitman, New Jersey 08071. The provisions of any mortgage or security agreement given as security for this Note are incorporated herein by reference. COVENANTS AND CONDITIONS: 1. Borrower has provided to THE BANK acceptable current financial statements and will provide annual updates on the Borrower and Guarantor. The updates for financial statements and tax returns are to be submitted within thirty (30) days of the date requested by THE BANK, but not earlier than the dates that any such statements are required by the U.S. Securities and Exchange Commission. Should the Borrower or Guarantor fail to submit required financial information within the required time period,THE BANK may, at its sole option, increase the interest rate on this Note by one-half (1/2) of one (1) percent per annum. 2. The Borrower and the Guarantor must continue to maintain with THE BANK a meaningful deposit relationship. 3. Borrower and Guarantor agree that until all obligations hereunder are fully paid and discharged, Borrower will not without the prior written consent of THE BANK: A. Permit the consolidated debt to net worth ratio of Borrower to be more than 1.25 at fiscal year-end 2004 and each fiscal year-end thereafter. B. Permit the consolidated net worth of Borrower to be less than $34 million at fiscal year-end 2004 and each fiscal year-end thereafter. C. Both of the above covenants set forth in paragraphs A and B above shall be calculated exclusive of declines due to changes in foreign exchange rates subsequent to January 3, 2004. D. Permit the consolidated annual debt coverage ratio of Borrower at each fiscal year end to be less than 1.50. E. Each of covenants set forth in paragraphs A, B, and D above shall be calculated without taking into account Pennsylvania Crusher Corporation and its subsidiaries. - 3 - F. Permit upstreaming of funds from Guarantor to Borrower or K-Tron Technologies, Inc. or downstreaming of funds from Borrower to Pennsylvania Crusher Corporation or its subsidiaries, except for (i) management fees consistent with past practice and royalties paid in the ordinary course of business, (ii) dividends or other advances paid or made to enable Borrower to pay any obligation to THE BANK in connection with this or any other loan, and (iii) the settlement of inter-company accounts in the ordinary course of business consistent with past practice. G. Permit any merger or acquisition by Borrower or its subsidiaries involving consideration of more than $4 million without the written approval of THE BANK. PREPAYMENT: As to the amount borrowed under the fixed interest rate portion of this Note, Borrower shall have the right at any time during the term hereof to prepay all or a part of the principal balance of such portion then outstanding under this Note upon payment of the premiums and charges, if any, hereinafter set forth. A principal prepayment requiring such a premium or charge shall be deemed to have occurred upon Borrower's payment to THE BANK in any Loan Year of any sum in reduction of the principal which exceeds one-third (1/3) of the original principal amount borrowed under the fixed interest rate portion, excluding principal payments (including scheduled amortization) the Borrower is obligated to make under any other terms or provisions of this Note or any other document constituting a part of the loan transaction evidenced by this Note. Upon the occurrence of such a principal prepayment, including prepayment of the entire debt, THE BANK shall be entitled to charge and Borrower shall be obligated to pay, in addition to interest and all other charges then properly due, a prepayment premium equal to 2% of the amount prepaid. The term "Loan Year" as used herein is defined as any period of one year commencing on the date of the Note or on any anniversary of such date. Except as provided above, there shall be no prepayment premium or charge on a prepayment of any amount borrowed under the fixed interest rate portion. At no time will there by a prepayment penalty on the variable interest rate portion of the loan, which portion may be prepaid in full or in part at any time. - 4 - LATE CHARGE: The effective date of the receipt by the holder of any installment of this Note shall be the day on which the holder receives cash or collected funds at the place of payment as specified herein in payment of any such installment. Borrower shall be entitled to a FIFTEEN (15) DAY grace period after which period a "late charge" of $0.05 FOR EACH $1.00 OVERDUE may be charged by the holder for the purpose of defraying the expense incident to handling such delinquent payment. DEFAULT: If any installment of this Note or interest payment is not paid within 15 days of the date and at the place herein specified and after THE BANK has given Borrower 15 days' written notice to cure said default, THE BANK may at its option, and without further notice declare this Note to be in default and the entire principal balance then remaining unpaid together with all interest which shall have accrued on the unpaid principal balance from and after the date of such default shall be due and payable in full without notice. It shall be a default of this Note if Borrower shall default in any payment of principal or interest on any indebtedness or contingent obligation for money borrowed (other than Borrower's obligations under this Note) or any other event shall occur, the effect of which is to permit such indebtedness or contingent obligation to be declared or such indebtedness or contingent obligation shall otherwise become due prior to its stated maturity, provided, however, that this provision shall not apply concerning obligations other than Borrower's obligations under this Note unless the amount involved exceeds $50,000.00. If a default shall occur in this loan and not be cured as provided in the loan documents or otherwise agreed to by THE BANK, THE BANK shall, after declaring the loan to be in default, have the right to increase the interest rate TWO (2%) PERCENT PER YEAR in excess of the note rate. This provision is in addition to any late charges that may be due. ATTORNEY'S FEE: If this Note is placed in the hands of an attorney for collection because of a default in the terms hereof or in the terms of any documents given as security for the within obligation, the undersigned agrees to pay the reasonable fees and costs of such attorney, whether or not legal action is - 5 - instituted and further consents that if a judgment is entered in any action the amount of such fees shall form a part of such judgment in addition to any fees allowed by Statute or Rule of the Court. COMMITMENT LETTER COMPLIANCE: This Note is contingent upon Borrower's compliance with all of the terms and conditions contained in the commitment letter issued by THE BANK to Borrower on May 28, 2004. Upon breach of any term or condition contained therein,THE BANK shall have the right to declare this loan in default and demand payment in full of the principal balance remaining unpaid, together with all interest which shall have accrued thereon. Further, providing the said commitment letter so provides, THE BANK reserves the right to increase the interest rate in accordance with the provisions of the loan commitment for failure of the Borrower or any guarantor to submit required financial information within thirty days of the date of request by THE BANK. Should there be any conflict between the provisions of said commitment letter and this Note, the provisions of this Note shall apply. PAYMENT AT MATURITY: THIS LOAN IS PAYABLE IN FULL AT MATURITY OR UPON DEMAND IN THE EVENT OF A DEFAULT HEREUNDER OR UNDER THE TERMS OF ANY OTHER APPLICABLE LOAN INSTRUMENT. YOU MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THE LOAN AND UNPAID INTEREST THEN DUE. THE BANK IS UNDER NO OBLIGATION TO REFINANCE THE LOAN AT THAT TIME. YOU WILL THEREFORE BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS YOU MAY OWN OR YOU WILL HAVE TO FIND A LENDER WILLING TO LEND YOU THE MONEY. IF YOU REFINANCE THIS LOAN AT MATURITY, YOU MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY ASSOCIATED WITH A NEW LOAN EVEN IF YOU OBTAIN REFINANCING FROM THE BANK. - 6 - WAIVER OF PRESENTMENT: EACH AND ALL PARTIES hereto whether maker, endorsers, sureties, guarantor or otherwise do hereby jointly and severally waive presentment and demand for payment, notice of dishonor, protest and notice of protest. IN WITNESS WHEREOF, the Borrower hereunder has hereunto set its hand and seal the day and year first above written. Attest: K-Tron International, Inc. By: /s/ Mary E. Vaccara /s/ Edward B. Cloues, II - ----------------------------- ------------------------------------------ Mary E. Vaccara, Secretary Edward B. Cloues, II, Chairman and Chief Executive Office Sworn to and Subscribed before me on June 9, 2004 ___________________________ JEFFREY G. ALBERTSON, ESQ. ATTORNEY AT LAW STATE OF NEW JERSEY - 7 - EX-10.2 4 w00582exv10w2.txt LOAN MODIFICATION/RENEWAL AGREEMENT Exhibit 10.2 THE BANK LOAN MODIFICATION/RENEWAL AGREEMENT K-TRON AMERICA, INC. Routes 55 & 553 Pitman, NJ 08071 Date: June 9, 2004 Loan #6039359-6600 Original Amount: $5,000,000.00 Annual Fee: $12,500.00 Current Balance: $3,230,000.00 Maturity Date: July 05, 2006 WHEREAS, the undersigned borrower executed the note referred to above on June 24, 1998, and, WHEREAS, the note, security agreement and commitment letter executed by the borrower allow a modification of interest rate, due date or other terms or conditions without affecting the priority of The Bank's lien. NOW, therefore, in consideration of an annual fee of $12,500.00, the above referenced note is extended and modified as follows: IT IS HEREBY AGREED THAT THE ABOVE NUMBERED NOTE SHALL BECOME DUE JULY 5, 2006. DURING THE TERMS OF THE RENEWAL, PAYMENTS OF INTEREST ONLY SHALL BE DUE EACH MONTH BEGINNING July 1, 2004 AND SHALL BE APPLIED TO INTEREST AND THEN TO PRINCIPAL. All terms and conditions of the original note, commitment letter and any security thereto attached is fully incorporated herein and fully ratified except as specifically modified by this modification agreement. ACCEPTED BY: K-TRON AMERICA, INC. THE BANK /s/ Kevin C. Bowen 6/9/04 --------------------------------------- By: /s/ David J. Hanrahan Kevin C. Bowen, President Date - ---------------------------------- David J. Hanrahan, Sr. /s/ Mary Vaccara 6-9-04 Executive Vice President --------------------------------------- Mary Vaccara, Secretary Date EX-31.1 5 w00582exv31w1.txt CEO CERTIFICATION PURSUANT TO SECTION 302 Exhibit 31.1 CERTIFICATION I, Edward B. Cloues, II, certify that: 1. I have reviewed the Quarterly Report on Form 10-Q for the period ended July 3, 2004 of K-Tron International, 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)) 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) 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 (c) 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 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 registrant's board of directors: (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 16, 2004 EDWARD B. CLOUES, II --------------------------- Edward B. Cloues, II Chairman and Chief Executive Officer EX-31.2 6 w00582exv31w2.txt CFO CERTIFICATION PURSUANT TO SECTION 302 Exhibit 31.2 CERTIFICATION I, Ronald R. Remick, certify that: 1. I have reviewed the Quarterly Report on Form 10-Q for the period ended July 3, 2004 of K-Tron International, 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)) 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) 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 (c) 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 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 registrant's board of directors: (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 16, 2004 RONALD R. REMICK ---------------- Ronald R. Remick Senior Vice President and Chief Financial Officer EX-32 7 w00582exv32.txt CEO AND CFO CERTIFICATION PURSUANT TO SECTION 906 Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of K-Tron International, Inc. (the "Company") on Form 10-Q for the period ended July 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward B. Cloues, II, Chairman of the Board of Directors and Chief Executive Officer of the Company, and I, Ronald R. Remick, Senior Vice President, Chief Financial Officer and Treasurer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. RONALD R. REMICK EDWARD B. CLOUES, II - ---------------- -------------------- Ronald R. Remick Edward B. Cloues, II Senior Vice President, Chief Financial Chairman and Chief Executive Officer Officer and Treasurer Date: August 16, 2004 Date: August 16, 2004 -----END PRIVACY-ENHANCED MESSAGE-----