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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 333-58675
KEY COMPONENTS, LLC
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(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3425424
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------ --------------------------------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Commission File Number: 333-58675
KEY COMPONENTS FINANCE CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 14-180594
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------ --------------------------------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether 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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K. |_|
At February 22, 2002, the membership interests in Key Components, LLC
were owned by Key Components, Inc., a privately-held New York corporation. All
of the shares of common stock of Key Components Finance Corp. were owned by Key
Components, LLC.
Documents Incorporated by Reference: None
PART I
Key Components LLC ("KCLLC"), a Delaware limited liability corporation, is the
parent holding company for its wholly owned subsidiaries, including Key
Components Finance Corp. ("Finance Corp."). KCLLC, together with such
subsidiaries, including Finance Corp., are collectively referred to herein as
the "Company." Key Components, Inc. ("KCI"), a New York corporation, is the sole
member of KCLLC. KCI has no other assets other than its interest in KCLLC and
has no operations. Accordingly, any transactions of KCI or obligations related
to KCI are reflected in the consolidated financials statements of the Company
and are reflected in the disclosures in this Form 10-K.
Item 1. Business
KCLLC, a Delaware limited liability corporation organized on May 15, 1998,
maintains its principal office at 200 White Plains Road, Tarrytown, New York
10591 and its telephone number is (914) 332-8088.
The Company is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company conducts its
operations through its two businesses, its electrical components ("EC") business
and its mechanical engineered components ("MEC") business. The EC business
product offerings include power conversion products, specialty electrical wiring
devices and connectors and high-voltage utility switches which are manufactured
by its subsidiaries Acme Electric Corporation ("Acme"), Marine Industries, LLC
("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner Electric, LLC ("Turner").
MEC's product offerings consist primarily of flexible shaft and remote valve
control components, turbo-charger components and medium security lock products
and accessories, which are manufactured by its subsidiaries Hudson Lock, LLC
("Hudson"), ESP Lock Products, LLC ("ESP"), B.W. Elliott Manufacturing Co., LLC
("BWE") and Gits Manufacturing, LLC ("Gits"). No one customer accounted for more
than ten percent of sales of the Company for any of the three years ended
December 31, 2001. For the years ended December 31, 2001 and 2000, four
customers, who are subsidiaries of one company accounted for approximately 13%
and 12%, respectively, of the MEC business.
Acquisition History
The 1992 acquisition of BWE began the acquisition program of the Company to
acquire small to medium size manufacturers of essential niche components for use
in various OEM customer products. In 1993, the Company acquired the flexible
shaft division of Stow Manufacturing Company, Inc., as a consolidation
opportunity for BWE. During 1997 and 1998, the Company added to the MEC's
product offerings with the acquisitions of Hudson and ESP. During 1999, the
Company complemented its MEC product offerings and formed its EC business
through its acquisition of Valley Forge Corporation ("VFC"). The Company
expanded its EC business with the acquisition of Acme for approximately $47.3
million in November 2000 (see Note 2 to the consolidated financial statements
contained elsewhere in this Form 10-K).
The Company has historically acquired complementary or related manufacturing
businesses and sought to integrate them into existing operations. Following an
acquisition, management seeks to rationalize operations, reduce overhead costs,
develop additional cross-selling opportunities and establish new customer
relationships. As a result of its integration efforts and internal growth, the
Company's consolidated net sales have increased from approximately $9.1 million
in fiscal year 1992 to approximately $193.8 million for fiscal year 2001.
The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies, but there are no agreements regarding any such
acquisitions existing as of the date hereof.
1
Electrical Components
The Company's EC business features three major product lines: (i) power
conversion products, (ii) specialty electrical components ("SPEC") and (iii)
electric utility components.
Power Conversion Products
The Company's acquisition of Acme enabled the Company's EC business to enter
into the production of power conversion products. Acme's primary products are
transformers that range in size from 1/4 KVA (1,000 volts x Amps) to 1,000 KVA.
A transformer is an electrical device designed to convert alternating current
from one voltage to another. A transformer has no moving parts and is a
completely static solid-state device, which insures a long and maintenance-free
life under normal operating conditions. It consists, in its simplest form, of
two or more wires or foils wound on a laminated steel core. The Company has
1,400 active transformer models, which are sold through two primary sales
channels, its wholesale distribution network and by direct sales to OEM's. Sales
through the wholesale distribution markets are generally of smaller sized
transformer models. Due to the small size of the average order through the
wholesale distribution network, the margins achieved are generally higher than
those achieved selling to OEM's. In the OEM sales channel, customers are offered
custom built products, which generally achieve lower margins as products are
price-reduced in anticipation of a higher volume of orders. The Company believes
the OEM sales channel will drive the transformer product line's revenue growth.
Transformer designs rarely change and most transformers have a long useful life.
Acme operates in a segment of the transformer market estimated by National
Electrical Manufacturers Association to be approximately $300 million for the
year 2001. This segment is defined as being comprised of dry type transformers
which are less than 600 volts and range from 1/4 to 1,000 KVA. The competition
in this segment is divided into two tiers: the large switch gear manufacturers
who sell transformers as part of a package of products, such as General
Electric, Electrical Distribution Products, a division of Schneider Electric
("Square D"), Hammond Manufacturing Inc., Eaton Corporation and Siemens, and
transformer specialists, such as Acme, Sola/Heavy-Duty, Jefferson Electric, Inc.
and Federal Pacific. Acme supplies products which comprise approximately 15% of
the total market, which is approximately one half that of General Electric and
Square D's market share but twice that of any other competitor.
In June 2001, the Company determined to retain the aerospace division of Acme as
part of the power conversion product line (see Note 2 to the consolidated
financial statements elsewhere in this Form 10-K). This expanded the power
conversion product line to include battery charger systems and the manufacturing
of fibrous nickel cadmium batteries for use in such battery systems, power
control systems, power supplies and converters used primarily in aerospace
applications. Major customers of this product line include governmental defense
manufacturers and OEM aerospace manufacturers. The aerospace aftermarket is an
increasing share of the product line's revenues as the quantity of batteries and
systems sold by the Company that were designed into OEM applications has grown
over the last five years.
2
Specialty Electrical
Within the SPEC market, the Company's core market niches are the recreational
and industrial markets, where the Company sells to both OEM customers and
after-market retail customers under brand names such as Marinco, Guest, AFI,
Nicro, Park Power, and various private labels. In the recreational marine
market, where the Company sells the entire range of its product offerings, the
Company specifically targets the blue water/leisure boating and inland
fishing/bass boat market segments and has a strong market presence. Customers
include OEMs and major after-market distributors. The Company's wiring devices
and components are designed to withstand hostile weather and corrosive
environments, while remaining easy to install in less than ideal conditions.
SPEC products include; (i) weather and corrosion resistant wiring devices, such
as ship-to-shore electrical connectors for marine and vehicle-to-outlet
connectors for recreational vehicle applications; (ii) onboard "potted" (i.e.,
completely insulated) battery chargers for outdoor applications including bass
boat and other marine applications; and (iii) various accessory products such as
plugs, receptacles, electrical switches, solar ventilation products, and boat
accessories such as horns, windshield wiper systems, lighting products, and teak
accessories. The SPEC product line enjoys a dominant market position in its core
market where the Company's brands are highly regarded by both OEM and
aftermarket customers. The Company's SPEC product line also has products
targeted for industrial applications. The SPEC's market share from sales of
these products has grown dramatically since these products were targeted to the
industrial marketplace approximately six years ago. The primary product
offerings include; (i) onboard "potted" battery chargers for industrial and
healthcare applications such as fork and "scissor" lifts, personal mobility
carts, and electric wheelchairs; and (ii) specialty wiring devices designed for
industrial applications where protection from water, chemicals, dust, or other
elements is required. Growth in this market has resulted from the development of
customized products for applications such as outdoor power generators, movie and
theatrical production, and semiconductor equipment manufacturing.
Electric Utility Components
The Company dominates the design and manufacture of high-voltage switchgear for
electric utilities in the power transmission segment of the electric utility
industry. While the Company competes in the distribution and substation segments
of the electric utility marketplace as well, it is in the transmission segment
that enabled the Company to secure its position over time through superior
quality and service, while creating high barriers to entry through
specialization, reputation, and investments in machinery and equipment.
Significant customers include large utilities. The EC business switchgear
products consist primarily of air break switches, load break interrupters, and
accessory equipment. Air break switches are used for sectionalizing and routing
power from one point to another. Load break interrupters allow the
sectionalizing and routing of power under full load conditions. Accessory
equipment enables the utility operator to program parameters and related
functions that will automatically sectionalize and switch power flow in the
event of a fault. Once switched, the faulted line can be repaired, re-energized,
and returned to service with minimal downtime or loss of service revenue.
Consistent with the Company's systems approach, electric utility components and
accessories are sold together in all-in-one packages.
Mechanical Engineered Components
The MEC business features three major product lines: (i) flexible shafts for the
transmission of rotary power, (ii) turbocharger components, including wastegate
actuators, and (iii) medium-security locks and locking systems.
Flexible Shafts
The Company is the leading domestic designer and manufacturer of flexible shaft
products and assemblies. Flexible shafting is constructed utilizing unique wire
winding technology. Flexible shaft assemblies are custom designed for the
transmission of rotary power at low torque levels (less than ten horsepower),
and can be incorporated into almost any machine, product, or device replacing
conventional power transmission components such as rigid shafts, gearboxes,
universal joints, and couplings. Flexible shafts are integrally designed into
the OEM's final product to offer benefits, such as lighter weight, fewer
component parts, less assembly time, and greater freedom in design, resulting in
a lower manufacturing cost for the OEM's final product. The flexible shaft
assemblies are critical components utilized in weed trimmers, concrete
vibrators, lawn tractors, aircraft engines and wings, plant processing
equipment, large vessels such as Navy ships, nuclear power plants, and many
other applications in a variety of industries. The potential applications for
flexible shafting are limited only by the Company's ability to develop new
solutions to integrate flexible shafts into new OEM designs or to displace
conventional power transmission products in existing applications.
Turbocharger components and actuation
The Company is a primary outsource supplier of actuation devices and related
componentry to the domestic market for turbocharged diesel engines. Wastegate
actuators are an essential component of a diesel engine turbocharger system,
which through the use of flow valve controls increases engine power, efficiency,
and economy while reducing emissions. As the primary supplier of wastegate
actuators to nearly every major OEM turbocharger manufacturer, the Company's
products can be found on a variety of truck, pick-up, and heavy-duty
diesel-operated platforms. End-use customers for the Company's products include
high-end truck and vehicle manufacturers such as Ford. The Company holds
multiple patents and is very active in the development of new products to expand
the Company's product line, including related emission control products.
3
Medium-Security Locks and Locking Systems
The Company competes in the medium-security segment for cylindrical lock
applications. Medium-security locks are used in applications that involve
non-life-threatening situations or when articles of low to moderate financial
value are being secured. The Company produces highly engineered, custom, and
specialty medium-security locks and locking systems to meet OEM customers'
specifications for use in office furniture, point of sale terminals, bank bags,
post office boxes, storage lockers, and other applications. The Company's lock
products are typically small and low-cost but are precision-engineered and
custom-designed critical components of a larger, more expensive end product. The
Company also produces locking systems, which provide a safety feature used to
prevent multiple drawers from being opened simultaneously in filing cabinets and
desks. The Company is a sole or primary source for locks to leading furniture
OEMs.
Sales and Marketing
The Company employs both salaried and commission-based sales personnel, as well
as independent sales representatives and distributors to facilitate the
marketing and sales of its products. The Company's sales and marketing teams
have adopted an integrated approach to product development, marketing and sales.
They seek to work closely with the Company's engineers to address customer
specific design requirements and the hurdles associated therewith, as well as
potential product profitability. In addition, the sales team is responsible for
keeping the Company's engineering, manufacturing and management personnel
advised of possible future trends and requirements of customers. The Company's
sales and marketing personnel also focus on bringing customers a level of
personal service the Company believes to be superior to its competitors.
Raw Materials and Suppliers
The primary raw materials used by the Company are copper, brass, zinc, stainless
steel, steel wire and rubber, all of which are commodity items, readily
available from a wide range of sources. The Company has enjoyed and continues to
enjoy good relations with its suppliers and has not suffered any significant
interruptions in the delivery of its required materials. Additionally, the
Company is not dependent on any single supplier. In the event a supply
arrangement is terminated, the Company would be forced to look elsewhere for its
raw materials. Management believes these can be obtained with minimal, if any,
business interruption. However, the prices for such materials can fluctuate, and
such fluctuations can be material. A significant increase in raw material prices
could adversely affect the results of operations of the Company.
Competition
While the Company faces competition in each of its business segments, management
believes that its products are able to achieve a significant share of their
related market niches due to a variety of factors. The Company's strategy
attempts to differentiate its products from its competitors by providing high
product quality, customer service, superior design capabilities and proprietary,
vertically integrated manufacturing processes. The Company's strategy of
providing custom engineered solutions and a high level of service to its
customer base has protected and strengthened its market share in the markets
that it serves. Although it is possible other competitors may seek to serve
these markets, the Company believes significant barriers to entry exist,
including the unwillingness of OEMs to expand their vendor relationships for the
same products purchased, the availability of customized processes which the
Company possesses and enables the Company to service its customers needs on an
efficient basis and the capital investment required to purchase the equipment
needed to manufacture products of similar quality.
Environmental and Safety Regulations
The Company's operations are subject to federal, state and local environmental
laws and regulations, which impose limitations on the discharge of pollutants
into the air and water and establish standards for treatment, storage and
disposal of solid and hazardous wastes. The Company believes that it is in
substantial compliance with applicable environmental laws and regulations. The
Company also maintains environmental insurance at certain of its locations.
4
Employees
As of December 31, 2001, the Company employed 1,558 persons on a full-time
basis. Of these employees, 769 were employed in the EC business, 652 were
employed in the MEC business, the Company's corporate office had 8 employees and
the division of Acme that was held for sale employed 129 persons as of December
31, 2001. Two of the Company's subsidiaries have collective bargaining
agreements, one of which covered 70 employees and the other which covered 71
employees. Neither the Company nor any of its subsidiaries has ever had a work
stoppage and each of KCLLC and its subsidiaries considers its relationship with
its employees to be satisfactory.
Item 2. Properties
At December 31, 2001 the Company's principal properties consisted of:
Manufacturing Use/ Corporate Square
Facility office Location Footage Owned/Leased
- ------------------------------- ------------------------------- ---------------------- ------------ ------------------
KCLLC Corporate office Tarrytown, NY 3,000 Leased
Electrical Engineered
Components:
Acme (1) Power conversion Lumberton, NC 128,000 Owned
Acme (1) Power conversion Monterrey, Mexico 45,000 Leased
Acme (1) Power conversion Tempe, AZ 35,000 Leased
Marinco SPEC Napa, CA 77,000 Leased
Guest SPEC Meriden, CT 33,000 Owned
Turner Utility switchgear Fairview Heights, IL 52,000 Owned
Turner Utility switchgear Milstadt, IL 28,000 Leased
Mechanical Engineered
Components:
BWE Flexible shaft products Binghamton, NY 250,000 Owned
Gits Turbocharger components Creston, Iowa 60,400 Owned
Gits Turbocharger components Chonburi, Thailand 17,200 Leased
Hudson Lock products Hudson, MA 218,000 Owned
ESP Lock products Leominster, MA 55,000 Leased
(1) Does not include facilities for the business of Acme that was sold in
February 2002 (See Note 2 of the consolidated financial statements
elsewhere in this Form 10-K).
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the year ended
December 31, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
KCLLC's membership interests are not publicly traded (see Certain Relationships
and Related Transactions).
Item 6. Selected Financial Data
The following selected financial data has been derived from the consolidated
financial statements of the Company included elsewhere in this Form 10-K. The
financial data set forth includes the results of operations of its wholly owned
subsidiaries from their respective dates of acquisition. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and the Company's consolidated
financial statements and notes thereto.
5
Year ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Sales $193,817 $160,465 $144,400 $61,862 $27,318
Income from operations 26,486 31,368 22,346 11,953 5,115
Income from continuing operations 4,731 3,899 4,843 4,619 1,250
Net income (loss) (a)(b)(c) 4,731 (1,316) 4,815 3 1,250
Total assets 225,719 245,671 181,256 93,144 79,757
Long term debt (including current
maturities)(d)(e) 165,837 182,711 149,149 81,278 66,856
(a) Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated
as a subchapter S corporation, which caused the shareholders of their
then parent company, KCI, to be personally liable for the taxes due on
the income of the Company. Through August 31, 1999, VFC was a C
corporation and was responsible for paying taxes on its income.
Effective August 31, 1999, VFC was merged into KCLLC and most of VFC's
subsidiaries, as well as BWE, Hudson and ESP, were converted to limited
liability company ("LLC") status. Corporations which elect subchapter S
corporation or LLC status are no longer liable for the majority of
taxes due on their income since the shareholders then become personally
liable for most taxes on the income of the Company. Accordingly,
subsequent to May 31, 1997 through December 31, 1998, the provision for
income taxes includes only those taxes applicable to certain states.
For the year ended December 31, 1999, the Company's provision for
income taxes related primarily to VFC's consolidated taxable income (as
a C corporation) and the taxable income of the subsidiaries not
converted to LLC status. On May 22, 2000, KCI's S election terminated
and KCI became responsible for taxes on the income of the Company (See
Notes 1 and 9(a) to the consolidated financial statements).
(b) Net (loss) income for the years ended December 31, 2000 and 1998
reflects an extraordinary loss, net of tax, on early extinguishment of
debt of approximately $1.2 million and $4.6 million, respectively.
(c) Net (loss) income for the years ended December 31, 2000 and 1999
reflects loss from discontinued operations, net of tax, of
approximately $4.0 million and $28,000 respectively.
(d) Does not include approximately $5.9 million related to accrued stock
appreciation rights as of December 31, 1999.
(e) Includes approximately $13.1 million of redeemable member's equity at
December 31, 1999.
6
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
KCLLC is the parent holding company of the wholly owned subsidiaries of the
Company. KCI, the sole member of KCLLC, holds no other assets other than its
investment in KCLLC and has no operations. The Company has two operating
business segments, its electrical components ("EC") business and mechanical
engineered components business ("MEC"). Through its two businesses, the Company
is a leading manufacturer of custom-engineered essential componentry for
application in a diverse array of end-use products. The Company targets original
equipment manufacturer ("OEM") markets where the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company's EC
business was formed through its acquisition of VFC in 1999. The Company expanded
the product offerings of its EC business with the power conversion product lines
it acquired through its acquisition of Acme in November 2000. (See Note 2 to the
consolidated financial statements contained elsewhere in this Form 10-K). The
Company's MEC business, which was comprised of its flexible shaft and lock
product lines prior to the VFC acquisition, was expanded with the addition of
the Company's turbocharger line, which it acquired in 1999 when the Company
completed its acquisition of VFC.
The Company has historically acquired complementary or related manufacturing
businesses and sought to integrate them into existing operations. Following an
acquisition, management seeks to rationalize operations, reduce overhead costs,
develop additional cross-selling opportunities and establish new customer
relationships. As a result of its integration efforts and internal growth, the
Company's consolidated net sales have increased from approximately $9.1 million
in fiscal year 1992 to approximately $193.8 million for fiscal year 2001.
The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies, but there are no agreements regarding any such
acquisitions existing as of the date hereof.
7
Results of Operations
The following table sets forth, for the periods indicated, consolidated
statement of operations data for the Company expressed in dollar amounts (in
thousands) and as a percentage of net sales. The financial data set forth
includes the result of operations of its wholly owned subsidiaries from their
respective dates of acquisition (see Note 2 to the consolidated financial
statements elsewhere in this Form 10-K). The data set forth below should be read
in conjunction with the Company's consolidated financial statements and notes
thereto contained elsewhere in this Form 10-K.
Consolidated Statement of Operations Data:
Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
- --------------------------------------------------------------------------------------------------------------------
Net Sales $193,817 100.0% $160,465 100.0% $144,400 100.0%
Cost of Goods Sold 122,975 63.4 93,847 58.5 85,079 58.9
------------- ------------- ------------- -------------- ------------- -------------
Gross Profit 70,842 36.6 66,618 41.5 59,321 41.1
Selling, general and
administrative expenses 41,208 21.3 30,290 18.9 30,001 20.8
Amortization of goodwill 3,558 1.8 2,626 1.6 2,464 1.7
Cumulative adjustment for
Aerospace (721) (0.4) - - - -
Stock appreciation rights
compensation and other
nonrecurring expenses 311 0.2 2,334 1.5 4,510 3.1
------------- ------------- ------------- -------------- ------------- -------------
Income from operations 26,486 13.7 31,368 19.5 22,346 15.5
Other income 376 0.2 799 0.5 465 0.3
Recapitialization expenses - - (7,937) (4.9) - -
Interest expense (16,573) (8.6) (15,159) (9.4) (15,417) (10.7)
------------- ------------- ------------- -------------- ------------- -------------
Income before provision for 10,289 5.3 9,071 5.7 7,394 5.1
taxes, discontinued
operations and
extraordinary item
Provision for income taxes 5,558 2.9 5,172 3.3 2,551 1.7
------------- ------------- ------------- -------------- ------------- -------------
Income from continuing 4,731 2.4 3,899 2.4 4,843 3.4
operations
Loss from discontinued
operations, net - - (3,988) (2.5) (28) (0.1)
Extraordinary loss on early
extinguishment of debt, net - - (1,227) (0.7) - -
------------- ------------- ------------- -------------- ------------- -------------
Net income (loss) $4,731 2.4% $(1,316) (0.8)% $4,815 3.3%
============= ============= ============= ============== ============= =============
8
A summary of the Company's segments is as follows:
Electrical Components Business Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2001 2000 1999
--------------------------- -------------------------- --------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
----------- --------------- ------------ ------------- -------------- -----------
Net Sales $120,401 100.0% $71,656 100.0% $62,543 100.0%
Cost of Sales 77,653 64.5 40,935 57.1 35,495 56.8
----------- --------------- ------------ ------------- -------------- -----------
Gross Margin 42,748 35.5 30,721 42.9 27,048 43.2
Selling, general and administrative
expenses 26,126 21.7 16,917 23.6 16,593 26.5
Amortization of goodwill 1,824 1.5 895 1.2 777 1.2
Cumulative adjustment for Aerospace (721) (0.6) - - - -
Stock appreciation rights compensation
and other nonrecurring expenses - - - - 3,945 6.3
----------- --------------- ------------ ------------- -------------- -----------
Income from operations $15,519 12.9% $12,909 18.0% $5,733 9.2%
=========== =============== ============ ============= ============== ===========
Mechanical Engineered Components Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- -------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
----------- --------------- ------------ -------------- ------------- -----------
Net Sales $73,416 100.0% $88,809 100.0% $81,857 100.0%
Cost of Sales 45,322 61.7 52,912 59.6 49,584 60.6
----------- --------------- ------------ -------------- ------------- -----------
Gross Margin 28,094 38.3 35,897 40.4 32,273 39.4
Selling, general and administrative
expenses 8,961 12.2 10,074 11.3 10,635 13.0
Amortization of goodwill 1,734 2.4 1,731 1.9 1,620 2.0
Non-recurring expenses 311 0.4 6 - 266 0.3
----------- --------------- ------------ -------------- ------------- -----------
Income from operations $17,088 23.3% $24,086 27.1% $19,752 24.1%
=========== =============== ============ ============== ============= ===========
Year ended December 31, 2001 compared to the year ended December 31, 2000
Net Sales: Net sales for the year ended December 31, 2001 ("Fiscal 2001")
increased by approximately $33.4 million, or 20.8% over net sales for the year
ended December 31, 2000 ("Fiscal 2000"). This increase was the result of the sum
of the $48.7 million, or 68.0%, increase in the net sales of the EC business
less the $15.4 million, or 17.3%, decrease in net sales of the MEC business.
The growth within the EC business was primarily due to the full year inclusion
of the results of operations of the transformer power conversion product line
for Fiscal 2001 as compared to the one-month inclusion of sales for December of
2000 in the results for Fiscal 2000. The transformer power conversion product
line contributed approximately $50.4 million in net sales for Fiscal 2001,
representing an increase of $45.1 million over Fiscal 2000. This product line
was acquired in November 2000 when the Company completed the acquisition of Acme
Electric Corporation ("Acme"). In addition, in June 2001, the Company decided to
retain rather than sell the aerospace product line ("Aerospace") of Acme.
Aerospace was merged into the power conversion product line of the Company. The
Company recorded a $721,000 cumulative adjustment (see Note 2 to the
consolidated financial statements elsewhere in this Form 10-K) representing the
net result of Aerospace's operations from date of acquisition to June 1, 2001.
Subsequent to June 1, 2001 the results of Aerospace's operations have been
included in the respective categories of operations. Included in net sales for
Fiscal 2001 is approximately $8.8 million of net sales from Aerospace for the
period June 1, 2001 to December 31, 2001.
9
Net sales in the MEC business decreased approximately $15.4 million to
approximately $73.4 million for Fiscal 2001. This decrease is primarily related
to the decline in sales of the Company's lock and turbocharger product lines,
which resulted from a downturn in the domestic economy and a reduction in
customer demand.
Gross Profit: Gross profit increased $4.2 million, or 6.3%, in Fiscal 2001 as a
result of an increase of approximately $12.0 million, or 39.1%, in the gross
profit of the EC business less the decline in gross profit of the MEC business
for Fiscal 2001 of approximately $7.8 million, or 21.7%.
The increase in the gross profit of the EC business is primarily related to the
inclusion of the results of operations of the transformer power conversion
product line for the full year in Fiscal 2001, as compared to Fiscal 2000, in
which only the results of operations of this product line for the month of
December 2000 were included due to the acquisition of this product line with
Acme at the end of November 2000. The transformer power conversion product line
contributed approximately $14.3 million in gross profit for Fiscal 2001,
representing an increase of approximately $12.7 million over Fiscal 2000. In
addition, the gross profit of the EC business for Fiscal 2001 increased
approximately $2.9 million as a result of the operations of Aerospace, which was
merged into the power conversion product line in June 2001 (see Note 2 to the
consolidated financial statements elsewhere in this Form 10-K). These increases
were slightly offset by a decline in gross profit of the specialty electrical
components product line, which was primarily driven by a decline in sales due to
the downturn in the domestic economy.
The approximately $7.8 million decline in gross profit of the MEC business for
Fiscal 2001 is primarily due to the decline in sales of the lock and
turbocharger product lines of MEC business for Fiscal 2001 that resulted from a
downturn in the domestic economy and a reduction in customer demand.
The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business declined approximately 7.4% for Fiscal 2001. For the MEC business the
GP percentage declined approximately 2.1% during Fiscal 2001.
The decline in the GP percentage of the EC business was primarily the result of
the inclusion of the results of the transformer power conversion product line
for the full year in Fiscal 2001 as compared to Fiscal 2000, in which only the
results of December 2000 were included. The gross margin profile of the
transformer product line is lower than the margins experienced in the remainder
of the product lines of the EC business. The decrease in GP percentage of the
MEC business is primarily related to a change in product mix and margin
compression due to lower sales levels.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses increased approximately $10.9 million, or
36.0%, in Fiscal 2001. As a percentage of net sales, SG&A increased 2.4% from
Fiscal 2000. SG&A of the EC business increased approximately $9.2 million, or
54.4%, for Fiscal 2001 and, as a percentage of net sales, declined 1.9% during
Fiscal 2001. SG&A of the MEC business, which declined approximately $1.1 million
during Fiscal 2001, increased as a percentage of net sales by approximately
0.9%.
The increase in SG&A expenses for Fiscal 2001 is primarily related to the
acquisition of Acme, which resulted in the Company integrating the transformer
and aerospace product lines of Acme into the EC business. The results of the
transformer power conversion product line were included for the full year in
Fiscal 2001 as compared to Fiscal 2000 where the results of this product line
were only included for the month of December 2000. SG&A of the transformer power
conversion product line for Fiscal 2001 was approximately $9.4 million,
representing an increase of approximately $8.4 million over SG&A of the Company
and the EC business for Fiscal 2001. Aerospace, which was merged into the power
conversion product line in June 2001 (see Note 2 to the consolidated financial
statements elsewhere in this Form 10-K), added approximately $1.6 million to
SG&A for Fiscal 2001. In addition, the corporate office of Acme, which was
closed in October 2001, added approximately $2.3 million of SG&A expenses for
Fiscal 2001, including approximately $425,000 of depreciation. This is an
increase over Fiscal 2000 of approximately $2.0 million. Upon the close of the
Acme corporate office, all remaining related expenses of that office terminated.
The decline in SG&A of the EC business as a percentage of net sales and in SG&A
of the MEC business was primarily related to the Company's cost reduction
initiatives in response to the slowing economy. The increase in SG&A as a
percentage of net sales of the MEC business primarily resulted from the impact
of the sharper decline in the net sales of the MEC business as compared to the
cost reductions made by the Company in SG&A. The Company's MEC business has a
lower overhead structure than its EC business due to lower sales and marketing
expenses of the MEC's business, which limits the ability of the Company to
reduce the expenses of the MEC business beyond a certain level.
10
On a pro forma comparative basis, assuming that the effects of the Acme
acquisition were reflected in Fiscal 2000 results, exclusive of the impact of
the additional corporate office expenses of Acme, all the product lines, except
for the Company's utility product line, which has experienced sales growth over
Fiscal 2000, have experienced a reduction in operating expense levels for Fiscal
2001, primarily driven by the Company's cost reduction initiatives.
Amortization of Goodwill: Goodwill amortization increased by approximately
$932,000 during Fiscal 2001, primarily related to the full year inclusion of
amortization of goodwill acquired in the Acme acquisition.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the Company reclassify the carrying amount of
certain intangible assets into or out of goodwill.
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill.
In the first quarter of 2002, the Company will apply the new rules on accounting
for goodwill and other intangible assets and will make determinations as to what
amounts of goodwill, intangible assets and long term debt should be allocated to
its reporting units. In addition, the Company will perform the first of the
required impairment tests of goodwill. The Company has not yet determined what
the effect, if any, that these tests will have on the earnings and financial
position of the Company.
Cumulative Adjustment for Aerospace: Based on the strength of the operating
performance of Aerospace, which management believes is sustainable, on June 1,
2001, the Company decided to retain Aerospace, which had been previously
classified as held for sale. On that date and in accordance with Emerging Issue
Task Force ("EITF") 90-6, "Accounting for Certain Events Not Addressed in Issue
No. 87-11 Relating to an Acquired Operating Unit to be Sold," the Company
reallocated the purchase price paid for Acme as if Aerospace had never been held
for sale and recorded a cumulative adjustment for the results of operations of
Aerospace from the date of acquisition through May 31, 2001 of $721,000. This
amount previously had been excluded from the results of operations of the
Company and had been included in goodwill.
Stock appreciation rights compensation and other nonrecurring expenses: For the
year ended December 31, 2001, the Company's nonrecurring charges primarily
related to administrative expenses incurred in connection with the establishment
of a production facility in Mexico for the Company's lock products. At December
31, 2001, the Company had not begun production at its new Mexico facility. For
December 31, 2000 the nonrecurring charges primarily related to approximately
$1.6 million recorded in connection with outstanding stock appreciation rights
("SARs"). The SARs were issued in conjunction with the VFC acquisition in lieu
of cash consideration for the purchase of equity held by operating management of
former VFC subsidiaries who continued with the Company. The Company was required
to report any change in the valuation of the SARs as a charge against earnings.
In connection with the Recapitalization (see Liquidity and Capital Resources),
all of the SARs were exercised and the holders of the SARs purchased KCI Common
Stock with a substantial portion of the after-tax proceeds of such exercise.
Income from Operations: The decline in income from operations of approximately
$4.9 million, or 15.6%, resulted from the increase in gross profit of
approximately $4.2 million offset by the increase in SG&A expenses of
approximately $10.9 million and the increase in goodwill amortization of
approximately $932,000. The increase in operating expenses were reduced by the
$721,000 cumulative income adjustment for Aerospace and the decrease in stock
appreciation compensation and other non-recurring expenses of approximately $2.0
million due to the factors discussed above.
11
Recapitalization expenses: In connection with the Recapitalization (see
Liquidity and Capital Resources) completed during Fiscal 2000, the Company
incurred approximately $7.9 million of transaction fees.
Interest Expense: Interest expense increased by approximately $1.4 million, or
9.3%, during Fiscal 2001. This increase is primarily due to higher levels of
outstanding borrowings during Fiscal 2001 as compared to Fiscal 2000, primarily
due to the additional borrowings used to finance the acquisition of Acme in
November 2000 (see Liquidity and Capital Resources below). The impact of the
higher debt levels, however, was partially offset by the reduced rates of
interest charged on the outstanding principal on the variable rate term loan and
revolving credit facility due to declining interest rates of Fiscal 2001.
Provision for Income Taxes: The provision for income taxes increased
approximately $386,000, or 7.5%, from approximately $5.2 million in Fiscal 2000.
The Company's effective tax rate for Fiscal 2001 was approximately 54.0% on
income before taxes, which resulted primarily from the Company's additional
foreign tax liabilities as well as non-deductible expenses relating primarily to
goodwill amortization and non-deductible professional fees in connection with
the Acme acquisition. The effective rate for Fiscal 2000 was 57.0% which
resulted primarily due to the change in tax status of the Company during 2000 to
a C corporation as well as non-deductibility of expenses relating primarily to
the Reorganization expenses and goodwill amortization.
Income from Continuing Operations: Income from continuing operations increased
by approximately $832,000, or 21.3%, during Fiscal 2001. The increase resulted
from the decrease in income from operations of approximately $4.9 million, a
decrease in other income of approximately $423,000, an increase in interest
expense of approximately $1.4 million and a decrease in the Recapitalization
expenses of approximately $7.9 million, due to the factors discussed above.
Loss from Discontinued Operations, net: In Fiscal 2000, the Company incurred a
loss from discontinued operations of approximately $4.0 million. In April 2000,
the Company consummated the sale of Heart Interface Corporation ("Heart") and
Cruising Equipment Company ("Cruising"). The Company received approximately $9.0
million in proceeds before any transaction related expenses. Of the $9.0 million
of proceeds, $600,000 was placed in escrow in accordance with the agreement. The
Company recorded a loss on disposal of Heart and Cruising of approximately $3.3
million. To the extent that cash is released from the escrow, which is to
terminate in April 2002, such funds will be recorded as a gain at that time. In
July 2001, the Company received notice of a claim against the escrow. The
Company has responded to the claim and is awaiting further response from the new
owners of Heart and Cruising. The Company believes that the escrow will cover
any potential settlement of the claim.
On December 29, 2000, the Company sold its interests in Mastervolt B.V. and
subsidiaries ("Mastervolt"), which had been acquired as part of VFC (see Note 2
to the consolidated financial statements elsewhere in this Form 10-K). The
Company received approximately $2.3 million in proceeds and recorded a loss on
disposal of approximately $525,000.
Extraordinary loss on early extinguishment of debt, net: In November 2000, the
Company closed on its new credit facility (see Liquidity and Capital Resources).
As a result, in Fiscal 2000, the Company wrote off the unamortized balance of
the deferred financing costs relating to the prior credit facility of
approximately $2.1 million. The expense is reflected, net of a tax benefit of
approximately $828,000, as an extraordinary item.
Net Income (Loss): Net income increased by approximately $6.0 million for Fiscal
2001. The increase in net income is the result of the sum of an increase in
income from continuing operations of approximately $832,000 and a decrease in
loss from discontinued operations of approximately $4.0 million and the
extraordinary charge of approximately $1.2 million, due to the factors discussed
above.
Year ended December 31, 2000 compared to the year ended December 31, 1999
Net Sales: Net sales increased by approximately $16.1 million, or 11.1%, for
Fiscal 2000 as compared to the year ended December 31, 1999 ("Fiscal 1999"),
resulting from the increase in net sales of the EC business of approximately
$9.1 million, or 14.6%, and an increase in net sales of the MEC business of
approximately $7.0 million, or 8.5%.
The growth in sales of the EC business, which the Company entered into as a
result of the VFC acquisition, was fueled by growth in the core markets of the
business as well as continued new product development, which enabled the Company
to expand its market share in the industrial markets that it serves. In
addition, the results of the EC business include the results of the transformer
power conversion product line for the month of December 2000, due to the
acquisition of Acme as well as the inclusion of the results of operations of the
remaining product lines of the EC business for the full year in 2000, whereas
Fiscal 1999 only reflects the results of operations from January 19, 1999, as a
result of the VFC acquisition.
12
The increase in net sales in the MEC business is related to growth in the
business' core markets.
Gross Profit: Gross profit increased approximately $7.3 million, representing a
12.3% increase for Fiscal 2000 as compared to Fiscal 1999, as a result of the
approximately $3.7 million, or 13.5%, increase in the gross profit of the EC
business and the approximately $3.6 million, or 11.2%, increase in gross profit
of the MEC business for Fiscal 2000.
The increase in the gross profit of the EC business is primarily related to the
inclusion of the results of operations of the EC business for the full year in
2000 versus 1999, which only reflects the results from January 19, 1999 as a
result of the VFC acquisition in January 1999.
The approximately $3.6 million increase in gross profit of the MEC business for
Fiscal 2000 is primarily due to growth in the business' core markets.
The GP percentage for the EC business declined approximately 0.3% for Fiscal
2000. For the MEC business the GP percentage increased approximately 1.0% during
Fiscal 2000. The changes in the GP percentages of the EC and MEC business for
Fiscal 2000 were primarily related to changes in product mix.
Selling, General and Administrative Expenses: SG&A expenses increased
approximately $289,000, or 1.0%, for Fiscal 2000 over Fiscal 1999. As a
percentage of net sales, SG&A declined 1.9%. SG&A of the EC business increased
approximately $324,000, or 2.0%, for Fiscal 2000 over Fiscal 1999 and as a
percentage of net sales, declined 2.9% during Fiscal 2000. SG&A of the MEC
business declined approximately $561,000 during Fiscal 2000, or as a percentage
of net sales, by approximately 1.7%.
The decline in SG&A for the EC and MEC businesses, as a percentage of net sales,
is primarily related to the business' ability to support top line growth on its
established infrastructure. In addition, the final rationalization of the VFC
acquisition resulted in lower corporate overhead and lower SG&A expenses for the
EC business as a result of the formulation of its specialty electrical
components product line through the integration of Marinco, Guest and certain
product lines of Glendinning Marine Products, Inc. ("Glendinning"). Glendinning
was sold in November 1999. The SG&A expenses, as a percentage of sales, of the
EC business are generally higher than those of the MEC business as a result of
the EC business maintaining higher levels of sales and marketing expenses due to
the businesses to which it targets its products.
Amortization of Goodwill: Goodwill amortization increased by approximately
$162,000 during Fiscal 2000, primarily related to the full year inclusion of
amortization of goodwill related to the VFC acquisition in that year. In
addition the Company recorded amortization expense in December 2000 related to
the goodwill acquired in connection with the acquisition of Acme.
Stock appreciation rights compensation and other nonrecurring expenses: For
Fiscal 2000 and 1999, the Company recorded charges of approximately $1.6 million
and $4.2 million, respectively, related to outstanding stock appreciation rights
("SARs"). The SARs were issued in conjunction with the VFC acquisition in lieu
of cash consideration for the purchase of equity held by operating management of
former VFC subsidiaries who continued with the Company. The Company was required
to report any change in the valuation of the SARs as a charge against earnings.
In connection with the Recapitalization (see Liquidity and Capital Resources),
all of the SARs were exercised and the holders of the SARs purchased KCI Common
Stock with a substantial portion of the after-tax proceeds of such exercise.
Income from Operations: Income from operations increased by approximately $9.0
million, or 40.4%, for Fiscal 2000. This increase results from the increase in
gross profit of approximately $7.3 million less the increase in SG&A expenses of
approximately $289,000 and the increase in goodwill amortization of
approximately $162,000 plus the decrease in stock appreciation rights
compensation and other non-recurring expenses of approximately $2.2 million due
to the factors discussed above.
Recapitalization expenses: In connection with the Recapitalization (see
Liquidity and Capital Resources), the Company incurred approximately $7.9
million of transaction fees.
Interest Expense: Interest expense decreased by approximately $258,000, or 1.7%,
during Fiscal 2000. This decrease is due to lower levels of outstanding
borrowings throughout most of 2000 versus Fiscal 1999, as a result of the
Company not having any borrowings outstanding under its revolving credit
facility during Fiscal 2000 as well as lower debt outstanding under the term
loan for most of Fiscal 2000. In September 2000, the Company entered into a new
credit agreement (see Liquidity and Capital Resources), which the Company closed
on, in November 2000, in order to finance a large portion of the acquisition of
Acme.
13
Provision for Income Taxes: The provision for income taxes increased by
approximately $2.6 million, or 102.7%, during Fiscal 2000. The Company's
effective tax rates for Fiscal 2000 and 1999 were approximately 57.0% and 34.5%,
respectively.
Through May 22, 2000, KCI, the majority member of KCLLC, was an S corporation
and shareholders of KCI were personally responsible for the income taxes on the
income of KCLLC that was allocated to KCI. Upon the consummation of the
Recapitalization (see Liquidity and Capital Resources), KCI automatically
converted to C corporation status. In addition, as part of the Recapitalization,
KCI acquired Keyhold, Inc. ("Keyhold"), which owned the minority interest in
KCLLC and was a C corporation for tax purposes. On December 31, 2000, Keyhold
merged into KCI. Beginning May 23, 2000, the Company's financial statements
reflect its tax provision as if it were a C corporation, the tax status of its
member. The tax provision for the year ended December 31, 2000 is primarily
related to the taxable income of the Company from May 23, 2000 through December
31, 2000. In addition, the Company's high effective tax rate for the year ended
December 31, 2000 is primarily a result of the loss allocated to the S
corporation period and the impact of the non-deductibility of amortization of
goodwill and certain intangible assets.
The tax provision for Fiscal 1999 is primarily related to the taxable income of
VFC and its former subsidiaries through August 31, 1999. Through August 31,
1999, VFC and its subsidiaries were C corporations for tax purposes.
Income from Continuing Operations: Income from continuing operations declined by
approximately $944,000, or 19.5%, for Fiscal 2000. The decrease is primarily the
result of the sum of increases in income from operations of approximately $9.0
million and other income of approximately $334,000 and a decrease in interest
expense of approximately $258,000 offset by an increase in the provision for
taxes of approximately $2.6 million and the Recapitalization expenses of
approximately $7.9 million, due to the factors discussed above.
Loss from Discontinued Operations, net: Loss from discontinued operations net
increased by approximately $4.0 million for Fiscal 2000. In April 2000, the
Company consummated the sale of Heart and Cruising, which were acquired as part
of VFC (see Note 2 to the consolidated financial statements elsewhere in this
Form 10-K). The Company received approximately $9.0 million in proceeds before
any transaction related expenses. Of the $9.0 million of proceeds, $600,000 was
placed in escrow in accordance with the agreement, which the Company has
recorded in its other assets. The Company recorded a loss on the disposal of
Heart and Cruising of approximately $3.3 million. To the extent that cash is
released from escrow, which terminates in April 2002, such funds will be
recorded as a gain at that time. In July 2001, the Company received notice of a
claim against the escrow. The Company has responded to the claim and is awaiting
further response from the new owners of Heart and Cruising. The Company believes
that the escrow will cover any potential settlement of the claim.
On December 29, 2000, the Company sold its interests in Mastervolt, which had
been acquired as part of VFC (see Note 2 to the consolidated financial
statements elsewhere in this Form 10-K). The Company received approximately $2.3
million in proceeds and recorded a loss on disposal of approximately $525,000
during Fiscal 2000.
Extraordinary loss on early extinguishment of debt, net: In November 2000, the
Company closed on its new credit facility (see Liquidity and Capital Resources).
As a result, the Company wrote off the unamortized balance of the deferred
financing costs relating to the prior credit facility of approximately $2.1
million. Such expense is reflected, net of a tax benefit of approximately
$828,000, as an extraordinary item.
Net (Loss) Income: Net loss increased by approximately $6.1 million, or 127.3%
for Fiscal 2000. The increase in loss is the result of the sum of a decrease in
income from continuing operations of approximately $944,000, which was primarily
driven by the Recapitalization expenses, an increase in loss from discontinued
operations of approximately $4.0 million and the extraordinary charge of
approximately $1.2 million, due to the factors discussed above.
Liquidity and Capital Resources
The Company has historically generated funds from its operations and its working
capital requirements generally have not materially fluctuated from quarter to
quarter. The Company's other main sources of liquidity have historically been
the Company's $80 million of unsecured 10.5% senior notes due 2008 and its
outstanding credit facilities. In November 2000, the Company closed on a new
credit facility, which replaced the Company's previous credit facility. The
Company used the proceeds from the new credit agreement to repay the previous
borrowing facility and finance the acquisition of Acme. The new credit facility
provides for a six-year $40 million revolving credit facility and a six-year
$100 million term loan facility. The new credit agreement, guaranteed by the
Company's subsidiaries and KCI, is collateralized by all of the capital stock of
the subsidiaries, receivables, inventories, equipment and certain intangible
property. There were no amounts outstanding under the revolving credit facility
at December 31, 2001. The term loan is payable in quarterly installments through
September 2006. Both the term loan and revolving credit facility bear interest
at fluctuating interest rates determined by reference to a base rate or the
London interbank offered rate ("LIBOR") plus an applicable margin which will
vary from 1.0% to 2.75% and require the payment of a commitment fee of 0.50% on
the unused portion of the facility as well as quarterly commitment fees.
14
The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At December 31, 2001, the Company had one letter of credit outstanding
for approximately $443,000. The letter of credit primarily relates to a prior
year Acme self-insured liability related to outstanding workman's compensation
claims.
The new credit agreement contains certain covenants and restrictions which
require the maintenance of financial ratios and restrict or limit dividends and
other shareholder distributions, transactions with affiliates, capital
expenditures, rental obligations and the incurrence of indebtedness. At December
31, 2001, the Company was in compliance with the covenants of the credit
agreement.
The Company's remaining liquidity demands will be for capital expenditures,
general corporate purposes, and principal and interest payments on its
outstanding debt. The Company's senior notes require semiannual interest
payments on the outstanding principal. The term loan requires quarterly
principal payments. Principal payments required for the next 12 months will be
approximately $6.3 million. Under the revolving credit facility and term loan,
the Company has the option to lock in a specified interest rate by entering into
a contract, for different periods, which cannot exceed 180 days. As the
underlying contract comes up for renewal, the interest associated with the
contract becomes due. As of December 31, 2001, the Company had no outstanding
commitments for capital expenditures. The Company anticipates its capital
expenditures for the year ended December 2002 to be approximately $4.4 million.
The expenditures are primarily needed to maintain its facilities and expand its
production capacity for the Company's ongoing plan to expand operations in
Mexico and in order to take advantage of profitable market opportunities. To the
extent cash flow from operations is insufficient to cover the Company's capital
expenditures, debt service and other general requirements, the Company would
seek to utilize its borrowing availability under its existing revolving credit
facility.
In connection with the Company's desire to continue to grow through acquisition
and be a leading supplier of essential componentry, in May 2000, KCI and its
shareholders consummated a Recapitalization of KCI with affiliates of Kelso &
Company ("Kelso") pursuant to which, among other things:
o KCI was recapitalized with Common Stock and Preferred Stock;
o KCI shareholders exchanged approximately 862,000 shares of their Common
Stock for Preferred Stock and KCI optionholders exercised options to
purchase 20,533 shares of Common Stock, all of which were then
exchanged for shares of Preferred Stock. All such Preferred Stock was
immediately sold to Kelso for cash at approximately $117 per share;
o SGC Partners II LLC ("SG"), which owned all of the stock of Keyhold,
Inc. ("Keyhold"), which owned approximately 11.1% of the membership
interests of KCLLC prior to the Recapitalization, exchanged all of its
Keyhold stock for shares of Preferred Stock which were immediately sold
to Kelso for cash at approximately $117 per share, terminating
Keyhold's right to require KCLLC to repurchase Keyhold's outstanding
investment in KCLLC at the then current market value thereof;
o Holders of KCI SARs exercised their SARs and with a substantial portion
of their after-tax proceeds from the exercise, purchased Common Stock;
15
o Kelso purchased an aggregate of approximately 35,000 shares of
Preferred Stock from KCI at approximately $117 per share.
At the closing of the Recapitalization, KCI, Kelso and certain shareholders of
KCI entered into a Shareholders Agreement and a Registration Rights Agreement
and KCI and Kelso entered into an Advisory Agreement.
Effective upon the consummation of the Recapitalization, Kelso owns all of the
Preferred Stock. The Preferred Stock is not entitled to vote for the election of
directors but is entitled to designate two members of KCI's seven member Board
of Directors. In addition, the Preferred Stock has certain approval rights and
is convertible into Common Stock at the holder's option (upon conversion the
Preferred Stock would constitute over 60% of the total outstanding common equity
of KCI on a fully diluted basis). The Preferred Stock has a liquidation
preference equal to its purchase price plus accrued dividends, bears a 1%
cumulative annual dividend payable in kind and is redeemable at the option of
the holder after June 2, 2009. All of the outstanding Common Stock and options
to purchase Common Stock of KCI continue to be held by parties that held such
securities prior to the Recapitalization and by the parties who purchased Common
Stock with the after-tax proceeds from the exercise of their SARs. The aggregate
purchase price of the Preferred Stock paid by Kelso was approximately $105.0
million of which approximately $4.1 million was paid to KCI. The Company paid
fees in connection with the Recapitalization of $7.9 million during Fiscal 2000.
All proceeds received by KCI from the Recapitalization were contributed to KCLLC
for additional membership interest.
KCI has no operations and is dependent on KCLLC for financial resources in the
form of capital distributions to meet its obligations. KCI obligations include
the $105.0 million of its preferred stock plus any dividends payable in arrears
(approximately $1.0 million in cumulative dividends in arrears, payable in kind,
at December 31, 2001), which are redeemable for cash at the option of the holder
after June 2, 2009, the requirement to purchase shares from its common
shareholders under certain circumstances and its tax obligations. Repurchases of
KCI Common Stock are made at fair market value as defined in KCI's shareholder
agreement. At December 31, 2001 approximately 1.3 million KCI common shares plus
potentially 182,000 shares covered by stock options were subject to repurchase
by KCI. The ability of KCLLC to make such capital distributions will be limited
by its available resources and is limited by restrictions of debt and other
agreements. KCLLC reflects in its tax provision the obligations of KCI.
Cash flows provided by operating activities were approximately $21.9 million,
$7.7 million, and $20.5 million for Fiscal 2001, 2000 and 1999, respectively.
The net increase of approximately $14.2 million for Fiscal 2001 resulted
primarily from the decrease in use of cash by the operating assets of the
business. During 2001 the Company, in response to the downturn in the economy,
initiated cost cutting programs and focused on the Company's working capital
accounts, specifically accounts receivable, inventory and accounts payable. In
addition, as business declined during Fiscal 2001 less cash was used in accounts
receivable and inventory. For Fiscal 2001, accounts receivable and inventory had
a net decline of approximately $11.8 million as compared to Fiscal 2000 when
accounts receivable and inventory resulted in a net increase of $6.6 million
over Fiscal 1999. Prepaid expenses and other current assets declined by
approximately $2.7 million, primarily driven by the Company's use of tax
overpayments in the prior year. Offsetting these increases in cash flows from
operations was a decrease in accounts payable and accrued expenses of
approximately $8.4 million, reflecting lower levels of spending due to the
current economic conditions.
The net decrease in cash provided by operating activities of approximately $12.8
million for Fiscal 2000 as compared to Fiscal 1999 resulted primarily from the
decrease in net income, primarily driven by the Recapitalization expenses during
Fiscal 2000 and increases of operating assets during Fiscal 2000. The net
increase in accounts receivable for Fiscal 2000 was primarily driven by the
growth of the Company as well as higher sales in November and December 2000 as
compared to the prior year. The increase in the inventory for Fiscal 2000 was
related primarily to the Company's growth over the Fiscal 1999, a build up of
inventory to counter the increased lead times resulting from an increased
overseas vendor base as well as expansion of its Thailand facility. The increase
in the prepaid expenses for Fiscal 2000 is primarily driven by prepaid income
taxes.
Cash flows from operations of discontinued operations generated approximately
$1.4 million for Fiscal 1999.
Cash flows used in investing activities were approximately $3.5 million, $38.7
million and $82.9 million for Fiscal 2001, 2000 and 1999, respectively. The
decrease in cash used in investing activities for Fiscal 2001 as compared to
Fiscal 2000 of approximately $35.2 million and approximately $44.2 million for
Fiscal 2000 as compared to Fiscal 1999, are primarily related to the size of the
acquisitions accomplished in Fiscal 2000 and Fiscal 1999. On November 21, 2000,
the Company acquired all of the outstanding shares of Acme for a purchase price
of approximately $47.3 million and assumed liabilities of approximately $28.8
million. On January 19, 1999, the Company acquired all of the outstanding shares
of VFC for a purchase price of approximately $84.0 million and assumed
liabilities of approximately $21.7 million (see Note 2 to the consolidated
financial statements elsewhere in this Form 10-K). The Company realized $10.7
million of proceeds from the sale of Heart, Cruising and Mastervolt (See Note 2
to the consolidated financial statements elsewhere in this Form 10-K) during
Fiscal 2000. During Fiscal 1999, the Company divested itself of Force 10 Marine,
Inc., Multiplex Technology Inc. and Glendinning, which it had acquired as part
of VFC, for a total of approximately $7.4 million. Capital expenditures for
Fiscal 2001, 2000 and 1999 were approximately $4.1 million, $3.1 million and
$2.7 million, respectively. The increase in capital expenditures over the three
year period is primarily due to the Company's growth through acquisitions.
16
Cash flows from financing activities used net cash of approximately $17.2
million during Fiscal 2001 and provided net cash of approximately $30.6 million
and $53.4 million for Fiscal 2000 and Fiscal 1999, respectively. The net cash
used in financing activities for Fiscal 2001 was primarily driven by the
Company's net repayment of approximately $16.2 million in debt under its
existing credit facilities. At December 31, 2001, the Company was two payments
ahead of schedule under its current term debt facility.
The net decrease in financing activities for Fiscal 2000 as compared to Fiscal
1999 of approximately $22.8 million was primarily due to the changes made in the
Company debt facilities. Proceeds received under the Company's existing credit
facility for Fiscal 2000 totaled $103.7 million. The Company used such proceeds
to repay its prior credit facility, finance the acquisition of Acme, which
included repaying approximately $10.4 million of debt assumed in the Acme
acquisition, and working capital purposes. For Fiscal 1999, the Company received
an aggregate of approximately $82.6 million from its prior term loan and credit
facility. The repayment of approximately $37.1 million of long-term debt and
other long-term obligations offset this, the most significant portions being the
repayment of approximately $8.9 million of VFC's long-term debt, which was made
in conjunction with the VFC acquisition and the subsequent repayments of all
amounts outstanding under the then existing revolving credit facility throughout
the course of 1999.
For Fiscal 2000 and 1999, the Company paid deferred financing costs of
approximately $3.8 million and $2.2 million, respectively, related to the
Company's existing and previous credit facilities.
During Fiscal 2000 and 1999 the Company was the recipient of approximately $7.1
million, and $12.3 million in capital contributions. The capital contributions
received during Fiscal 2000 were contributed by KCI in connection with
Recapitalization described above. Approximately $7.5 million was used to repay
the outstanding SARs, including, approximately $420,000 related to outstanding
vested SARs with certain members of operating management of Glendinning and the
inverter business, which were divested in fiscal years 1999 and 2000,
respectively. The remaining holders who are current members of operating
management purchased Common Stock as part of the Recapitalization with a
substantial portion of their after-tax proceeds from the exercise of their SARs.
Simultaneous with the closing of the VFC acquisition, the Company was the
recipient of approximately $3.3 million in capital from KCI. This capital was
raised by KCI through the sale of new stock in KCI.
In September 1999, SG and Keyhold purchased their interests in KCLLC and the
Company received net proceeds of approximately $9.0 million related to the
capital contribution by SG and Keyhold. The proceeds of the SG and Keyhold
contribution, divestitures of subsidiaries and cash from operations enabled the
Company to repay all amounts outstanding under the revolving credit facility in
1999. In addition, the Company prepaid its $1.5 million term loan installment,
due in January 2000, during December 1999.
During Fiscal 2001 and 2000, the Company paid member withdrawals of
approximately $906,000 and $1.4 million, respectively. KCI used approximately
$906,000 and $1.1 million of the funds received during Fiscal 2001 and 2000,
respectively, to repurchase outstanding shares of its common stock from former
shareholders. The remaining withdrawals in 2000 of approximately $300,000 as
well as approximately $2.3 million paid during Fiscal 1999 were for tax
distributions to the members.
In December 1999, the Company consummated the acquisition of the outstanding
minority interest in Guest, which was one of the subsidiaries acquired as part
of the VFC acquisition. The minority shareholders agreed to sell their 7% share
of Guest to the Company for a combination of cash and KCI stock. KCI received
additional membership interests as consideration for the stock distributed to
the minority shareholders.
17
Management believes that the Company's cash flow from operations, together with
its borrowing availability under its existing credit facilities, will be
adequate to meet its anticipated capital requirements for the foreseeable
future.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the consolidated financial statements, included
elsewhere in this Form 10-K, includes a summary of the significant accounting
policies and methods used in the preparation of the Company's consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by the Company.
Revenue recognition: The Company recognizes revenue upon shipment of
products to customers, when title passes and all risks and rewards of
ownership have transferred. The Company considers revenue realized or
realizable and earned when the product has been shipped, the sales price
is fixed or determinable and collectibility is reasonably assured. The
Company reduces revenue for estimated customer returns.
Inventory: Inventories are stated at the lower of cost or market, on a
first-in, first-out basis. The Company purchases materials for the
manufacture of inventory for sale in its various markets. The decision to
purchase a set quantity of a particular inventory item is influenced by
several factors including current and projected cost, future estimated
availability and existing and projected sales to produce certain items.
The Company evaluates the net realizable value of its inventories and
establishes allowances to reduce the carrying amount of these inventories
as deemed necessary.
Goodwill and other intangible assets: At December 31, 2001, the Company
has recorded approximately $125.3 million in goodwill and other intangible
assets related to acquisitions made in 2000 and prior years. The
recoverability of these assets is subject to an impairment test based on
the estimated fair value of the underlying businesses. These estimated
fair values are based on estimates of the future cash flows of the
businesses. Factors affecting these future cash flows include: the
continued market acceptance of the products and services offered by the
businesses; the development of new products and services by the businesses
and the underlying cost of development; the future cost structure of the
businesses; and future technological changes.
Management's Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to product returns, bad debts,
inventories, intangible assets, pensions and post retirement benefits, warranty
obligations and contingencies and litigation. The Company bases its estimates on
historical experience, the use of external resources and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Significant estimates used by the Company that are subject to change include,
but are not limited to (i) the Company's allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments for their open accounts receivable with the Company. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be
required, (ii) allowances established against its inventory carrying value to
record its inventories at net realizable value. If actual market conditions are
less favorable than those projected by management, additional inventory
allowances may be required, (iii) the Company records as necessary, valuation
allowances against its deferred tax assets. Were the Company to determine that
it would not be able to realize its deferred tax assets in the future,
additional valuation allowances could be required, (iv) the Company evaluates
the carrying amounts of its long lived assets for recoverability. If the Company
were to determine that the value ascribed to any of its long-lived assets was
not recoverable an allowance could be required, (v) the Company records the
effects of its existing pension plans in its financial statements using various
assumptions and the use of independent actuaries. If any of the underlying
assumptions were to change, the carrying value of the pension assets and
obligations may require adjustment, and (vi) the Company's financial covenants,
as defined in its credit facilities, were based, in part, by estimates of future
results of the Company's operations. If actual results were not to meet those
expectations, the Company may not meet its financial covenants and may be
required to obtain waivers for those covenants.
18
Inflation
Inflation has not been material to the Company's operations for the periods
presented.
Backlog
The Company's backlog of orders as of December 31, 2001, was approximately $33.4
million. The Company includes in its backlog only accepted purchase orders.
However, backlog is not necessarily indicative of future sales. In addition,
purchase orders can generally be cancelled at any time without penalty.
New Accounting Pronouncements
On January 1, 2001, the Company adopted Financial Accounting Standard ("FAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement did not have a material impact on the Company's consolidated financial
statements.
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the Company reclassify the carrying amount of
certain intangible assets into or out of goodwill.
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill. Goodwill amortization for the years ended December 31,
2001, 2000 and 1999 was approximately $3.6 million, $2.6 million and $2.5
million, respectively.
In the first quarter of 2002 the Company will apply the new rules on accounting
for goodwill and other intangible assets and will make determinations as to what
amounts of goodwill, intangible assets and long term debt should be allocated to
its reporting units. In addition, the Company will perform the first of the
required impairment tests of goodwill. The Company has not yet determined what
the effect, if any, that these tests will have on the earnings and financial
position of the Company.
In October 2001, FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 provides guidance on the accounting for
long-lived assets to be held and used and for assets to be disposed of through
sale or other means. FAS 144 also broadens the definition of what constitutes a
discontinued operation and how such results are to be measured and presented.
FAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of FAS 144 to have a material impact on the
earnings or financial position of the Company.
19
Other Matters
Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risk is related to the variability in
interest rates associated with the $85.0 million outstanding under its term loan
and with any amounts outstanding under its $40-million revolving credit
facility. Under both the term loan and the revolving credit facility, the
Company has the option to lock in a certain interest rate based on either the
base rate, which is equivalent to prime, or LIBOR plus an applicable margin
specified in the agreement. Principally all of the borrowings under the term
loan are locked in at approximately 4.43% until March 15, 2002, when the
underlying LIBOR contract is up for renewal. At December 31, 2001 the Company
had no borrowings under its line of credit and was two payments ahead of
schedule on its term debt. A 1% change in the interest rate for the Company's
credit facilities in place in Fiscal 2001 would have resulted in a change in the
Company's interest expense of approximately $940,000. The senior notes bear a
fixed rate of interest and therefore are not subject to market risk. The Company
does not hold derivative financial instruments or believe that material imbedded
derivatives exist within its contracts.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements for the three years ended
December 31, 2001, together with the report of PricewaterhouseCoopers LLP dated
February 15, 2002, are included elsewhere herein. See Item 14 for a list of the
consolidated financial statements and consolidated financial statement schedule.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors, Executive Officers and Key Employees of the Company
The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company as of December 31,
2001. All directors and officers of the Company hold office until the annual
meeting of stockholders next following their election, or until their successors
are elected and qualified.
20
Name Age Position
- ---- --- --------
John S. Dyson 59 Chairman of the Board of Directors of KCI and KCLLC
Clay B. Lifflander 39 Director of KCI and KCLLC. Chief Executive Officer of
KCLLC.
Robert B. Kay 39 Director of KCI and KCLLC. President of KCLLC.
Alan L. Rivera 39 Director of KCI and KCLLC, Vice President and Secretary of
KCI and KCLLC
George M. Scherer 48 Director of KCI and KCLLC, Vice President of KCI and
President of BWE
Philip E. Berney 38 Director of KCI and KCLLC
Tom R. Wall, IV 42 Director of KCI and KCLLC
Albert W. Weggeman 38 Senior Vice President of Operations
Keith A. McGowan 39 Chief Financial Officer and Vice President of KCLLC
J. Marty O'Donohue 51 President of Marinco
Daryl A. Lilly 41 President of Gits
Michael L. Colecchi 52 President of Hudson and ESP
A. Jack Hoppenjans 65 President of Turner
John S. Dyson has been Chairman of the Board of Directors of the KCI, KCLLC and
Finance Corp. since their inception. Since 1996, Mr. Dyson has been Chairman of
the Board of Directors of Millbrook Capital Management ("Millbrook"), a
management company providing executive level services to the Company under the
Management Agreement. From 1996 to December 2001 he served as Chairman of the
Mayor of the City of New York's Council of Economic Advisors. From 1994 to 1996,
Mr. Dyson served as Deputy Mayor for Finance and Economic Development for the
City of New York. From 1982 to 1993 Mr. Dyson was the Chairman of Dyson-Sinclair
Associates, a management company and the predecessor of Millbrook. From 1976 to
1979, he served as Commissioner of the New York State Department of Commerce.
Mr. Dyson was Vice Chairman of Dyson-Kissner-Moran Corporation from 1970 to
1975, at which time he was appointed to the position of Commissioner of the New
York State Department of Agriculture.
Clay B. Lifflander has served as a director of KCI and KCLLC since their
inception. Mr. Lifflander was elected Chief Executive Officer in November 1999.
Before November 1999, Mr. Lifflander had been President of KCI since its
inception. Mr. Lifflander has been President of Millbrook since 1995, and from
1994 to 1995, Mr. Lifflander was President of the New York City Economic
Development Corporation. Previously, Mr. Lifflander was Managing Director in the
Mergers and Acquisitions Group at Smith Barney Inc., where he worked from 1984
to 1994.
Robert B. Kay was elected President of KCLLC in November 1999. Prior to his
election he had served as the Chief Financial Officer of KCLLC since February
1999. Mr. Kay became a director of KCI and KCLLC in March 1999. From August 1998
through December 1998, Mr. Kay was the Senior Vice-President and Chief Financial
Officer, as well as a director, of Tiffen Manufacturing Corp., a manufacturer
and distributor of photographic and imaging products. From January 1994 through
August 1998, Mr. Kay was a Senior Vice-President and Chief Financial Officer of
Oxford Resources Corp. (renamed NationsBank Auto Leasing, Inc.), a publicly
traded consumer finance company.
Alan L. Rivera has been the Vice President, Secretary and a Director of KCI,
KCLLC and Finance Corp. since their inception. Since September 1996, Millbrook
has employed Mr. Rivera, as Chief Financial Officer and General Counsel. From
1994 to 1996, Mr. Rivera served as Executive Vice President of Finance and
Administration and General Counsel of the New York City Economic Development
Corporation. From 1990 to 1994, Mr. Rivera was an associate with the New York
City law firm of Townley & Updike, specializing in corporate finance matters,
and from 1987 to 1990, Mr. Rivera was an associate with Mudge, Rose, Guthrie,
Alexander and Ferdon, specializing in public finance matters.
21
George M. Scherer has been the Vice President-Manufacturing and a Director of
KCI and KCLLC since their inception. Mr. Scherer has been with BWE since 1978
when he began as Engineering Manager. He has served as the President and a
Director of BWE since 1982. Prior to joining BWE, Mr. Scherer was a product
application engineer for Stow Manufacturing Company, Inc. in Binghamton, N.Y.
from 1975 to 1978. Prior to his position at Stow Manufacturing Company, Inc.,
Mr. Scherer was a plant engineer at GAF Corporation in Binghamton, N.Y. from
1973 to 1975.
Philip E. Berney has served as a director since May 2000, and is a board
designee of Kelso. Mr. Berney joined Kelso & Company, a private investment firm
in 1999, as one of its Managing Directors. Previously, Mr. Berney worked at
Bear, Stearns & Co. Inc. where he was a Senior Managing Director. He also serves
as a director of CDT Acquisition Corp. and Armkel, LLC.
Thomas R. Wall, IV has served as a director since May 2000, and is a board
designee of Kelso. Mr. Wall has held various positions of increasing
responsibility with Kelso & Company, a private investment firm, since 1983, and
currently serves as one of its Managing Directors. Mr. Wall also serves as a
director of AMF Bowling, Inc., Citation Corporation, Consolidated Vision Group,
Inc., Cygnus Publishing, Inc., IXL Enterprises Inc., Mitchell Supreme Fuel
Company, Mosler, Inc., Peebles Inc., and 21st Century Newspapers, Inc.
Mr. Albert W. Weggeman joined the Company in March 2001 as Senior Vice President
of Operations. From November 1997 to March 2001, Mr. Weggeman held positions in
General Electric Company ("GE") Industrial Systems division as Manager - Mergers
& Acquisitions, and most recently as President and General Manager of Midwest
Electric (a GE subsidiary). Prior to GE, Mr. Weggeman was the Director of
Marketing for Norton Coated Abrasives.
Keith A. McGowan was appointed the Chief Financial Officer of KCLLC in November
1999. Prior to this promotion, he had served as KCLLC's Principal Accounting
Officer since April 1999. From April 1998 to March 1999, Mr. McGowan was a
self-employed consultant. From July 1997 to April 1998, he served as the Vice
President of Finance of Digitec 2000, Inc., a distributor of prepaid phone
products. From November 1985 to June 1997, Mr. McGowan was employed by BDO
Seidman, LLP, an accounting and consulting firm, where he was promoted to
Partner in July 1995.
J. Marty O'Donohue has been President of Marinco since 1991. Mr. O'Donohue
managed his own marketing consulting firm, O'Donohue and Associates, from 1988
to 1991.
Michael L. Colecchi has been with Hudson since 1970, when he began as a tool and
die maker. He subsequently assumed various positions of responsibility in
Hudson's manufacturing department until 1980, when he was appointed Plant
Manager. In 1984, Mr. Colecchi was promoted to Vice President of Manufacturing.
In 1989, Mr. Colecchi was promoted to Vice President and General Manager. Mr.
Colecchi has served as President of Hudson since 1996.
Daryl Lilly has been the President of Gits since June of 2000. From February
1999 through June 2000, Mr. Lilly served as Executive Vice President, Vice
President of Product Development and Engineering Manager for Gits. From January
1997 to February 1999, Mr. Lilly was the Plant Engineering Manager for Reman,
Inc. In addition to his experience with the Company, Mr. Lilly has 15 years of
experience in various automotive component manufacturing industries.
A. Jack Hoppenjans has been President of Turner since 1982. He joined Turner in
1960 as a mechanical designer and has held various positions with the Turner
during his 40 year tenure.
22
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The summary table sets forth information with respect to the compensation of
each of the named executive officers and key employees for services provided in
all capacities to the Company for the three years in the period ended December
31, 2001.
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------- ---------------------
Other Annual Securities
Name and Principal Compensation Underlying Options
Position Year Salary ($) Bonus ($) (2)
- ------------------------------ -------- --------------- ---------------- ----------------- ---------------------
Clay B. Lifflander (1),
Chief Executive Officer 2001 -- -- -- --
2000 -- -- -- 30,000
1999 -- -- -- --
Robert B. Kay (3),
President 2001 $295,000 $ -- (4) -- --
2000 $266,178 $138,000 $100,000 30,000
1999 $250,000 $125,000 30,000
Alan L. Rivera (1),
Secretary 2001 -- -- -- --
2000 -- -- -- 7,500
1999 -- -- -- --
--
Albert W. Weggeman (3), SVP
of Operations 2001 $ 174,262 $ -- (4) -- 5,000
2000 -- -- -- --
1999 -- -- -- --
Keith A. McGowan,
Chief Financial Officer 2001 $ 170,000 $ -- (4) -- 192
2000 $ 143,584 $ 48,000 $ 60,000 5,250
1999 $ 90,000 $ 40,000 -- 5,000
George M. Scherer (3),
President of BWE 2001 $ 225,000 $ -- (4) -- --
2000 $ 225,000 $ 23,144 $ 72,500 4,000
1999 $ 225,000 $ 23,000 -- --
(1) The salaries of Clay B. Lifflander and Alan L. Rivera are paid by
Millbrook Capital Management, Inc. ("Millbrook") pursuant to the terms of
a Management Agreement. See "Certain Relationships and Related
Transactions--Management Agreement."
(2) Long terms awards related to options granted to purchase KCI common stock.
(3) The Company is a party to employment agreements with certain of its key
employees.
(4) The 2001 bonuses for Robert B. Kay, Albert W. Weggeman, George M. Scherer
and Keith McGowan have yet to be determined. The bonuses of these
individuals are at the discretion of the Board of Directors of KCLLC.
23
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the options that were granted to named executive
officers of the Company in the fiscal year ended December 31, 2001.
- -----------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates for Option
Individual Grants Term (1)
- ------------------------------------------------------------------------------ -------------------------------
Number of Percent of
Securities Total
Underlying Options
Options /SARS Granted
/SARS to Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price ($/sh) Date 5% 10%
- ------------------ ------------- --------------- --------------- ------------ --------------- --------------
Albert W. Weggeman 5,000 39.3% $125.00 1/02/11 $444,000 $1,159,000
Keith A. McGowan 192 1.5% $125.00 1/02/11 $16,000 $40,000
(1) Market value was determined by the Board of Directors to equal the
exercise price at date of grant.
Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the term of the options. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date and are not
intended to forecast possible future appreciation, if any, in the price of the
KCI common stock. The gains shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the exercise
of the options or the sale of the underlying shares. The actual gains, if any,
on the stock option exercises will depend on the future performance of the KCI
common stock, the holder's continued employment through applicable vesting
periods and the date on which the options are exercised. The potential
realizable value of the foregoing options is calculated by assuming that the
fair market value of the KCI common stock on the date of grant of such options
equaled the exercise price of such options.
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 2001 AND
YEAR END OPTION/SAR VALUES
The following table provides information related to the number and value of
options held by the named executive officers at December 31, 2001.
Number of Securities underlying Unexercised Value of Unexercised In-the-Money Options
Options at Year End (1) at Year End (1)
---------------------------------------------- ---------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Clay B. Lifflander 3,333 26,667 $ - $ -
Robert B. Kay 15,714 34,286 $1,207,115 $92,885
George M. Scherer 444 3,556 $ - $ -
Alan L. Rivera 833 6,667 $ - $ -
Albert W. Weggeman 555 4,445 $ - $ -
Keith A. McGowan 3,522 4,720 $ 115,833 $ 417
(1) Assumes management's estimate of fair market value of $100.00 per share of
common stock at December 31, 2001.
24
Employment and Related Agreements
The employment agreement with Robert B. Kay, President of the Company, is dated
March 1, 1999, terminates March 1, 2004 and provides for, among other things, a
base salary of $295,000 per annum with yearly increases based on the consumer
price index, an annual incentive bonus in the event Mr. Kay and the Company
reach certain performance goals, a car allowance, and vacation and benefits
commensurate with the plans and programs generally offered by the Company to
employees of the same level and responsibility of Mr. Kay. The agreement also
provides that Mr. Kay will not compete with the Company for two years after
termination of his agreement and contains certain confidentiality provisions.
In March 2001, the Company signed an employment agreement with Albert W.
Weggeman, the Company's Senior Vice President of Operations, which terminates in
March 2006. The agreement provides for a base salary of $212,500 per annum and
entitles Mr. Weggeman to merit increases in his compensation after one year of
service. In addition, the agreement provides for incentive compensation based on
the performance of the Company and Mr. Weggeman. The agreement provides for
vacation and benefits commensurate with the plans and programs generally offered
by the Company to employees of the same level and responsibility of Mr.
Weggeman. The agreement also provides that Mr. Weggeman will not (i) compete
with Company for two years after termination of his agreement, and (ii) at any
time following the termination of the agreement directly or indirectly contact
or do business with any customers of the Company as defined in the agreement. In
connection with the execution of the agreement Mr. Weggeman received an option
to purchase 5,000 shares of the Company's common stock at $125 per share. The
option is exercisable for a period of ten years. One-third of the shares
underlying the option vest over a period of three years, beginning at December
31, 2001. The remaining shares vest upon certain events as defined in the option
agreement.
In December 2001, the Company signed a new employment agreement with George M.
Scherer, President of Elliott and board member of KCI and KCLLC, which
terminates in December 1, 2006. The agreement provides for a base salary of
$254,000 per annum, incentive compensation, as defined in the agreement and the
use of a company car. In addition, Mr. Scherer is entitled to vacation and other
benefits commensurate with the plans and programs generally offered by the
Company to employees of the same level and responsibility of Mr. Scherer. The
agreement also provides that Mr. Scherer will not (i) compete with Company for
three years after termination of his agreement, and (ii) for a period of three
years after the termination of the agreement directly or indirectly contact or
do business with any customers or former customers of the Company as defined in
the agreement.
1998 Long-Term Incentive Plan
KCI's 1998 Incentive Compensation Plan (the "1998 Plan") was adopted to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and
consultants of KCI, KCLLC and its subsidiaries and to promote the success of the
Company's business. Options granted under the 1998 Plan may be either incentive
stock options, as defined in Section 422A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options. In addition, stock appreciation
rights, and restricted stock awards and other stock-based awards may be granted
under the 1998 Plan. No further grants will be made under the 1998 Plan. As of
December 31, 2001, options to purchase an aggregate of 51,972 shares were
outstanding under the 1998 Plan at a weighted average exercise price of $40 per
share, of which options to purchase 43,587 shares are currently exercisable.
The 1998 Plan is administered by the Board of Directors of KCI, which has the
power to determine the terms of any options or awards granted thereunder,
including the exercise price, the number of shares subject to the option or
award, and the exercisability thereof. Options and awards granted under the 1998
Plan are generally not transferable, and each option or award is exercisable
during the lifetime of the optionee only by such optionee. The exercise price of
all incentive stock options granted under the 1998 Plan must be at least equal
to the fair market value of the shares of Common Stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of KCI, the exercise price of any stock
option granted must be equal to at least 110% of the fair market value on the
grant date and the maximum term of the option must not exceed five years. The
term of all other options or awards under the 1998 Plan may not exceed ten
years. The specific terms of each option grant or award are approved by KCI's
Board of Directors and are reflected in a written stock option or award
agreement.
25
Key Components Stock Incentive Plan
In May 2000, the Company adopted the Key Components, Inc. Stock Incentive Plan
(the "KCI Plan"). Approximately 205,000 shares of KCI's Common Stock have been
reserved for options issued under the KCI Plan. Options granted under the 1998
Plan may be either incentive stock options, as defined in Section 422A of the
Internal Revenue Code of 1986, as amended, or non-qualified stock options. At
December 31, 2001, the Company had options for approximately 130,000 shares of
common stock at a weighted average exercise price of approximately $118 per
share outstanding under the Plan. Options for approximately 45,000 shares vest
over the next three years. The options for the approximately 85,000 remaining
shares vest only after a change in control of the Company and if the Company's
Preferred Shareholders obtain a targeted return on their investment. The Company
would take a charge to earnings for the accretion in value upon the date that
the Company is reasonably assured that such criteria would be satisfied. At
December 31, 2001, options to purchase approximately 15,100 shares issued under
the KCI Plan were vested.
The KCI Plan is administered by a committee as determined by the Board of
Directors of KCI and in accordance with the Shareholders Agreement. Any options
granted under the KCI Plan must be assigned an exercise price equal to the
market value of KCI Common Stock on the date of the grant of the option. Options
and awards granted under the KCI Plan are generally not transferable, and each
option or award is exercisable during the lifetime of the optionee only by such
optionee. The term of the options under the KCI Plan may not exceed ten years.
The specific terms of each option grant or award are approved by KCI's Board of
Directors and are reflected in a written stock option or award agreement.
Stock Appreciation Rights
In connection with the VFC acquisition, KCI issued SARs to certain members of
operating subsidiary management. The SARs, which were fully vested, entitle the
holder to receive, in cash, the difference between the exercise price and market
value of KCI stock as of the date of exercise. The Company was required to
record as compensation expense any net accretion in the value of the SARs based
on current market value of KCI stock. For Fiscal 2000 and Fiscal 1999, the
Company included in continuing operations approximately $1.6 million and $4.2
million in compensation expense related to the SARs. All of the SARs were
exercised in connection with the Recapitalization, with the holders of the SARs
using a substantial portion of their after-tax proceeds to purchase shares of
KCI common stock.
KCLLC 401(k) Plan
Effective January 1, 2001, the Company merged the 401(k) plans covering
substantially all the employees of the Company, other than those of Acme into
one newly formed KCLLC 401(k) plan (the "KCLLC Plan"). The KCLLC plan covers all
the employees of the Company, other than those of Acme and those covered by the
Gits defined benefit plan. The KCLLC Plan provides for a match of 4% of
employee's compensation up to 2% maximum employer match. The Company has the
ability to make additional discretionary contributions. The benefits of the
KCLLC Plan vest over five years.
The Company also has two 401(k) plans, which the employees of Acme participate
in. There is no Company match in the plans. All funds, which are participant
contributions, are vested to the employee. One of the 401(k) plans was divested
as part of the divestiture of the Electronics division of Acme.
26
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company is comprised of KCLLC, a Delaware corporation which is a parent
holding company for its wholly owned subsidiaries, including Key Components
Finance Corp. KCI holds the entire member interests in KCLLC. KCI has no
material assets other than its interest in KCLLC and has no operations. The
following table sets forth information concerning the beneficial ownership of
KCLLC membership interests, as of February 20, 2002 of (i) each person known to
own beneficially more than 5% of KCLLC membership interest and KCI's outstanding
Common Stock, (ii) by each director, executive officer and key employee of the
Company and/or any of its subsidiaries and (iii) all such directors, executive
officers, and key employees as a group. All shares are owned with sole voting
and investment power, unless otherwise indicated.
Beneficial Owner Address Common Stock Beneficially Owned
Shares (1) % (2)
John S. Dyson Key Components, LLC
200 White Plains Road 223,932 (3) 16.5%
Tarrytown, NY 10591
Clay B. Lifflander Key Components, LLC
200 White Plains Road 176,780(3)(4) 13.0%
Tarrytown, NY 10591
Robert B. Kay Key Components, LLC
200 White Plains Road 21,904(5) 1.6%
Tarrytown, NY 10591
Alan L. Rivera Key Components, LLC
200 White Plains Road 15,595(6) 1.1%
Tarrytown, NY 10591
George M. Scherer Key Components, LLC
200 White Plains Road 53,301(7) 3.9%
Tarrytown, NY 10591
Philip Berney Kelso & Co. 918,065(8) 67.5%
320 Park Avenue
New York, NY 10022
Thomas R. Wall, IV Kelso & Co. 918,065(8) 67.5%
320 Park Avenue
New York, NY 10022
Kelso & Co. Kelso & Co. 918,065(8) 67.5%
320 Park Avenue
New York, NY 10022
Albert W. Weggeman Key Components, LLC 555(9) 0.0%
200 White Plains Road
Tarrytown, NY 10591
Keith A. McGowan Key Components, LLC
200 White Plains Road 3,522(10) 0.3%
Tarrytown, NY 10591
All Officers and Directors (8 persons) Key Components, LLC
200 White Plains Road 1,300,377(11) 95.6%
Tarrytown, NY 10591
27
(1) Unless otherwise indicated, the Company believes that the beneficial
owners of the securities have sole investment and voting power with
respect to such securities, subject to community property laws where
applicable. Shares represent fully diluted share ownership of KCI.
(2) Percentages are based on effective membership percentages including
dilutive effect of outstanding vested stock options exercisable within
60 days.
(3) Includes an aggregate of 113,279 shares of KCI Common Stock owned of
record by the Charles H. Dyson Trust #1 F/B/O John Dyson U/A DTD
8/2/68, Charles H. Dyson Trust #1 F/B/O John Dyson U/A DTD 4/6/76 and
the Margaret M. Dyson Trust #1 F/B/O John Dyson U/A DTD 3/26/68 (the
"Dyson Trusts"), of which Mr. Dyson is a beneficiary and trustee.
(4) Includes 464 shares of KCI Common Stock owned of record by trusts for
the benefit of Mr. Lifflander's minor children, or which Mr. Lifflander
is a trustee and 113,279 shares of KCI Common Stock owned of record by
the Dyson Trusts, of which Mr. Lifflander is a trustee. Also includes
vested options to purchase 3,333 shares of KCI Common Stock.
(5) Represents vested options to purchase 21,904 shares of KCI Common
Stock. See "Executive Compensation."
(6) Includes vested options to purchase 833 shares of KCI Common Stock. See
"Executive Compensation."
(7) Includes vested options to purchase 444 shares of KCI Common Stock. See
"Executive Compensation."
(8) Includes 918,065 shares of KCI Preferred Stock owned by Kelso and its
affiliates, which are convertible at the option of the holder into
918,065 shares of KCI Common Stock.
(9) Represents vested options to purchase 555 shares of KCI Common Stock.
See "Executive Compensation"
(10) Represents vested options to purchase 3,522 shares of KCI Common Stock.
See "Executive Compensation"
(11) Includes 113,279 shares of KCI Common Stock owned of record by the
Dyson Trusts and 464 shares of KCI common stock owned of record by
trusts for the benefit of Mr. Lifflander's minor children, of which Mr.
Lifflander is a trustee and 918,065 shares of KCI Preferred Stock owned
by Kelso and its affiliates.
Item 13. Certain Relationships and Related Transactions
ESP Lease
The Company rents its Leominster; Massachusetts manufacturing facility under an
operating lease agreement entered into with a company that is co-owned by the
former President of ESP and a shareholder of KCI. The lease, which expires on
May 31, 2003, provides for annual rent increases based on the CPI. Rental
payments amounted to $213,000, $208,000 and $203,000 for the three years ended
December 31, 2001, 2000 and 1999, respectively.
BWE Lease
The Company rents one of its manufacturing facilities under an operating lease
agreement entered into with a company which is co-owned by George Scherer who is
a member of the Board of Directors of KCI and KCLLC, a shareholder of KCI and
the President of BWE. The terms of the lease, which expires December 31, 2008,
provide for annual rent increases of 5%. Rental payments amounted to $159,000,
$151,000 and $144,000 in 2001, 2000 and 1999, respectively.
Management Agreement
KCLLC pays management fees to Millbrook, a party related to John S. Dyson,
Chairman of the Boards of KCI and KCLLC and a shareholder of the KCI. The
Company recorded management fees related to Millbrook of $920,000, $920,000, and
$800,000 for Fiscal 2001, 2000 and 1999, respectively. Pursuant to the terms of
a Management Agreement, dated as of May 28, 1998, Millbrook provides the Company
with executive level services, for an annual base management fee equal to
$500,000 (the "Base Fee") payable in quarterly installments, plus an additional
fee of $420,000 per year (the "Additional Fee") for Fiscal 2001 and 2000, and
$300,000 for Fiscal 1999 and 1998, payable following completion of the Company's
audited financial statements for such year. No portion of the Base Fee or the
Additional Fee may be paid at the time that any Event of Default (as defined
therein) exists under the Company's Indenture, dated as of May 28, 1998 (the
"Indenture"). In addition, the Additional Fee may only be paid to the extent
that, after giving effect thereto, the Company's Consolidated Coverage Ratio (as
defined in the Indenture) exceeds 2.0:1, for the fiscal years ending on or prior
to December 31, 1999, and 2.25:1 for the fiscal years ending after December 31,
1999. For Fiscal 2000 the additional fee was increased by $20,000 as a result of
the pro forma growth over Fiscal 1999 and in accordance with the management
agreement. Any management fee, which are not permitted to be paid at the time
due will be deferred (without interest) and will be paid as soon as permitted.
Millbrook is also entitled reimbursement for it's out of pocket expenses. As
part of the Recapitalization, Millbrook agreed with Kelso to a reduced
management fee, commencing in 2002, of $175,000 plus amounts paid to Kelso.
Kelso agreed that amounts paid by Millbrook to Kelso out of management fees
received by Millbrook from KCI or KCLLC would offset KCI's obligation to Kelso
under the Advisory Agreement between Kelso and KCI.
28
During 2000, KCLLC paid Millbrook $825,000 and $400,000, respectively, for
investment advisory services in connection with the acquisition of Acme and the
sale of the inverter business. During 1999, KCLLC also paid Millbrook $500,000
and $350,000, respectively, for investment advisory services related to the sale
of the Keyhold membership interest and the sale of Multiplex.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Form 10-K Page
--------------
(a) Documents filed as part of the Form 10-K
(1) Financial Statements:
Report of Independent Accountants 37
Consolidated Balance Sheet at December 31, 2001 and 2000 38
Consolidated Statement of Income for the three years ended December 31, 2001 39
Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2001 40
Consolidated Statement of Cash Flows for the three years ended December 31, 2001 41
Notes to Consolidated Financial Statements 42-61
(2) Financial Statement Schedules:
Valuation and Qualifying Accounts (Schedule II) 62
(b) Reports on Form 8-K- none
-------------------
(c) Exhibits
See list of exhibits on page 29
(d) Financial Statement Schedules
See (a)(2) above 62
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit Description Reference
------- -------------------------------------------------------------------------------------- ---------
2.1 Agreement and Plan of Merger. (1)
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of December 28, 1998. (1)
2.1 Agreement and Plan of Merger, dated as of May 26, 2000 (11)
2.2 Amendment No. 1 to the Agreement and Plan of Merger, dated as of September 18, 2000 (11)
29
2.3 Amendment No. 2 to the Agreement and Plan of Merger, dated as of October 6, 2000 (11)
2.4 Letter of Transmittal relating to surrendered Shares. (7)
3.1 Certificate of Formation of KCLLC. (2)
3.2 Limited Liability Company Agreement of KCLLC. (2)
3.3 Certificate of Incorporation of Finance Corp. (2)
3.4 By-Laws of Finance Corp. (2)
3.5 Amended and Restated Limited Liability Company Operating Agreement of KCLLC, dated (5)
as of September 1, 1999.
4.1 Indenture, dated as of May 28, 1998, by and among KCLLC, Finance Corp, BWE, Hudson, (2)
ESP and United States Trust Company of New York, as trustee.
4.2 Form of 10 1/2% Senior Notes, Due 2008 (filed as part of Exhibit 4.1). (2)
4.3 Exchange and Registration Rights Agreement, dated May 20, 1998, among KCLLC, Finance (2)
Corp, BWE, Hudson, ESP and Societe Generale Securities Corporation.
4.4 Supplemental Indenture, dated as of August 31, 1999, among KCLLC, Finance Corp, Gits (5)
Manufacturing Co., LLC Marine Industries, LLC, Turner Electric, LLC, Hudson Lock,
LLC, BWE Manufacturing, LLC, ESP Lock, LLC and United States Trust Company.
4.5 Amendment to Indenture dated August 31, 1999, among KCI and certain of its (5)
subsidiaries and United States Trust Company.
10.1 Purchase Agreement among KCLLC, Finance Corp, BWE, Hudson, ESP and Societe Generale (2)
Securities Corporation, dated May 20, 1998.
10.2 Form of 10 1/2% Senior Notes, issued by KC LLC and Finance Corp. to certain (2)
purchasers, and dated as of May 28, 1998 (filed as part of Exhibit 4.1).
10.3 Employment Agreement between BWE and George M. Scherer, dated as of January 16, (2)
1996, as amended March 16, 1996.
10.4 Employment Agreement between KCI and Michael L. Colecchi, dated as of May 15, 1997, (2)
as amended April 27, 1998.
10.5 Employment Agreement between ESP and August M. Boucher, dated as of December 10, (2)
1997.
10.7 1998 Long-Term Incentive Plan of KCI. (2)
10.8 Management Agreement, dated May 28, 1998, with Millbrook Capital Management Inc. (2)
10.9 Lease, dated January 1, 1989, between BWE and Empire Realty Company. (2)
10.10 Lease, dated December 1, 1992, between RAD Lock, Inc. and S&S Properties, Inc. (2)
10.12 Lease Agreement, dated June 7, 1990, between BWE and Route 12A Associates, as (2)
amended.
10.12 Lease of Real Property, dated June 1, 1993, between ESP and Massachusetts Colony (2)
Corporation.
10.13 Commercial Lease and Deposit Receipt, dated August 27, 1998, between Hudson and Jim (2)
Jelsema.
10.14 Credit and Guaranty Agreement, dated as of July 27, 1998, among the Issuers, BWE, (2)
Hudson, ESP, Societe Generale, as agent and certain financial institutions named
therein.
10.15 Guarantor Security Agreement, dated as of July 27, 1998, among BWE, Hudson, Finance (2)
Corp., ESP and Societe Generale.
10.16 Borrower Security Agreement, dated as of July 27, 1998, between KCLLC and Societe (2)
Generale.
10.17 Pledge Agreement, dated as of July 27, 1998, between KCLLC and Societe Generale. (2)
10.18 Form of Amended and Restated Credit and Guaranty Agreement, dated as of January 19, (3)
1999, by and among Key Components, LLC, as Borrower, certain of
its subsidiaries, as Guarantors, certain financial
institutions, as Lenders and Societe Generale, as Agent for
Lenders.
10.19 Form of Valley Forge Pledge Agreement, dated as of January 19, 1999, by Valley Forge (3)
Corporation and in favor of Societe Generale.
10.20 Form of Amended and Restated Pledge Agreement, dated as of January 19, 1999, made by (3)
KCLLC in favor of Societe Generale.
30
10.21 Form of Amended and Restated Borrower Security Agreement, dated as of January 19, (3)
1999, made by KCLLC in favor of Societe Generale.
10.22 Form of Amended and Restated Guarantor Security Agreement, dated as of January 19, (3)
1999, made by BW Elliott Manufacturing Co., Inc., Hudson Lock, Inc., ESP Lock
Products Inc., KCI Acquisition Corp., Valley Forge Corporation, Cruising Equipment
Company, Force 10 Marine Ltd., Gits Manufacturing Company, Inc., Glendinning Marine
Products, Inc., Atlantic Guest, Inc., Heart Interface Corporation, Marine Industries
Company, Multiplex Technology, Inc., Turner Electric Corporation, VFC Acquisition
Company, Inc., and Valley Forge International Corporation in favor of Societe
Generale.
10.23 Agreement and General Release between KCLLC and James D. Wilcox, dated March 9, 1999. (4)
10.24 Form of Employment Agreement between the Company, Millbrook and Robert Kay, dated (4)
March 1, 1999.
10.25 Share Purchase Agreement among KCI, KCLLC, SGCP and Keyhold dated August 12, 1999. (5)
10.26 Registration Rights Agreement of KCLLC, dated as of September 1, 1999, among KCI, (5)
KCLLC, SGCP and Keyhold.
10.27 Shareholders Agreement dated as of September 1, 1999, among KCLLC, KCI, SGCP, (5)
Keyhold and certain other shareholders of KCI.
10.28 Amendment No. 2 to Amended and Restated Credit and Guaranty Agreement, dated August (5)
31, 1999 among KCLLC and Certain of its Subsidiaries, Certain Lenders and Societe
Generale.
10.29 Joinder Agreement, dated as of August 31, 1999, by Certain Subsidiaries of KCLLC to (5)
Societe Generale.
10.30 Stock Purchase Agreement dated February 24,2000 by and between Trace Holdings LLC (6)
and KCLLC and KCLLC Holdings, Inc. with respect to all outstanding capital stock of
Heart and Cruising.
10.31 Amended Stock Purchase Agreement dated February 24,2000 by and between Trace (8)
Holdings LLC and KCLLC and KCLLC Holdings, Inc. with respect to all outstanding
capital stock of Heart and Cruising.
10.32 Recapitalization agreement among KELSO Investment Associates VI, L.P., KEP VI, LLC, (9)
Key Components, Inc., the shareholders of Key Components, Inc., and SGC Partners II,
LLC dated May 8, 2000.
10.33 Credit and Guaranty Agreement, dated as of September 29, 2000 among Key Components, (10)
LLC, as Borrower, certain of its Subsidiaries and Equity Holders, as Guarantors, Certain
Financial Institutions and Other Persons, as Lenders, First Union National Bank, as
Administrative Agent for the Lenders, and Societe Generale, as Syndication Agent for
the Lenders.
10.34 Key Components, LLC Pledge Agreement, dated as of November 21, 2000, by Key (7)
Components, LLC and in favor of First Union National Bank.
10.35 Key Components, Inc. Pledge Agreement, dated as of November 21, 2000, by Key (7)
Components, Inc. and in favor of First Union National Bank.
10.36 KCI Merger Corp. Pledge Agreement, dated as of November 21, 2000, by KCI Merger (7)
Corp. and in favor of First Union National Bank.
10.37 Guarantor Security Agreement, dated as of November 21, 2000, made by B.W. Elliott (7)
Manufacturing Co., LLC, Hudson Lock, LLC, ESP Lock Products, LLC, Gits Manufacturing
Company, LLC, Atlantic Guest, Inc., Guest Building, LLC, Marine Industries Company,
LLC, Turner Electric, LLC, KCLLC Holdings, Inc. VFC Acquisition Company, Inc.,
Keyhold, Inc., Key Components, Inc., KCI Merger Corp., Acme Electric Corporation,
Acme-URDC, Inc., Acme Electric Mexico Holdings, I, Inc., Acme Electric Mexico
Holdings, II, Inc., and in favor of First Union National Bank.
31
10.38 Employment Agreement between KCI and Albert W. Weggeman dated as of March 9, 2001 (13)
10.39 Employment Agreement between KCI and George M. Scherer dated as of December 1, 2001 (13)
20.1 Notice of Merger, dated November 21, 2000. (7)
21.1 List of the Company's Subsidiaries. (12)
25.1 Form T-1 Statement of Eligibility of Trustee. (2)
(1) Previously filed with the Company's Schedule 14D-1, filed on December
9,1998 (Commission File No.5-13949).
(2) Previously filed with the Company's registration statement on Form S-4
(File No. 333- 59675), which was declared effective on November 9,
1998.
(3) Previously filed with the Company's Current Report on Form 8-K (File
No. 333-58675-01), filed February 3, 1999.
(4) Previously filed with the Company's Form 10-K for the year ended
December 31, 1998.
(5) Previously filed with the Company's Form 10-Q for the three months
ended December 31, 1999.
(6) Previously filed with the Company's Form 10-K for the year ended
December 31, 1999.
(7) Previously filed with the Company's Form 8-K filed on December 6, 2000.
(8) Previously filed with the Company's Form 8-K filed on April 19, 2000.
(9) Previously filed with the Company's Form 10-Q for the three months
ended June 30, 2000.
(10) Previously filed with the Company's Form 10-Q for the three months
ended September 30, 2000.
(11) Previously filed with Schedule 14A of Acme, filed October 12,
2000(Commission File No. 001-08277).
(12) Previously filed with the Company's Form 10-K for the year ended
December 31, 2000.
(13) Filed herewith.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KEY COMPONENTS, LLC
Dated: February 22, 2002 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
Dated: February 22, 2002 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
President
Dated: February 22, 2002 By: /s/ Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: February 22, 2002 By: /s/ John S. Dyson
-----------------
John S. Dyson
Director
Dated: February 22, 2002 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Director
Dated: February 22, 2002 By: /s/ Alan L. Rivera
------------------
Alan L. Rivera
Director
Dated: February 22, 2002 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
Director
Dated: February 22, 2002 By: /s/ George M. Scherer
---------------------
George M. Scherer
Director
Dated: February 22, 2002 By: /s/ Philip E. Berney
--------------------
Philip E. Berney
Director
Dated: February 22, 2002 By: /s/ Thomas R. Wall, IV
----------------------
Thomas R. Wall, IV
Director
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report to be signed on its behalf by the undersigned thereunto
duly authorized.
KEY COMPONENTS FINANCE CORP.
Dated: February 22, 2002 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
Dated: February 22, 2002 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
President
Dated: February 22, 2002 By: /s/ Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
35
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: February 22, 2002 By: /s/ John S. Dyson
-----------------
John S. Dyson
Director
Dated: February 22, 2002 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Director
Dated: February 22, 2002 By: /s/ Alan L. Rivera
------------------
Alan L. Rivera
Director
Dated: February 22, 2002 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
Director
Dated: February 22, 2002 By: /s/ George M. Scherer
---------------------
George M. Scherer
Director
Dated: February 22, 2002 By: /s/ Philip E. Berney
--------------------
Philip E. Berney
Director
Dated: February 22, 2002 By: /s/ Thomas R. Wall, IV
----------------------
Thomas R. Wall, IV
Director
36
Report of Independent Accountants
To the Board of Directors and Member of
Key Components, LLC:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 29 present fairly, in all material
respects, the financial position of Key Components, LLC and its subsidiaries at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14(a)(2) on page 29 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, CT
February 15, 2002
37
Key Components, LLC
and subsidiaries
Consolidated Balance Sheets
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
<
December 31, 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current:
Cash $ 5,080 $ 3,775
Accounts receivable, net of allowance for doubtful accounts of
$1,004 and $808 in 2001 and 2000, respectively 25,461 29,129
Inventories 30,412 35,337
Prepaid expenses and other current assets 1,986 2,158
Prepaid income taxes 1,316 3,699
Deferred income taxes 4,025 3,614
Assets held for sale 2,250 9,842
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 70,530 87,554
Property, plant and equipment, net 25,891 27,864
Goodwill, net 119,067 118,455
Deferred financing costs, net 5,259 6,675
Intangibles, net 314 752
Prepaid pension cost 3,588 3,311
Other assets 1,070 1,060
- ---------------------------------------------------------------------------------------------------------------------
$225,719 $ 245,671
- ---------------------------------------------------------------------------------------------------------------------
Liabilities and Member's Equity
Current liabilities:
Current portion of long-term debt $ 6,305 $ 8,195
Accounts payable 8,876 11,552
Accrued compensation 2,814 3,198
Accrued expenses 7,572 7,271
Accrued acquisition costs 1,414 3,767
Accrued interest 888 904
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 27,869 34,887
Long-term debt 159,532 174,516
Accrued lease costs 525 553
Deferred income taxes 5,056 4,982
Other long-term liabilities 1,062 2,883
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 194,044 217,821
Commitments and contingencies
Member's equity 31,675 27,850
- ---------------------------------------------------------------------------------------------------------------------
$ 225,719 $ 245,671
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
38
Key Components, LLC
and subsidiaries
Consolidated Statement of Operations
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Net sales $ 193,817 $ 160,465 $ 144,400
Cost of goods sold 122,975 93,847 85,079
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 70,842 66,618 59,321
Selling, general and administrative expenses 41,208 30,290 30,001
Amortization of goodwill 3,558 2,626 2,464
Cumulative adjustment for Aerospace (721) - -
Stock appreciation rights compensation expense and other
nonrecurring expenses 311 2,334 4,510
- ---------------------------------------------------------------------------------------------------------------------
Income from operations 26,486 31,368 22,346
Other income (expense):
Other income 376 799 465
Recapitalization expenses - (7,937) -
Interest expense (16,573) (15,159) (15,417)
- ---------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes,
discontinued operations and extraordinary
item 10,289 9,071 7,394
Provision for income taxes 5,558 5,172 2,551
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations 4,731 3,899 4,843
- ---------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations of the inverter business, net - (146) (28)
Loss on disposal of the inverter business, net - (3,842) -
- ---------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations - (3,988) (28)
- ---------------------------------------------------------------------------------------------------------------------
Extraordinary loss on early extinguishment of debt (net
of income tax benefit of $828) - (1,227) -
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,731 $ (1,316) $ 4,815
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
Key Components, LLC
and subsidiaries
Consolidated Statements of Member's Equity
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Member's equity, beginning of year $27,850 $ 9,411 $ 7,674
Capital contributions - 7,111 3,336
Capital distributions (906) (1,420) (2,317)
Tax benefits of options exercised - 698 -
Tax benefit of deduction related to capitalized
investment costs - 221 -
Option exercise compensation charge - 45 -
Redeemable member's interest accretion to market value - (3,087) (4,097)
Reclass of redeemable member's interest - 16,187 -
Net income (loss) 4,731 (1,316) 4,815
- ---------------------------------------------------------------------------------------------------------------------
Member's equity, end of year $31,675 $27,850 $ 9,411
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
Key Components, LLC
and subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 4,731 $ (1,316) $ 4,815
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss of discontinued operations - 3,988 28
Extraordinary loss on early extinguishment of debt - 1,227 -
Provision for doubtful accounts 570 148 164
Depreciation and amortization 9,056 6,818 6,768
Amortization of deferred finance costs 933 1,016 875
Tax benefits from equity transactions - 919 -
Deferred income taxes 1,207 1,021 (128)
Loss (gain) on disposal of assets - 1 (8)
Option compensation charge - 45 -
Stock appreciation rights - 1,556 4,211
(Increase) decrease in (net of effects of acquisitions):
Accounts receivable 4,214 (1,935) (630)
Inventories 6,985 (4,708) (91)
Prepaid expenses and other assets 2,662 (670) 77
Increase (decrease) in (net of effects of acquisitions):
Accounts payable (3,419) 722 314
Accrued expenses and other liabilities (5,007) (1,025) 2,737
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 21,932 7,807 19,132
Net cash (used in) provided by discontinued
operations - (99) 1,350
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 21,932 7,708 20,482
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired - (46,319) (87,319)
Proceeds from business dispositions - 10,721 7,406
Capital expenditures (4,131) (3,089) (2,680)
Cash provided by assets held for sale 666 - -
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operations (3,465) (38,687) (82,593)
Net cash used in discontinued operations - - (258)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,465) (38,687) (82,851)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of term debt, notes payable and other
obligations (19,056) (67,583) (37,050)
Proceeds from issuance of debt 2,800 103,700 82,638
Deferred financing costs - (3,771) (2,189)
Repayment of outstanding stock appreciation rights - (7,454) -
Capital withdrawals (906) (1,420) (2,317)
Capital contributions - 7,111 12,339
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (17,162) 30,583 53,421
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,305 (396) (8,948)
Cash and cash equivalents, beginning of year 3,775 4,171 13,119
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,080 $ 3,775 $ 4,171
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Basis of Presentation and Nature of Operations
The consolidated financial statements as of and for the three years
ended December 31, 2001 include the financial statements of Key
Components, LLC ("KCLLC"), a Delaware corporation and its
wholly-owned subsidiaries (collectively the "Company") from their
respective dates of acquisition. All significant intercompany
transactions have been eliminated.
The Company is in the business of the manufacture and sale of custom
engineered essential componentry in a diverse array of end use
markets. Through its two business segments, mechanical engineered
components and electrical components, the Company targets its
products to original equipment manufacturers. The Company's
electrical components business, whose product offerings include
power conversion products, specialty electrical components and
high-voltage utility switches which are manufactured by its
subsidiaries Acme Electric Corporation ("Acme"), Marine Industries,
LLC ("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner Electric,
LLC ("Turner"). The Company's mechanical engineered components
business, whose product offerings consist primarily of medium
security lock products and accessories, flexible shaft and remote
valve control components and turbo-charger actuators, are
manufactured by Hudson Lock, LLC ("Hudson"), ESP Lock Products, LLC
("ESP"), B.W. Elliott Manufacturing, LLC ("BWE") and Gits
Manufacturing, LLC ("Gits").
KCLLC's assets are limited to the Company's corporate office and its
investments in its subsidiaries. KCLLC's financial statements
include the related expenses of operating the Company's corporate
office. At December 31, 2001, KCLLC was wholly-owned by Key
Components, Inc. ("KCI"), a New York corporation. KCI holds no other
assets other than its investments in KCLLC and has no operations.
From August 31, 1999 to December 31, 2000, Keyhold, Inc.
("Keyhold"), a Delaware corporation (Note 9(b)) held a minority
membership in KCLLC. In connection with the Recapitalization (Note
9(a)) Keyhold was acquired by KCI in May 2000. On December 31, 2000,
Keyhold was merged into KCI. From its date of acquisition by KCI to
December 31, 2000, all transactions of or obligations related to
Keyhold are reflected in the consolidated financial statements of
KCLLC.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates used by the Company that
are subject to change include, but are not limited to, provision for
doubtful accounts, the Acme acquisition accruals (Note 2) and the
estimated liabilities related to the pension plans of the Company
(Note 10). Actual results could differ from the estimates used by
the Company.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, on a
first-in, first-out basis.
42
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over useful lives of the assets as
follows:
--------------------------------------------------------------
Buildings and improvements 20 - 40 years
Equipment 3 - 10 years
Furniture and fixtures 3 - 10 years
Leasehold improvements Shorter of term of lease or
useful life of the asset
--------------------------------------------------------------
Income Taxes
From May 31, 1997 to August 31, 1999, BWE, Hudson and ESP and its
then parent company, KCI, were subchapter S corporations, resulting
in the stockholders of KCI being personally liable for the taxes due
on the income of those companies. Prior to August 31, 1999, Valley
Forge Corporation ("VFC") (Note 2) and its subsidiaries were C
corporations and were responsible for paying taxes on their income.
Effective August 31, 1999, VFC was merged into KCLLC and most of
VFC's subsidiaries, as well as BWE, Hudson and ESP, were converted
to limited liability company ("LLC") status. These conversions were
accomplished by merging each of the existing subsidiaries into a
newly organized Delaware LLC. Upon conversion to LLC status of the
subsidiaries, the two members of KCLLC at that time, KCI and
Keyhold, became responsible for the taxes due on the income of the
Company, apart from the subsidiaries that remained C corporations.
As KCI remained an S corporation after the conversions, its
stockholders remained personally liable for the taxes on income
passed through to KCI from KCLLC. Prior to May 23, 2000, KCLLC
distributed to its members the estimated amount of taxes owed on
income of the Company. Upon the consummation of the Recapitalization
(Note 9(a)), KCI automatically converted to a C corporation for tax
purposes. At the same time, KCI acquired Keyhold, which was a C
corporation for tax purposes. Beginning May 23, 2000, the Company
reflects its tax provision as if it were a C corporation, the status
of its member. Keyhold was merged into KCI effective December 31,
2000.
For the year ended December 31, 1999, the Company's provision for
income taxes relates primarily to VFC's consolidated taxable income
(as a C corporation) and the taxable income of one subsidiary not
converted to LLC status. For the years ended December 31, 2001 and
2000, the Company's provision primarily relates to the C corporation
taxes that the Company is responsible for on the taxable income of
the Company.
Deferred income taxes have been recorded to reflect the tax
consequences on future years of temporary differences between the
tax bases of assets and liabilities and their financial reporting
amounts at year-end. Valuation allowances are recorded when
necessary to reduce deferred tax assets to the amounts expected to
be realized.
43
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Intangibles
Intangibles at December 31, 2001 primarily consist of costs
associated with a licensing agreement and covenants not to compete
arising from business acquisitions. These assets are being amortized
on a straight-line basis over the lives of the related agreements,
which range from five to seven years. Amortization of intangibles
charged to continuing operations amounted to approximately $438,000,
$506,000 and $681,000 for 2001, 2000 and 1999, respectively.
Accumulated amortization at December 31, 2001 and 2000 was
approximately $3.6 million and $3.1 million, respectively.
Long-lived Assets
Whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, the Company
evaluates the basis of its long-lived assets based on expectations
of undiscounted cash flows related to those assets. Based on its
most recent analysis, the Company believes that no impairment of its
long-lived assets exists at December 31, 2001.
Goodwill
Goodwill represents the excess of the cost of acquired businesses
over the fair market value of their net tangible assets. Through
December 31, 2001 (see "New Accounting Pronouncements" below)
goodwill was being amortized on the straight-line method over
thirty-five to forty years. Accumulated amortization at December 31,
2001 and 2000 was approximately $10.3 million and $6.7 million,
respectively.
Deferred Financing Costs
Debt issuance costs have been deferred and are being amortized on a
straight-line basis over the lives of the financings. Amortization
charged to continuing operations amounted to approximately $933,000,
$1,016,000 and $875,000 for the years ended December 31, 2001, 2000
and 1999, respectively. Accumulated amortization at December 31,
2001 and 2000 was approximately $2.2 million and approximately $1.2
million, respectively.
Revenue Recognition
The Company recognizes revenue upon shipment of products to
customers, when title passes and all risk and rewards of ownership
have been transferred.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company's customer base includes customers in a
multitude of industries. Some of its larger customers are focused in
the marine, turbocharger, aerospace, lawn and garden and office
furniture industries. Due to the distribution of its customer base
amongst a large array of end user markets, management does not
believe that a significant concentration of credit risk exists at
December 31, 2001.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash,
accounts receivable, accounts payable and accrued expenses,
management believes that the carrying amounts approximate fair value
due to their short maturities. The estimated fair value of the
Company's long-term debt is based on the current rates offered to
the Company for debt of similar maturities and approximates carrying
value at December 31, 2001. The Company's Senior Notes (Note 6) are
currently market listed at approximately 93% of the their face
value, however the market for the notes is highly inactive.
44
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
New Accounting Pronouncements
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement did not impact
on the Company's consolidated financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial
recognition and measurement of intangible assets apart from
goodwill. SFAS 141 also requires that upon adoption of SFAS 142 the
Company reclassify the carrying amount of certain intangible assets
into or out of goodwill.
The provisions of SFAS 142; (i) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (ii) require that
goodwill and indefinite-lived intangible assets be tested annually
for impairment (and in interim periods if certain events occur which
would impact the carrying value of such assets), and (iii) require
that the Company's operations be formally identified into reporting
units for the purpose of assessing potential future impairments of
goodwill.
In the first quarter of 2002 the Company will apply the new rules on
accounting for goodwill and other intangible assets and make the
determinations as to what amounts of goodwill, intangible assets and
long term debt should be allocated to its reporting units. In
addition, the Company will perform the first of the required
impairment tests of goodwill. The Company has not yet determined
what the effect, if any, that these tests will have on the earnings
and financial position of the Company. Goodwill amortization for the
years ended December 31, 2001, 2000 and 1999 was approximately $3.6
million, $2.6 million and $2.5 million, respectively.
In October 2001, FASB issued FAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." FAS 144 provides
guidance on the accounting for long-lived assets to be held and used
and for assets to be disposed of through sale or other means. FAS
144 also broadens the definition of what constitutes a discontinued
operation and how such results are to be measured and presented. FAS
144 is effective for fiscal years beginning after December 15, 2001.
The Company does not expect the adoption of FAS 144 to have a
material impact on the earnings or financial position of the
Company.
Reclassifications
Certain reclassifications were made to conform prior periods to the
current year presentation.
2. Acquisitions and Dispositions
During the three years ended December 31, 2001, the Company acquired
the entities described below, which were accounted for by the
purchase method of accounting, and the results of operations have
been included in the consolidated financial statements since the
date of acquisition.
45
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(a) Acme Electric Corporation
On November 21, 2000, the Company acquired all of the outstanding
shares of Acme for a purchase price of approximately $47.3 million
and assumed liabilities of approximately $28.8 million. In
conjunction with the acquisition, the Company repaid approximately
$10.4 million of Acme's outstanding long-term debt out of the
approximately $28.8 million of liabilities assumed as part of the
acquisition. The Company recorded the excess purchase price over net
assets acquired of approximately $33.1 million as goodwill.
Approximately $3.5 million was recorded to goodwill in 2001 related
to the changes resulting from retaining Aerospace, from actual
results of Electronics and other changes. The Company ascribed a
thirty-five year useful life to goodwill.
At the time of the acquisition, the Company decided to divest the
Acme Aerospace ("Aerospace") division and sell the Acme Electronics
("Electronics") division. In accordance with Emerging Issues Task
Force ("EITF") Bulletin 87-11, "Allocation of Purchase Price to
Assets to be Sold," the Company recorded the anticipated net
proceeds from the sale of these subsidiaries adjusted for the
anticipated net cash inflows during the holding period (date of
acquisition to date of sale) as assets held for sale. In addition,
the net earnings from these subsidiaries during the holding period
are excluded from the operations of the Company, in accordance with
EITF 87-11. Such results and estimated sale proceeds plus the net
cash inflows during the holding periods have been included in
goodwill. Aerospace manufactures lightweight high power battery
chargers and related power systems for aerospace applications.
Electronics is a contract electronics manufacturer for data storage,
telecommunications and medical electronic applications.
Based on the strength of the operating performance of Aerospace,
which management believes is sustainable, on June 1, 2001, the
Company decided to retain rather than divest Aerospace. On that date
and in accordance with EITF 90-6, "Accounting for Certain Events Not
Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit
to be Sold," the Company reallocated the purchase price of Acme as
if Aerospace had never been held for sale and recorded a cumulative
adjustment for the results of operations of Aerospace from the date
of acquisition through May 31, 2001 of $721,000 comprised of the
following:
(In thousands)
--------------------------------------------------------------
Net sales $4,988
Cost of goods sold (including depreciation of $75) 3,367
-------
Gross profit 1,621
Selling, general and administrative expenses
(including depreciation of $33) 900
--------------------------------------------------------------
Income from operations $721
--------------------------------------------------------------
In December 2001, the Company executed an agreement to sell the
Electronics division of Acme. The agreement, which closed on
February 15, 2002, calls for the Company to receive $100,000 in cash
and a 7% per annum $300,000 note receivable due on February 15,
2006. In addition, contingent consideration of up to $2.1 million
will be earned, if the Electronics division meets certain annual
revenue targets over the next 48 months. Contingent consideration
earned, if any, including interest at 7% per annum, will be paid on
the fourth anniversary from the date such contingent consideration
is earned and will be recorded against goodwill. At December 31,
2001, the approximately $2.3 million recorded as assets held for
sale consisted primarily of the tax deduction the Company will
receive in 2002 from the tax loss generated from the sale.
As part of the Company's plan of integrating the Acme acquisition,
the Company accrued approximately $2.3 million of severance and
related costs and $260,000 of lease exit costs related to exiting
Acme's corporate office. At December 31, 2001, $1.2 million of
payments had been made related to these accruals. The Acme corporate
office was closed in October 2001. The accrued acquisition costs
represents a significant estimate and is subject to change based on
actual results.
46
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(b) Valley Forge Corporation
On January 19, 1999, the Company acquired all of the outstanding
shares of VFC for a purchase price of approximately $84.0 million
(including the issuance of stock appreciation rights of
approximately $1.4 million) and assumed liabilities of approximately
$21.7 million. In conjunction with the acquisition, the Company
repaid approximately $8.9 million of VFC's outstanding long-term
debt out of the approximately $21.7 million of liabilities assumed
as part of the acquisition. VFC manufactures electrical and
mechanical engineered components sold to original equipment
manufacturers ("OEM"), dealers, and distributors. The Company
recorded the excess purchase price over net assets acquired of
approximately $52.5 million as goodwill. The Company ascribed a
thirty-five year useful life to goodwill.
At the time of the acquisition, the Company decided to divest two
VFC subsidiaries, Force 10 Marine Company ("Force 10") and Multiplex
Technology, Inc. ("Multiplex"). In accordance with EITF 87-11, the
Company recorded the anticipated net proceeds from the sale of these
subsidiaries adjusted for the anticipated net cash outflows during
the holding period (date of acquisition to date of sale) as assets
held for sale. In addition, the net earnings from these subsidiaries
during the holding period were excluded from the operations of the
Company, in accordance with EITF 87-11. Such results and sale
proceeds have been included in goodwill. The sale of Force 10 was
completed on February 26, 1999 for proceeds before taxes of $1.7
million in cash. Multiplex was sold on May 28, 1999 for proceeds
before taxes of approximately $4.3 million. The tax liability for
the sales of Force 10 and Multiplex was approximately $144,000.
On November 30, 1999, the Company sold the stock of Glendinning
Marine Products, Inc. ("Glendinning"), a former subsidiary of VFC,
for approximately $3.0 million. The Company received approximately
$2.1 million in cash and the new owners assumed the outstanding
mortgage of the Glendinning facility.
In November 1999, management of the Company decided to withdraw from
the business of the manufacture and sale of power inverters and
related instrumentation by selling its interests in Heart Interface
Corporation ("Heart"), Cruising Equipment Company ("Cruising") and
Mastervolt International B.V. ("Mastervolt"), all of which were
acquired as part of the VFC acquisition. In accordance with
Accounting Principles Board Opinion 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions", the Company recorded the net assets of
Heart, Cruising, and Mastervolt as net assets of discontinued
operations and reported the results of operations as loss from
discontinued operations. At December 31, 1999, the Company had made
no accrual of costs of disposal related to the sale of their
interests since it had been management's estimate that the Company
would record gains from the sales at that time.
In April 2000, the Company consummated the sale of Heart and
Cruising. The Company received approximately $9.0 million in
proceeds before any transaction related expenses. Of the $9.0
million of proceeds, $600,000 was placed in escrow in accordance
with the agreement. The Company recorded a loss on disposal of Heart
and Cruising of approximately $3.3 million. To the extent that cash
is released to the Company from escrow, such funds will be recorded
as a gain at that time. In July 2001, the Company received notice of
a claim against the escrow. At December 31, 2000, the Company had
approximately $646,000 of restricted cash related to the escrow
included in other assets. The Company has responded to the claim and
is awaiting further response from the new owners of Heart and
Cruising.
On December 29, 2000, the Company sold its interests in Mastervolt
to the minority shareholders of Mastervolt. The Company received
approximately $2.3 million before related expenses and recorded a
loss on disposal of approximately $525,000.
47
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The summary of the operations of the power inverter business for the
years ended December 31, 2000 and 1999 are as follows:
December 31, 2000 1999
--------------------------------------------------------------------------------------------------------
(in thousands)
Net sales $ 6,573 $23,956
------- -------
Net loss from operations of the inverter business (net of income taxes
(benefit) of ($111) and $149, respectively) $ (146) $ (28)
Loss on disposal of the inverter business (net of income taxes of $0) (3,842) --
------- -------
Net loss of discontinued operations (net of income taxes (benefit) of ($111)
and $149, respectively) $(3,988) $ (28)
--------------------------------------------------------------------------------------------------------
On an unaudited pro forma basis, assuming that the Acme acquisition,
the Recapitalization transaction (Note 9(a)) and the termination of
KCI's S election (Note 1) for tax purposes, and for the 1999
presentation that the VFC acquisition (Note 2(b)), the sale of
Glendinning and decision to dispose of the inverter business had
occurred on January 1, 1999, the consolidated results of operations
of the Company would have been as follows for the years ended
December 31, 2000 and 1999:
Year ended December 31, 2000 1999
------------------------------------------------------------------------------------------------------------
(Unaudited) (In thousands)
Pro forma net sales $220,615 $205,987
Pro forma income from continuing operations $ 12,666 $ 5,523
Pro forma net income $ 7,451 $ 5,533
------------------------------------------------------------------------------------------------------------
The unaudited pro forma financial information presented above is not
necessarily indicative of the results that would have actually
occurred had the companies been combined for the period presented.
3. Inventories
Inventories consist of:
December 31, 2001 2000
------------------------------------------------------------------------------------------------------------
(in thousands)
Raw materials $ 15,566 $ 17,070
Work-in-process 6,808 7,857
Finished goods 8,038 10,410
------------------------------------------------------------------------------------------------------------
Total inventory $ 30,412 $ 35,337
------------------------------------------------------------------------------------------------------------
48
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31, 2001 2000
------------------------------------------------------------------------------------------------------------
(in thousands)
Land, building and improvements $ 9,080 $ 8,227
Equipment 32,888 31,290
Furniture and fixtures and leasehold improvements 1,517 1,056
Construction-in-progress 126 316
------------------------------------------------------------------------------------------------------------
43,611 40,889
Less: Accumulated depreciation (17,720) (13,025)
------------------------------------------------------------------------------------------------------------
Total property, plant and equipment $ 25,891 $ 27,864
------------------------------------------------------------------------------------------------------------
Depreciation expense amounted to approximately $5.1 million, $3.8
million and $3.6 million for the years ended December 31, 2001, 2000,
and 1999, respectively.
5. Operating Segments
The Company operates in two business segments, the mechanical
engineered components business and the electrical components
business. The electrical components business product offerings
include power conversion products, specialty electrical components
and high-voltage utility switches. The mechanical engineered
components business manufactures flexible shaft products, turbo
charger actuators and related componentry and specialty locks and
related accessories.
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest, taxes, depreciation
and amortization ("EBITDA"). In its calculation of EBITDA certain
charges that management determines as non-recurring are excluded.
Segment information is as follows:
Mechanical engineered
(In thousands) Electrical components components Total
------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001:
Net sales from external customers $ 120,401 $ 73,416 $ 193,817
Intersegment net sales -- 135 135
Segment profit - EBITDA 20,275 21,569 41,844
Segment assets 116,576 100,265 216,841
Depreciation and amortization 3,340 4,159 7,499
Year ended December 31, 2000:
Net sales from external customers $ 71,656 $ 88,809 $ 160,465
Intersegment net sales -- 154 154
Segment profit - EBITDA 15,394 28,816 44,210
Segment assets 115,870 108,883 224,753
Depreciation and amortization 2,241 4,559 6,800
Year ended December 31, 1999:
Net sales from external customers $ 62,543 $ 81,857 $ 144,400
Intersegment net sales 314 327 641
Segment profit - EBITDA 12,528 24,953 37,481
Segment assets 71,534 91,037 162,571
Depreciation and amortization 2,483 4,260 6,743
------------------------------------------------------------------------------------------------------------
49
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Reconciliation of Selected Segment Information
to the Company's Consolidated Totals
Year ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Profit or loss:
Total profit from reportable segments - EBITDA $ 41,844 $ 44,210 $ 37,481
Reconciling items:
Corporate expenses (4,267) (1,704) (2,592)
Depreciation and amortization (8,955) (6,818) (6,768)
Interest expense (16,573) (15,159) (15,417)
Management fee (1,259) (1,147) (800)
Other non recurring charges (501) (10,311) (4,510)
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision for income taxes $ 10,289 $ 9,071 $ 7,394
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Assets:
Total assets for reportable segments $216,841 $224,753
Assets held for sale 2,250 9,842
Corporate assets 6,628 11,076
- ------------------------------------------------------------------------------------------------------------------------------------
Total consolidated assets $225,719 $245,671
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Geographical Sales Information: (in thousands)
United States $173,228 $144,756 $136,856
Canada 4,107 4,245 1,848
China 3,852 1,617 175
England 2,819 3,138 510
Mexico 2,259 1,234 1,172
Netherlands 1,610 -- --
Other 5,942 5,475 3,839
- ------------------------------------------------------------------------------------------------------------------------------------
Total $193,817 $160,465 $144,400
- ------------------------------------------------------------------------------------------------------------------------------------
6. Long-term debt consists of the following:
December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Senior notes $ 80,000 $ 80,000
Term loan and revolving credit facility 85,000 101,825
Mortgage 800 817
Other 37 69
- ------------------------------------------------------------------------------------------------------------------------------------
165,837 182,711
Less: Current portion (6,305) (8,195)
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 159,532 $ 174,516
- ------------------------------------------------------------------------------------------------------------------------------------
50
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(a) Senior Notes
On May 28, 1998, the Company issued $80,000,000 of 10.50% Senior
Notes due June 1, 2008, with interest payable semi-annually. The net
proceeds from the Senior Notes were used to repay debt, repurchase
outstanding warrants and for general corporate purposes. At December
31, 2001 and 2000, the Company has accrued interest on these notes
in the amount of $700,000.
The notes are fully and unconditionally guaranteed, jointly and
severally, on a noncollateralized basis, by the subsidiaries of the
Company (the "Subsidiary Guarantors"). At December 31, 2001, KCLLC
has de minimus assets other than its investments in the Subsidiary
Guarantors and cash and no operations other than those of the
Company's corporate office. Accordingly, the consolidated financial
statements present the combined assets and operations of the
Subsidiary Guarantors.
(b) Term Loan and Revolving Credit Facility
On September 29, 2000 and in connection with the acquisition of
Acme, the Company entered into its current credit facility. The
credit facility provides for a six-year $40,000,000 revolving credit
facility and a six-year $100,000,000 term loan facility. The credit
agreement is guaranteed by KCI and the Company's subsidiaries, and
is collateralized by all of the capital stock of the subsidiaries,
receivables, inventories, equipment and certain intangible property.
The Company closed on the credit agreement in November 2000. The
term loan is payable in quarterly installments through September
2006 and the Company may pay the quarterly installments in advance.
Both the term loan and revolving credit facility bear interest at
fluctuating interest rates determined by reference to a base rate or
the London interbank offered rate ("LIBOR") plus an applicable
margin which will vary from 1.00% to 2.75%. The Company has the
option to lock in a rate based on the base or LIBOR rate. Rates
determined by reference to the LIBOR rate can be set for 30, 90 or
180 days. Base rate and LIBOR were 6.0% and 4.43%, respectively, at
December 31, 2001. The revolving credit facility also requires a
commitment fee of 0.50% on the unused portion of the facility as
well as quarterly facility commitment fees. The facility also allows
for up to $5.0 million of outstanding letters of credit. At December
31, 2001 the Company had one outstanding letter of credit for
approximately $443,000. In addition, the credit agreement contains
certain covenants and restrictions, which require the maintenance of
financial ratios, and restrict or limit dividends and other
shareholder distributions, transactions with affiliates, capital
expenditures, rental obligations and the incurrence of indebtedness.
At December 31, 2001, the Company was in compliance with these
covenants and restrictions. As of December 31, 2001, the Company had
no borrowings outstanding under the revolving credit facility and
had $85,000,000 outstanding under the term loan. Accrued interest
payable at December 31, 2001 and 2000 was approximately $183,000 and
$204,000, respectively.
(c) Mortgage
The Company has a mortgage collateralized by one of the Company's
manufacturing facilities. The mortgage requires monthly payments of
approximately $5,000 of principal and interest at approximately 7.7%
per annum with the balance of the principal of approximately
$657,000 due May 1, 2008.
51
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 2001, aggregate principal payments required on all
amounts due are as follows:
Year ending December 31, Amount
------------------------------------------------------------
(in thousands)
2002 $ 6,305
2003 15,645
2004 18,146
2005 22,523
2006 22,525
Thereafter 80,693
------------------------------------------------------------
$165,837
------------------------------------------------------------
7. Federal and State Income Taxes
Income tax expense (benefit) consists of the following:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------------
(in thousands)
Current:
Federal $ 3,087 $ 2,796 $ 2,261
State 748 1,356 418
Foreign 365 -- --
-------------------------------------------------------------------------------------------------------------
Current 4,200 4,152 2,679
-------------------------------------------------------------------------------------------------------------
Deferred:
Federal 925 760 (115)
State 333 260 (13)
Foreign 100 -- --
-------------------------------------------------------------------------------------------------------------
Deferred 1,358 1,020 (128)
-------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 5,558 $ 5,172 $ 2,551
-------------------------------------------------------------------------------------------------------------
A reconciliation between income taxes computed at the statutory
federal rate and income tax expense is as follows:
Year ended December 31, 2001 2000 1999
-------------------------------------------------------------------------------------------------------------
Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 7.1 7.9 4.0
Nondeductible goodwill 8.8 3.9 --
Recording of temporary differences from changes in tax
status -- 2.0 --
Loss (income) taxed directly to shareholders -- 3.1 (6.7)
Foreign income taxes, net of federal benefit 3.3 -- --
Other permanent differences 1.6 5.1 2.9
Other, net (0.8) 1.0 0.3
-------------------------------------------------------------------------------------------------------------
54.0% 57.0% 34.5%
-------------------------------------------------------------------------------------------------------------
52
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Taxable foreign income was approximately $1.0 million for the year
ended December 31, 2001 and was primarily generated from operations
in Thailand.
The Company's net deferred assets and liabilities were as follows:
December 31, 2001 2000
-------------------------------------------------------------------------------------------------------------
(in thousands)
Deferred tax assets:
Allowance for doubtful accounts $ 355 $ 272
Inventory 1,628 1,352
Warranty reserve 290 166
Accrued severance and other acquisition costs 526 1,024
Accrued compensation costs 842 510
Supplemental retirement plan 769 793
Accrued expenses 709 334
Accrued lease costs 204 216
Other 282 315
-------------------------------------------------------------------------------------------------------------
Total deferred tax assets 5,605 4,982
-------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Intangibles (2,274) (1,171)
Pension (1,573) (1,540)
Excess depreciation (2,789) (3,639)
-------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (6,636) (6,350)
-------------------------------------------------------------------------------------------------------------
Net deferred tax liability $(1,031) $(1,368)
-------------------------------------------------------------------------------------------------------------
At December 31, 2001, the Company also had a $1,972,000 deferred tax
asset with a 100% valuation allowance relating primarily to capital
losses generated from the sales of the inverter business. The
Company recorded a 100% allowance since the Company does not believe
that it can derive a benefit from this asset at this time. The
capital losses expire between 2004 and 2005.
8. Commitments and Contingencies
The Company rents several manufacturing and warehouse facilities
under operating lease agreements, two of which are with related
parties (Note 11). Rent expense under all lease agreements amounted
to approximately $2.1 million, $1.3 million and $1.1 million in
2001, 2000 and 1999, respectively.
53
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 2001 and 2000, approximately $576,000 and $585,000,
respectively, was recorded as accrued lease costs related to leased
facilities no longer in use by one of the Company's subsidiaries
(Note 11). The accrual represents the discounted future rental
payments, net of estimated sublease income. At December 31, 2001 and
2000, approximately $51,000 and $32,000, respectively, were included
in accrued expenses.
The following is a schedule of the future minimum lease payments
under operating leases which expire through 2010.
Year ended December 31, Minimum rental payments
-------------------------------------------------------------------
(in thousands)
2002 $2,206
2003 1,981
2004 1,537
2005 1,022
2006 873
Thereafter 2,072
-------------------------------------------------------------------
Total minimum lease payments $9,691
-------------------------------------------------------------------
Consistent with other entities its size, the Company is party to
legal actions and claims, none of which individually or in the
aggregate, in the opinion of management, are expected to have a
material adverse effect on the Company's results of operations or
financial position.
9. Members Equity
(a) Recapitalization
In May 2000, KCI and its shareholders consummated a Recapitalization
(the "Recapitalization") with affiliates of Kelso & Company
("Kelso") pursuant to which, among other things:
o KCI was recapitalized with Common Stock and Preferred
Stock;
o KCI shareholders exchanged approximately 862,000
shares of their Common Stock for Preferred Stock and
KCI option holders exercised options to purchase
20,533 shares of Common Stock, all of which were then
exchanged for shares of Preferred Stock. All such
Preferred Stock was immediately sold to Kelso for
cash at approximately $117 per share;
o SGC Partners II LLC ("SG"), which owned all of the
stock of Keyhold, which owned approximately 11.1% of
the membership interests of KCLLC prior to the
Recapitalization, exchanged all of its Keyhold stock
for shares of Preferred Stock which were immediately
sold to Kelso for cash at approximately $117 per
share, terminating Keyhold's right to require KCLLC
to repurchase Keyhold's outstanding investment in
KCLLC at the then current market value thereof;
o Holders of KCI stock appreciation rights ("SARs")
exercised their SARs and, with a substantial portion
of their after-tax proceeds from the exercise,
purchased Common Stock from KCI;
Kelso purchased an aggregate of approximately 35,000 shares of
Preferred Stock from KCI at approximately $117 per share.
54
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At the closing of the Recapitalization, KCI, Kelso and certain
shareholders of KCI entered into a Shareholders Agreement and a
Registration Rights Agreement and KCI and Kelso entered into an
Advisory Agreement. As part of Advisory Agreement, KCI is required
to pay a $325,000 annual management fee to Kelso. Kelso agreed that
amounts paid by Millbrook Capital Management ("Millbrook") (Note 11)
to Kelso out of management fees received by Millbrook from KCI or
KCLLC would offset KCI's obligation to Kelso under the Advisory
Agreement between Kelso and KCI.
Effective upon the consummation of the Recapitalization, KCI has 1.1
million and 10.0 million, respectively, of authorized shares of
Preferred and Common Stock. Kelso became the owner of all of the
outstanding shares of Preferred Stock. The Preferred Stock is not
entitled to vote for the election of directors but is entitled to
designate two members of KCI's seven member Board of Directors. In
addition, the Preferred Stock has certain approval rights and is
convertible into Common Stock at the holder's option (upon
conversion, the Preferred Stock would constitute approximately 62.0%
of the total outstanding Common Stock of KCI, on a fully diluted
basis).
The Preferred Stock has a liquidation preference equal to its
purchase price plus accrued dividends (approximately $1.0 million in
cumulative dividends in arrears at December 31, 2001), bears a 1%
dividend payable in kind and is redeemable for cash at the option of
the holder after June 2, 2009. All of the outstanding Common Stock
and options to purchase Common Stock of KCI continue to be held by
parties that held such securities prior to the Recapitalization and
the parties who purchased Common Stock with the after-tax proceeds
from the exercise of their SARs, which are primarily top management
and employees of the Company. The aggregate purchase price of the
Preferred Stock paid by Kelso was approximately $105,000,000 of
which approximately $4,100,000 was paid to KCI. The Company paid
approximately $7,900,000 of expenses in connection with the
transaction.
As a result of the Recapitalization, KCI, through its direct
majority interest in KCLLC, held directly and indirectly all of the
membership interests in KCLLC. As a result of the merger of Keyhold
into KCI (See Note 1), KCI now holds all of the membership interests
in KCLLC. In addition all proceeds received by KCI from the
Recapitalization were contributed to KCLLC for additional membership
interest.
(b) Keyhold Membership Interest
On August 12, 1999, KCLLC entered into agreements (the "SG
Agreements") with Keyhold and SG, to sell up to $20,000,000 of
membership equity interests in KCLLC. On September 1, 1999, SG
(through Keyhold) made a capital contribution to KCLLC of
$10,000,000, before expenses of approximately $997,000. Keyhold
received approximately an 11% membership equity interest in KCLLC.
In connection with the Recapitalization (Note 9 (a)), SG was paid
approximately $16,187,000 for their interest in Keyhold and Keyhold
became a wholly owned subsidiary of KCI. On December 31, 2000,
Keyhold was merged into KCI. Keyhold's investment had been
classified as redeemable member's equity and has been adjusted to
estimated fair value, through the date of sale of Keyhold to KCI.
The accretion in value had been recorded as a reduction in member's
equity.
(c) Stock Incentive Plans of KCI
In 1998, KCI adopted a Long-Term Incentive Plan (the "1998 Plan") to
attract, retain and provide additional incentive to employees. In
2000, the Company adopted the Key Components, Inc. Stock Incentive
Plan (the "KCI Plan"). Awards under either plan may take the form of
incentive stock options of KCI or non-qualified stock options of
KCI. Upon the adoption of the KCI Plan, no further grants will be
made under the 1998 Plan. Options for approximately 15,000 shares of
common stock were vested at December 31, 2001. Options to purchase
approximately 29,000 shares vest over the next three years. The
options for the approximately 86,000 remaining shares vest only
after a change in control of the Company and if KCI's preferred
shareholders obtain a targeted return on their investment. The
vesting event would allow the holder to be compensated for the net
accretive value of the underlying shares. The Company would take a
charge to earnings for the accretion in value upon the date that the
Company is reasonably assured that such criteria would be satisfied.
The holders of vested options under the KCI Plan can, under certain
circumstances, require KCI to repurchase the shares acquired by
exercise of the vested options at fair market value, as defined in
the Shareholders Agreement.
55
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Information regarding outstanding stock options is as follows:
1998 Incentive Plan KCI Stock Incentive Plan
------------------------------------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at January 1, 1999 23,000 $ 29 -- $ --
Options granted 55,120 39 -- --
Options exercised -- -- -- --
Options canceled (8,000) 35 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
December 31, 1999
70,120 36 -- --
Options granted 5,196 95 118,985 117
Options exercised (20,533) (33) -- --
Options canceled (1,758) (80) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
December 31, 2000 53,025 42 118,985 $ 117
Options granted
-- -- 12,711 125
Options exercised -- -- -- --
Options canceled (1,053) (95) (1,500) (122)
- ----------------------------------------------------------------------------------------------------------------------------------
Options outstanding at
December 31, 2001 51,972 $ 40 130,196 $ 118
- ----------------------------------------------------------------------------------------------------------------------------------
Exercise prices per share -- $25-$95 -- $117-$125
- ----------------------------------------------------------------------------------------------------------------------------------
Shares available for options -- -- 74,683 --
- ----------------------------------------------------------------------------------------------------------------------------------
56
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of stock options at December 31, 2001 is as follows:
-------------------------------
Options Exercisable
-------------------------------
Weighted Average Weighted Average
- ----------------------------------------------------------------------------------------------- -------------------------------
Range of Exercise
Exercise Prices Shares Life Price Shares Price
- ----------------------------------------------------------------------------------------------- -------------------------------
$25-$35 44,578 5.6 $ 33 37,434 $ 28
$75-$95 7,394 7.9 $ 85 6,153 $ 83
$117-$125 130,196 8.7 $ 118 15,097 $ 117
- ------------------------------------------------------------------------------------------------------------------------------------
182,168 58,684
- ------------------------------------------------------------------------------------------------------------------------------------
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan. Accordingly, as the exercise price of options was
at or above the market value estimated by management at date of grant, no
compensation cost has been recognized.
Pro forma information regarding net income is required by SFAS No. 123,
"Accounting for Stock-Based Compensation", and has been determined as if
the Company had accounted for its employee stock options under the minimum
value method with the following assumptions:
Year ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average risk-free interest rate 5.2% 5.5% 5.0%
Dividend yield None None None
Weighted average expected life 7.3 years 7.6 years 8 years
- ------------------------------------------------------------------------------------------------------------------------------------
Had compensation cost for the stock options been determined based on the
fair values at the grant dates, the Company's net income would have been
reduced to the pro forma amounts indicated below:
Year ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
Net income (loss)
As reported $ 4,731 $(1,316) $ 4,815
Pro forma $ 4,367 $(1,427) $ 4,432
- ------------------------------------------------------------------------------------------------------------------------------------
57
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(d) Accrued Compensation Rights
In connection with the VFC acquisition, KCI issued SARs to certain
members of operating subsidiary management. The Company is required
to record as compensation expense any change in the value of the
SARs based on current market value of KCI stock. For the years ended
December 31, 2000 and 1999, the Company included in continuing
operations approximately $1.6 million and $4.2 million,
respectively, in compensation expense related to the SARs. The SARs
were exercised in connection with the Recapitalization (Note 9(a)).
(e) KCI Obligations
As KCI has no operations, it is dependent on KCLLC for financial
resources in the form of capital distributions to meet its
obligations. KCI obligations include the $105 million of its
preferred stock (including any dividends in arrears which was
approximately $1.0 million at December 31, 2001) (Note 9(a)), which
is redeemable for cash at the option of the holder after June 2,
2009 and the requirement to purchase shares from its common
shareholders under certain circumstances. Such repurchases are to be
made at fair market value as defined in KCI's shareholder agreement.
At December 31, 2001 approximately 1.3 million KCI common shares
plus potentially 182,000 shares covered by stock options were
subject to repurchase by KCI. The ability of KCLLC to make such
capital distributions will be limited by its available resources and
is limited by restrictions of debt and other agreements.
(f) Capital withdrawals
During the year ended December 31, 2001, KCLLC paid a capital
withdrawal to KCI of approximately $906,000. The proceeds were used
by KCI to redeem shares of common stock from a stockholder who is no
longer employed by the Company. The capital distributions during the
years ended December 31, 2000 and 1999 were primarily used to make
tax distributions to the members of KCLLC.
10. Retirement Plans
(a) 401(k) Plans
At December 31, 2001, the Company had three 401(k) plans in effect.
The Company's employees at domestic locations, other than those of
Acme, are covered under the Key Components LLC Plan, which the
Company matches 50% of the employees contributions up to 4% of each
covered employee's annual compensation. The employees of Acme are
covered by two 401(k) plans. Employer contributions to the Acme
plans are discretionary. Employer contributions in the aggregate
were approximately $414,000, $404,000 and $496,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
(b) Profit Sharing Plan
The Company sponsors a profit sharing plan for all non-union
employees at two subsidiaries acquired as part of the VFC
acquisition. Under this plan, contributions are discretionary and
limited to a percentage of eligible employees' compensation. There
was no profit sharing expense for this plan for 2001, 2000 and 1999.
At December 31, 2001 the Company was in process of terminating the
plan. The Plan is fully funded and no liabilities are anticipated to
be generated from the termination.
58
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(c) Pension Plans
The Company has a non-contributory defined benefit pension plan
covering substantially all the employees of Acme (the "Acme Pension
Plan"). The formula covering the employees of Acme provides pension
benefits based upon the employee's individual yearly compensation.
The Acme Pension Plan assets are managed and invested by a financial
institution. It is the Company's intention during 2002 to initiate
the termination of the Acme Pension Plan. At such time that the Plan
is terminated, the Company's intention is to allow the employees of
Acme to begin to participate in a 401(k) plan with a match equal to
that in the Key Components, LLC 401(k) plan. At December 31, 2001
and 2000, the Company had recorded against the prepaid pension asset
approximately $2.3 million of anticipated excise tax liabilities and
the estimated future employer 401(k) contribution liability related
to the participant accounts of former Acme Pension Plan participants
who participate in the Key Components, LLC 401(k) plan that will be
paid using part of the Acme Pension Plan over funding. In addition,
Gits has a noncontributory defined benefit pension plan (the "Gits
Plan") covering its union employees retiring after August 1, 1993.
Pension benefits are based on a multiple of a fixed amount per month
and years of service, as defined in the union agreement. Benefits of
the Gits Plan generally vest over a seven-year period. The assets of
the Gits Plan are managed and invested by an insurance company.
It is the Company's funding policy for the Gits Plan and the Acme
Pension Plan to fund at least an amount necessary to satisfy the
minimum requirements of the Employee Retirement Income Security Act
of 1974. The amount to be funded is subject to annual review by
management and its consulting actuary. In recent years, funding
contributions have been restricted due to application of Internal
Revenue Code full-funding limitations.
At December 31, 2001, approximately 0.3% of the plans' assets are
invested in cash and cash equivalents, 62.1% are invested in
equities and 37.6% is invested in fixed income securities and
annuities.
Summarized information of the Plans, which are reflected from the
dates of acquisition (January 1999 for the Gits Plan and November
2000 for the Acme plans) to December 31, 2001 are shown below (in
thousands):
Pension Obligation
Year ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------------------------------------
(In thousands)
Benefit obligation at beginning of year $ 17,867 $ 1,033 $ --
Benefit obligations acquired -- 16,692 1,366
Service cost 513 95 43
Interest cost 1,055 148 60
Actuarial gain (29) (35) (382)
Benefits paid (820) (128) (54)
Other -- 62 --
--------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 18,586 $ 17,867 $ 1,033
--------------------------------------------------------------------------------------------------------------
59
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Plan Assets
--------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
--------------------------------------------------------------------------------------------------------------
(In thousands)
Fair value of plan assets at beginning of year $ 23,583 $ 1,343 $ --
Plan assets acquired -- 22,253 1,366
Actual return on plan assets (733) 119 31
Benefits paid (820) (128) (54)
Other (34) (4) --
--------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 21,996 $ 23,583 $ 1,343
--------------------------------------------------------------------------------------------------------------
Reconciliation of Funded Status
Year ended December 31,
2001 2000 1999
--------------------------------------------------------------------------------------------------------------
(In thousands)
Over funded status $ 3,410 $ 5,716 $ 310
Unrecognized net actuarial loss (gain) 2,447 (136) (310)
--------------------------------------------------------------------------------------------------------------
Prepaid benefit 5,857 5,580 --
Recorded liability for future 401(k) contributions and
excise taxes (2,269) (2,269) --
--------------------------------------------------------------------------------------------------------------
Net Prepaid asset $ 3,588 $ 3,311 $ --
--------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit
Year ended December 31,
2001 2000 1999
--------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $ 547 $ 99 $ 43
Interest cost 1,055 149 60
Expected return on plan assets (1,785) (269) (116)
Other 7 (7) --
--------------------------------------------------------------------------------------------------------------
Net period benefit $ (176) $ (28) $ (13)
--------------------------------------------------------------------------------------------------------------
Assumption and Method Disclosures
Year ended December 31,
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Discount rate 6.00 to 6.50% 6.00 to 6.75% 6.50%
Expected long-term rate of return on assets 7.5% to 8.50% 8.50% 8.50%
Amortization method Straight-line Straight-line Straight-line
------------------------------------------------------------------------------------------------------------------
60
Key Components, LLC
and subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(d) Other retirement liabilities
At December 31, 2001 and 2000, the Company had approximately $1.1
million and $2.9 million recorded as other long-term liabilities
related to obligations under Acme's non-qualified Supplemental
Executive Retirement Plan ("SERP") and a non-qualified
post-retirement benefits plan for certain former officers of Acme.
The SERP provides benefits based upon an executive's compensation in
the last year of service and is reduced by benefits received from the
salaried pension plan. The nonqualified benefits plan provides post
retirement health care. Six participants of this plan are retired and
receiving payments under the SERP. Due to certain provisions under
the SERP, the Company was required to fund approximately $1.1 million
to a trust account on behalf of certain of the SERP's participants.
In addition, as a result of the final resolution with Acme's former
CEO, the Company reduced the liability it had inherited as part of
the Acme acquisition. The assets in the trust remain a part of the
books and records of the Company and are subject to the Company's
creditors.
11. Related Party Transactions
The Company rents one of its manufacturing facilities under an
operating lease agreement entered into with a company that is
co-owned by the President of BWE who also is a shareholder of KCI.
The terms of the lease, which expires December 31, 2008, provide for
annual rent increases of 5%. Rental payments amounted to $159,000,
$151,000 and $144,000 in 2001, 2000 and 1999, respectively.
The Company rents its Leominster, Massachusetts manufacturing
facility under an operating lease agreement entered into with a
company that is co-owned by the former President of ESP who also is a
shareholder of KCI. The lease, which expires on May 31, 2003,
provides for annual rent increase based on the CPI. Rental payments
amounted to $213,000, $208,000 and $203,000 for the three years ended
December 31, 2001, 2000 and 1999, respectively.
The Company pays management fees to Millbrook, a party related to a
shareholder of the Company. These management fees amounted to
$920,000, $920,000 and $800,000 for the years ended December 31,
2001, 2000, and 1999, respectively. As part of the Recapitalization,
Millbrook agreed with Kelso to a reduced management fee, commencing
in 2002, of $175,000 plus amounts paid to Kelso (Note 9(a)). Kelso
agreed that amounts paid by Millbrook to Kelso out of management fees
received by Millbrook from KCI or KCLLC would offset KCI's obligation
to Kelso under the Advisory Agreement between Kelso and KCI.
During 2000, the Company paid Millbrook $400,000 and $825,000 for
investment advisory services related to the sale of the inverter
business and the acquisition of Acme, respectively. During 1999,
Millbrook received $500,000 and $350,000, respectively, for
investment advisory services related to the sale of the Keyhold
membership interest and the sale of Multiplex. Such costs are either
recorded as part of the respective transactions or are included in
deferral financing costs.
12. Statement of Cash Flows
December 31, 2001 2000 1999
----------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: (In thousands)
Cash paid during the year:
Interest $ 15,608 $ 14,898 $ 13,633
Income taxes $ 3,050 $ 4,116 $ 3,085
----------------------------------------------------------------------------------------------------------------
61
Key Components, LLC
and subsidiaries
Valuation and Qualifying Accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at Additions Balance at
beginning of Charged to costs Charged to other end of
Description period and expenses accounts (2) Deductions (1) period
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts deducted
from accounts receivable in the balance sheet:
Year ended December 31:
2001 $ 808 $570 $ 105 $(479) $1,004
2000 510 148 235 (85) 808
1999 175 164 202 (31) 510
Allowance for excess and obsolete inventory deducted
from inventory in the balance sheet
Year ended December 31:
2001 $3,159 $846 $ 150 $(378) $3,777
2000 2,902 439 451 (633) 3,159
1999 411 955 1,571 (35) 2,902
- ------------------------------------------------------------------------------------------------------------------------------------
- --------------
(1) Deductions primarily represent write-offs charged against the
allowances listed.
(2) Represents allowance account balances of companies acquired at the date
of acquisitions.
62