KEY COMPONENTS LLC - 10-K Annual Report

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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, 2002

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: 333-58675-01
------------

KEY COMPONENTS, LLC
- --------------------------------------------------------------------------------
(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: 333-58675-01
------------
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. Not Applicable

Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes__ No X_

State the aggregate market value of common equity held by
non-affiliates as of March 6, 2003: Not applicable since the membership
interests in Key Components, LLC were owned by Key Components, Inc., a privately
held New York corporation, and all of the shares of common stock of Key
Components Finance Corp. were owned by Key Components, LLC.

Documents Incorporated by Reference: None

* Key Components Finance Corp. meets the conditions set forth in
General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this
form with the reduced disclosure format.

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 files current,
quarterly and annual reports on Form 8-K, Form 10-Q and Form 10-K, respectively.
They can be accessed through the EDGAR database at www.sec.gov. Any debenture
holder can request a copy of filings in writing to the Company's principal
office.

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").
The product offerings of the MEC business 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 B.W. Elliott Manufacturing Co., LLC ("BWE"), Gits Manufacturing,
LLC ("Gits"), Hudson Lock, LLC ("Hudson") and ESP Lock Products, LLC ("ESP"). No
one customer accounted for more than ten percent of sales of the Company for any
of the three years ended December 31, 2002. For the years ended December 31,
2002, 2001 and 2000, four customers, who are subsidiaries of one company,
accounted for approximately 14%, 13% and 12% of sales, respectively, of the MEC
business. (See Note 5 to the Company's consolidated financial statements
elsewhere in this Form 10-K for information concerning the Company's business
segments).

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 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 $187.9 million for fiscal year 2002.

The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies (see Note 13 to the Company's consolidated financial
statements elsewhere in this Form 10-K).

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. Power conversion product net
sales were approximately 30% of the Company's consolidated net sales for the
year ended December 31, 2002. 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
coils 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 through direct sales to OEMs. Products sold through the
wholesale distribution network are generally smaller sized transformer models.
Due to the small size of the average order, the margins achieved are generally
higher than those achieved selling to OEMs. 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 which was estimated by the
National Electrical Manufacturers Association to be approximately $315 million
for 2002. 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,
that 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 that 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 are designed into OEM applications has grown
over the last five years.

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. Net sales of the Company's SPEC products accounted for
approximately 24% of the Company's consolidated net sales for the year ended
December 31, 2002. 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.

2

The Company's SPEC product line also has products targeted for industrial
applications. The market share of the Company's SPEC's 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 the Company has, over time, secured its relative position through superior
quality and service, and by creating high barriers to entry through
specialization, reputation, and investments in machinery and equipment. Net
sales of the Company's electric ulitilty products were approximately 9% of the
Company's consolidated net sales for the year ended December 31, 2002.
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.

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. Net sales of flexible shaft products were approximately
10% of the Company's net sales for the year ended December 31, 2002. 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

The Company is a primary outsource supplier of turbocharger components to the
domestic and international market for turbocharged diesel engines. The Company's
turbocharger components are essential components of diesel engine turbocharger
systems which, through the use of flow valve controls, increase engine power,
efficiency, and economy while reducing emissions. As the primary supplier of
turbocharger components and exhaust gas systems 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 Motor Company. Net sales of the Company's turbocharger components products
accounted for approximately 14% of the Company's consolidated net sales. 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. Net sales of the
Company's lock products were approximately 12% of the Company's consolidated net
sales for the year ended December 31, 2002. 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 is 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 it 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 enable
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, 2002, the Company employed 1,457 persons on a full-time
basis. Of these employees, 722 were employed in the EC business, 727 were
employed in the MEC business and the Company's corporate office had 8 employees
as of December 31, 2002. One of the Company's subsidiaries had a collective
bargaining agreement, which covered 67 employees. Neither KCLLC 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, 2002 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 Power conversion Lumberton, NC 128,000 Owned
Acme Power conversion Monterrey, Mexico 45,000 Leased
Acme 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
Hudson Lock products Monterrey, Mexico 37,500 Leased
ESP * Lock products Leominster, MA 55,000 Leased

* The lease for ESP Facility terminates in May 2003. During 2002 the Company
moved most of the production from this facility into its Hudson facility and
into its lock product facility in Mexico. The Company does not intend to
renew the lease for the ESP facility.

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 fourth
quarter of the fiscal year ended December 31, 2002.

5

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.

Year ended December 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------

Net Sales $187,943 $193,817 $160,465 $144,400 $61,862
Income from operations 17,287 26,486 31,368 22,346 11,953
Income from continuing operations 4,154 4,731 3,899 4,843 4,619
Net (loss) income (a)(b) (c) (d) (6,631) 4,731 (1,316) 4,815 3
Total assets 192,714 225,719 245,671 181,256 93,144
Long term debt (including current
maturities) (e) (f) 143,844 165,837 182,711 149,149 81,278

(a) Upon the adoption of SFAS 142, the Company stopped recording goodwill
amortization effective January 1, 2002. In June 2002, the Company completed
the assessment of its reporting units and its initial assessment of
impairment upon adoption. As a result, the Company identified one reporting
unit in the MEC business with a book value of goodwill that exceeded its
fair market value, which was estimated using a valuation methodology that
triangulates the discounted cash flows, market multiples and transactional
multiples of the reporting units. In accordance with SFAS 142, the Company,
during the second quarter 2002, estimated the amount of the impairment and
recorded a cumulative effect of change in accounting principle, as of
January 1, 2002, of approximately $7.8 million, net of taxes of
approximately $3.4 million, to write down the goodwill associated with the
Company's lock product line resulting from the market conditions of that
product line. The Company, as prescribed by SFAS 142, finalized its
impairment testing by comparing the implied fair value of the reporting
unit's goodwill to its carrying value during the third quarter to determine
the amount of the final impairment upon adoption of SFAS 142. As a result,
the Company reduced the tax impact of the charge by approximately $353,000
to reflect the proper deferred tax basis of the adjusted goodwill. No
further impairment charges were taken against the Company's goodwill.

In December 2002, in accordance with SFAS 142, the Company performed its
required annual fair value testing of its recorded goodwill for its
reporting units using a valuation approach consistent with the one used upon
adoption of SFAS 142. As a result of the analysis, the Company recorded a
charge of approximately $12.4 million, which is included in the Company's
operating expenses, related to its lock reporting unit, which experienced a
further decline of its fair value since the January 1, 2002 assessment, due
to a deterioration in the current year of its results of operations compared
to its operating plan and projected future financial results as well as a
decline in the market multiple ascribed to the product line in its fair
market valuation. Through December 31, 2002, the Company's cumulative
impairment of goodwill was approximately $23.5 million, all of which related
to its lock product line.

(b) Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated as an
S corporation, which caused the shareholders of their then parent company,
KCI, to be personally liable for the taxes 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"). Corporations that elect to
be treated as S corporations and LLCs are not liable for the majority of
taxes on their income, which are imposed instead on their shareholders or
members. Accordingly, subsequent to May 31, 1997 through December 31, 1998,
the provision for income taxes includes only those taxes applicable to
certain states.

6

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)

(c) 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.

(d) 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.

(e) Does not include approximately $5.9 million related to accrued stock
appreciation rights as of December 31, 1999.

(f) Includes approximately $13.1 million of redeemable member's equity at
December 31, 1999.

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 ("MEC") business. 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 EC business product
offerings include power conversion products, specialty electrical components and
high-voltage utility switches. The product offerings of the MEC business consist
primarily of flexible shaft and remote valve control components, turbo-charger
actuators and medium security lock products and accessories. 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
Company's 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 $187.9 million for fiscal year 2002.

The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies (see Note 13 to the Company's consolidated financial
statements elsewhere in this Form 10-K).

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 results of operations of KCLLC's wholly owned subsidiaries from
their respective dates of acquisition (see Note 2 to the Company's 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.

7

Consolidated Statement of Operations Data:

Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- -------------------------- ----------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
- --------------------------------------------------------------------------------------------------------------------

Net Sales $187,943 100.0% $193,817 100.0% $160,465 100.0%

Cost of Goods Sold 117,566 62.6 122,975 63.4 93,847 58.5
------------------------------------------------------------------------------------
Gross Profit 70,377 37.4 70,842 36.6 66,618 41.5
Selling, general and
administrative expenses 38,624 20.6 41,208 21.3 30,290 18.9
Goodwill Impairment 12,350 6.6 - - - -
Amortization of goodwill - - 3,558 1.8 2,626 1.6
Cumulative adjustment for
Aerospace - - (721) (0.4) - -
Other operating expenses 2,116 1.1 311 0.2 2,334 1.5
------------------------------------------------------------------------------------
Income from operations 17,287 9.2 26,486 13.7 31,368 19.5

Other income 168 0.1 376 0.2 799 0.5
Recapitialization expenses - - - - (7,937) (4.9)
Interest expense (13,301) (7.1) (16,573) (8.6) (15,159) (9.4)
------------------------------------------------------------------------------------
Income before provision for 4,154 2.2 10,289 5.3 9,071 5.7
taxes, discontinued
operations, extraordinary
item and cumulative effect
of change in accounting
principle
Provision for income taxes 2,628 1.4 5,558 2.9 5,172 3.3
------------------------------------------------------------------------------------
Income from continuing 1,526 0.8 4,731 2.4 3,899 2.4
operations
Loss from discontinued
operations, net - - - - (3,988) (2.5)
Extraordinary loss on early
extinguishment of debt, net - - - - (1,227) (0.7)
Cumulative effect of change
in accounting principle, net (8,157) (4.3) - - - -
------------------------------------------------------------------------------------
Net (loss) income $ (6,631) (3.5)% $ 4,731 2.4% $ (1,316) (0.8)%
====================================================================================

8

A summary of the Company's segments is as follows:

Electrical Components Business Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2002 2001 2000
--------------------------- -------------------------- --------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
---------------------------------------------------------------------------------

Net Sales $121,051 100.0% $120,401 100.0% $71,656 100.0%
Cost of Sales 75,384 62.3 77,683 64.5 40,935 57.1
---------------------------------------------------------------------------------
Gross Profit 45,667 37.7 42,718 35.5 30,721 42.9
Selling, general and administrative
expenses 26,383 21.8 26,096 21.7 16,917 23.6
Amortization of goodwill - - 1,824 1.5 895 1.2
Cumulative adjustment for Aerospace - - (721) (0.6) - -

Other expenses 777 0.6 - - - -
---------------------------------------------------------------------------------
Income from operations $18,507 15.3% $15,519 12.9% $12,909 18.0%
=================================================================================

Mechanical Engineered Components Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2002 2001 2000
--------------------------- --------------------------- -------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
----------- --------------- ------------ -------------- ------------- -----------
Net Sales $66,892 100.0% $73,416 100.0% $88,809 100.0%
Cost of Sales 42,182 63.1 45,322 61.7 52,912 59.6
---------------------------------------------------------------------------------
Gross Profit 24,710 36.9 28,094 38.3 35,897 40.4
Selling, general and administrative
expenses 8,946 13.4 8,962 12.2 10,074 11.3
Goodwill Impairment 12,350 18.5 - - - -
Amortization of goodwill - - 1,734 2.4 1,731 1.9

Other expenses 1,487 2.2 311 0.4 6 -
---------------------------------------------------------------------------------
Income from operations $1,927 2.9% $17,087 23.3% $24,086 27.1%
=================================================================================

Year ended December 31, 2002 compared to the year ended December 31, 2001

Net Sales: Net sales for the year ended December 31, 2002 ("Fiscal 2002")
decreased by approximately $5.9 million, or 3.0%, from approximately $193.8
million for the year ended December 31, 2001 ("Fiscal 2001") to $187.9 million
for Fiscal 2002. This decrease was the result of the approximately $650,000, or
0.5%, increase in the net sales of the EC business offset by the approximately
$6.5 million, or 8.9%, decrease in net sales of the MEC business.

For the first five months of 2001, the results of operations of the aerospace
division of Acme ("Aerospace") were excluded from the consolidated results of
the Company due to its classification as being held for sale during that period.
Net sales of the EC business, pro forma to include the net sales of Aerospace
for the entire period in the results of operations for Fiscal 2001, declined by
approximately $4.3 million, or 3.5% for Fiscal 2002. The primary driver of this
decline was the decline in sales for the power conversion product line of the EC
business. Net sales of the power conversion business for Fiscal 2002, pro forma
to include the net sales of Aerospace for the entire period in the results of
operations for Fiscal 2001, declined by approximately $6.2 million or 9.7%. This
decline was the result of lower demand in the industrial and telecom markets for
power distribution products. The decline in the power conversion product sales
were slightly offset by growth in the Company's specialty electrical product
sales, which increased by approximately $3.8 million or 9.0%. However, weakness
in the utility marketplace resulted in the Company's utility product sales
declining approximately $1.9 million or 10.0%.

9

Net sales in the MEC business decreased by approximately $6.5 million from
approximately $73.4 million in Fiscal 2001 to approximately $66.9 million in
Fiscal 2002. This decrease is primarily related to the decline in sales of the
Company's lock product line, which has continued to experience softness in
demand across its major markets.

Gross Profit: Gross profit decreased by approximately $465,000, or 0.7%, from
approximately $70.8 million for Fiscal 2001 to approximately $70.4 million
Fiscal 2002, resulting from the $2.9 million, or 6.9%, increase in the gross
profit of the EC business less the decline in gross profit of the MEC business
for Fiscal 2002 of approximately $3.4 million, or 12.0%.

Gross profit of the EC business, pro forma to include the results of operations
of Aerospace for the entire period in the results of operations for Fiscal 2001,
increased by approximately $887,000 for Fiscal 2002 as compared to Fiscal 2001.
The gross profit gains resulted from productivity improvements experienced
during Fiscal 2002 as well as from a sales product mix that resulted in higher
margins.

The approximately $3.4 million decline in gross profit for the MEC business for
Fiscal 2002 as compared to Fiscal 2001 is primarily due to the decline in sales
of the lock product line of the MEC business for Fiscal 2002.

The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business increased by approximately 2.2% from 35.5% for Fiscal 2001 to 37.7% to
Fiscal 2002. For the MEC business, the GP percentage declined by approximately
1.3% from 38.3% for Fiscal 2001 to 36.9% to Fiscal 2002. The GP percentage for
the EC business, pro forma to include the results of operations of Aerospace for
the entire period in the results of operations for Fiscal 2001, increased by
approximately 2.0% from 35.7% for Fiscal 2001 to 37.7% for Fiscal 2002. The
increase in GP percentage for the EC business is the result of product mix and
productivity gains. The Company's power conversion product line benefited from
high margin aftermarket aerospace produce sales and from significant
productivity gains as it consolidated distribution operations, negotiated
material cost savings and increased labor efficiency at its Mexico manufacturing
facility. The Company's SPEC product line's margins benefited from an increase
in sales volume during Fiscal 2002. The decline in GP percentage of the MEC
business is primarily related to margin compression resulting from fixed
overheads being absorbed by lower sales levels primarily related to the lock
product line.

Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses declined by approximately $2.6 million, or
6.3%, from approximately $41.2 million for Fiscal 2001 to approximately $38.6
million for Fiscal 2002. As a percentage of net sales, SG&A decreased by 0.7%
from 21.3% for Fiscal 2001 to 20.6% for Fiscal 2002.

SG&A of the EC business increased by approximately $287,000, or 1.1%, for Fiscal
2002 as compared to Fiscal 2001 and, as a percentage of net sales, increased
0.1% for Fiscal 2002. SG&A of the EC business, pro forma to include the results
of operations of Aerospace for the entire period in Fiscal 2001, declined by
approximately $771,000, or 2.8%, for Fiscal 2002 as compared to Fiscal 2001,
and, as a percentage of net sales, SG&A, pro forma to include the results of
operations of Aerospace for the entire period in the results of operations for
Fiscal 2001, increased 0.1% for Fiscal 2002.

SG&A of the MEC business, which declined by approximately $16,000, or 0.2%, for
Fiscal 2002 as compared to Fiscal 2001, increased as a percentage of sales by
1.2% from 12.2% for Fiscal 2001 to 13.4% for Fiscal 2002.

The decrease in SG&A expenses for Fiscal 2002 as compared to Fiscal 2001 is
primarily related to the expenses of the former corporate office of Acme, which
was closed in October 2001. That office added approximately $2.3 million to the
consolidated SG&A expenses of the Company during Fiscal 2001, including
approximately $425,000 of depreciation. Upon the close of the Acme corporate
office, all remaining related expenses of that office terminated.

The decrease in the SG&A of the EC business, pro forma to include the results of
operations of Aerospace for the entire period in Fiscal 2001, was primarily
related to the Company's cost reduction initiatives put in place during Fiscal
2001 in response to the downturn in the economy and lower commissions due to the
lower sales volumes and commission mix of the sales volume.

10

Goodwill Impairment: In December 2002, in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets",
the Company performed its required annual fair value testing of its recorded
goodwill for its reporting units. The fair value assessment was estimated using
a valuation methodology that triangulates the discounted cash flows, market
multiples and transactional multiples of the reporting units. As a result of the
analysis, the Company recorded a charge of approximately $12.4 million, related
to its lock reporting unit, which experienced a further decline of its fair
value since the January 1, 2002 assessment, due to a deterioration in the
current year of its results of operations compared to its operating plan and
projected future financial results as well as a decline in the market multiple
ascribed to the product line in its fair market valuation. Through December 31,
2002, the Company's cumulative impairment of goodwill was approximately $23.5
million, all of which related to its lock product line.

Amortization of Goodwill: Goodwill amortization decreased by approximately $3.6
million during Fiscal 2002 as compared to Fiscal 2001, due to the Company
ceasing the amortization of goodwill as of January 1, 2002 as required by SFAS
142 (See Cumulative Effect of Change in Accounting Principle).

Acme Aerospace Division Cumulative Adjustment: On September 1, 2001, the
Company, based on management's conclusion that Aerospace, which had previously
been held for sale, was more valuable than what current market conditions
dictated, 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 Acme purchase price 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, which had been
excluded from the results of operations of the Company and had been included in
goodwill.

Other Expenses: Other expenses increased by approximately $1.8 million for
Fiscal 2002 as compared to Fiscal 2001. For Fiscal 2002, the other expenses
include approximately $1.4 million of redundant facility and start up expenses
related to the Company's new lock production facility in Mexico. The Company
expects that the remainder of the startup expenses related to moving production
to Mexico to occur before the end of 2003. In addition, approximately $532,000
of expenses related to the Acme Pension Plan is primarily attributed to non-cash
accelerated amortization of the deferred loss in the pension asset over a Plan
life expectancy assuming termination of the plan. In addition, approximately
$145,000 of deferred finance costs, which were written off when the Company
amended its bank agreement in June (see Liquidity and Capital Resources) were
included.

Income from Operations: Income from operations decreased by approximately $9.2
million, or 34.7%, from approximately $26.5 million for Fiscal 2001 to $17.3
million for Fiscal 2002. This decrease resulted from the decrease in gross
profit of approximately $465,000 offset by the decreases in SG&A expenses of
approximately $2.6 million and goodwill amortization of approximately $3.6
million. The decrease in operating expenses was reduced by the $12.3 million
charge taken for impairment of goodwill and by $721,000 of cumulative income
recorded during Fiscal 2001 related to the inclusion of Aerospace in the
Company's reporting and the increase in other operating expenses of
approximately $1.8 million discussed above.

Interest Expense: Interest expense declined by approximately $3.3 million, or
19.7%, during Fiscal 2002. This decrease is primarily due to lower levels of
outstanding borrowings during Fiscal 2002 as compared to Fiscal 2001, as well as
reduced rates of interest charged on the outstanding principal on the Company's
variable rate term loan during Fiscal 2002 as compared to Fiscal 2001.

Provision for Income Taxes: The provision for income taxes declined by
approximately $2.9 million, or 52.7%, for Fiscal 2002 as compared to Fiscal
2001. The decline is primarily related to the decline in pretax income. In
addition, the Company was able to take advantage of certain foreign tax credits,
which reduced the Company's tax liability. The Company's effective tax rate for
Fiscal 2002, however, increased to 63.3% on income before taxes from Fiscal 2001
when the Company's effective tax rate was 54.0%. The increase in the effective
tax rate is primarily related to the impairment charges taken against goodwill,
which are not deductible for tax purposes.

Income from continuing operations: Income from continuing operations decreased
by approximately $3.2 million from approximately $4.7 million for Fiscal 2001 to
approximately $1.5 million for Fiscal 2002. The primary drivers of this decrease
were the approximately $9.2 million decrease in income from operations, the
approximately $3.3 million decrease in interest expense and the approximately
$2.9 million decrease in Company's provision for taxes due to the factors
discussed above.

Cumulative effect of Change in Accounting Principle: In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, which were effective for fiscal years beginning after December
15, 2001.

11

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.

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 June 2002, the Company completed the assessment of its reporting units and
its initial step one impairment test on January 1, 2002 financial information.
As a result, the Company identified one reporting unit in the MEC business with
a book value of goodwill that exceeded its fair market value, which was
estimated using valuation methodology involving discounted cash flows and market
and transactional multiples of the reporting units. In accordance with SFAS 142,
the Company estimated the amount of the impairment and recorded a cumulative
effect of change in accounting principle, as of January 1, 2002, of
approximately $7.8 million, net of taxes of approximately $3.4 million, to write
down the goodwill associated with the Company's lock product line resulting from
the current market conditions of that product line. The Company finalized its
impairment testing, as prescribed by SFAS 142, during the third quarter to
determine the amount of final impairment. As a result, the Company reduced the
tax impact of the charge by approximately $353,000 to reflect the proper
deferred tax basis of the adjusted goodwill. No further impairment charges were
taken against the Company's goodwill.

Net (Loss) income: Net loss increased by approximately $11.4 million from net
income in Fiscal 2001 of approximately $4.7 million to a net loss in Fiscal 2002
of approximately $6.6 million. This increase resulted from the decline in Fiscal
2002 in income from continuing operations of approximately $3.2 million from
Fiscal 2001, primarily driven by the 2002 goodwill impairment charge of
approximately $12.4 million and the approximately $8.2 million charge taken to
reduce the Company's carrying value of its goodwill as of January 1, 2002.

Year ended December 31, 2001 compared to the year ended December 31, 2000

Net Sales: Net sales for 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. In addition, in June 2001, the Company decided to retain rather than sell
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.

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%.

12

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 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: 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.

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.

Cumulative Adjustment for Aerospace: On June 1, 2001, the Company decided to
retain Aerospace, which had been previously classified as held for sale. On that
date 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.

13

Other 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.

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 estimated
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. In 2002, the escrow was settled with the buyer and the Company received
approximately $148,000. 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.

14

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 $80.0 million of uncollateralized 10.5% senior notes due 2008 and
it's outstanding credit facilities. The credit facility provides for a six-year
$40.0 million revolving credit facility, which as a result of the amendment
discussed below was reduced to $25.0 million through 2003, and a six-year $100.0
million term loan facility. The 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, 2002. 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 3.5% and require the payment of a commitment fee of 0.5% on
the unused portion of the facility as well as quarterly commitment fees.

The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At December 31, 2002, the Company had one letter of credit outstanding
for approximately $443,000. The letter of credit primarily relates to
outstanding Acme workman's compensation claims.

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.

In June 2002, the Company amended its credit agreement (the "Amendment") to
provide for revised financial covenant ratios from September 30, 2002 through
December 31, 2003 from the original covenant ratios stipulated in the credit
agreement. The Company anticipated that certain of the original covenants, which
became more stringent over the term of the agreement, would not be met due to
the general decline in the economy. In addition, the Amendment revised the
Company's applicable margin on borrowings, the maximum allowable capital
expenditures through 2003 and reduced the amount allowed for permitted
acquisitions (as defined in the credit agreement) from $15 million to $7.5
million through the end of 2003. Concurrent with the Amendment, the Company
voluntarily reduced the availability under its revolving credit facility by $15
million from $40 million to $25 million through the end of 2003. At December 31,
2002, the Company was in compliance with the covenants of the credit agreement
set forth in the Amendment. In connection with the Amendment and as a result of
the Company voluntarily reducing its borrowing capacity through the end of 2003,
the Company wrote off $145,000 of the deferred finance costs related to amending
the Company's credit facility.

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. At December 31, 2002, the Company had prepaid its next two
principal payments. Principal payments required for the next 12 months will be
approximately $7.2 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, 2002, the Company had no outstanding
commitments for capital expenditures. The Company anticipates its capital
expenditures for the year ended December 2003 to be approximately $3.5 million.
The expenditures are primarily needed to maintain its facilities and expand its
production capacity for the Company's ongoing plan to expand foreign operations
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 remain 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;

15

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;

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 $107.0
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 $107.0 million of its Preferred Stock plus any dividends payable in arrears
(approximately $2.8 million in cumulative dividends in arrears, payable in kind,
at December 31, 2002), 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, 2002 approximately 1.3 million KCI common shares plus
potentially 191,000 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 $22.4 million,
$21.9 million, and $7.7 million for Fiscal 2002, 2001 and 2000, respectively.
The net increase in cash flows of approximately $444,000 for Fiscal 2002
resulted primarily from the increase in the cash provided by Net income plus non
cash adjustments which year over year increased approximately $1.3 million
offset by the year over year net use of cash from the operating assets of the
business. The working capital accounts (accounts receivable, inventory and
accounts payable) provided net cash to operations of approximately $5.0 million
in Fiscal 2002 as compared to approximately $7.8 million in Fiscal 2001. The net
cash flow decline from the working capital accounts is due to certain of the
Company's product lines operations rebounding in Fiscal 2002 and the Company
increasing inventory safety stock levels to maintain high customer satisfaction
as it continues to move production to Mexico. Accrued expenses used net cash in
operations of approximately $801,000 in Fiscal 2002 as compared to approximately
$5.0 million in 2001, which is the result of accrued expenses returning to
normalized levels at the end of Fiscal 2001. As a result, accrued expenses at
December 31, 2002 were fairly constant as compared to accrued expenses as of
December 31, 2001, however, accrued expenses at December 31, 2001 were
significantly lower than accrued expenses as of December 31, 2000 primarily due
to the Company having paid, during fiscal 2001, a substantial portion of the
December 31, 2000 accrued expenses related to the acquisition of Acme.

16

The net increase in cash flows from operations of approximately $14.2 million
for Fiscal 2001 over Fiscal 2000 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.

Cash flows from operations of discontinued operations used approximately $99,000
for Fiscal 2000.

Cash flows used in investing activities were approximately $2.4 million, $3.5
million and $38.7 million for Fiscal 2002, 2001 and 2000, respectively. The
decrease in cash used in investing activities of approximately $1.1 million for
Fiscal 2002 as compared to Fiscal 2001 is primarily related to the decreased
level of capital expenditures made by the Company. In Fiscal 2002, the Company
spent approximately $2.7 million of capital expenditures as compared to Fiscal
2001 when the Company's capital expenditures were approximately $4.1 million.

The decline in cash used in investing activities of approximately $35.2 million
for Fiscal 2001 as compared to Fiscal 2000, is primarily related to the
acquisition of Acme made in 2000. 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 addition, 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. Capital expenditures for Fiscal 2000 were
approximately $3.1 million.

Cash flows from financing activities used net cash of approximately $22.2
million and $17.2 million during Fiscal 2002 and 2001, respectively. Cash flows
from financing activities provided net cash of approximately $30.6 million in
Fiscal 2000. The net cash used in financing activities for Fiscal 2002 and 2001
was primarily driven by the Company's net repayment of debt under its existing
credit facilities of approximately $22.0 million and $16.3 million in Fiscal
2002 and 2001, respectively. At December 31, 2002, the Company was two payments
ahead of schedule under its current term debt facility.

During Fiscal 2000 the Company acquired Acme, which resulted in the Company
renegotiating its current debt facilities during that year. Proceeds received
under the Company's existing credit facility for Fiscal 2001 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 2002 and 2000, the Company paid deferred financing costs of
approximately $229,000 and $3.8 million, respectively, related to the Company's
existing and previous credit facilities.

During Fiscal 2000 the Company was the recipient of approximately $7.1 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 of
the SAR's who were 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.

17

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 were
for tax distributions to the members of KCLLC.

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.

Critical Accounting Policies

Financial Reporting Release No. 60, 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, 2002, the Company
has recorded approximately $95.6 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 determined using a valuation methodology that triangulates
the discounted cash flows, market multiples and transactional multiples of
the reporting units. 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.

Pension Plans: The Company's assets and liabilities recorded in connection
with the Company's pension plans using estimates that include but are not
limited to expected return on assets and life expectancy of participants.
In preparation of the consolidated financial statements the Company
reviews these estimates by reviewing current market conditions and
internal information at its disposal.

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.

18

Significant estimates used by the Company that are subject to change include,
but are not limited to the following:

(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; if the Company were 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.

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, 2002, was approximately $25.5
million. During Fiscal 2002 the Company changed the way it reports its backlog
to include only those orders to be filled within the next 12 months. Comparable
backlog at December 31, 2001 was $29.2 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

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 rescinds SFAS 4, which required all gains and losses from the
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. SFAS 145 requires that
most gains and losses from the extinguishment of debt no longer be classified as
extraordinary items and that they be recorded as part of the results of
operations. In additions, SFAS 145 amends SFAS 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. Lastly, SFAS
145 makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, in some instances, they may change
accounting practice. This statement is effective for all years beginning after
December 15, 2002, with early adoption allowable. The Company plans on adopting
this statement effective January 1, 2003 and does not expect the adoption of
this statement to have a material effect on its future results of operations or
its financial position. Had the Company adopted this standard, all prior
extraordinary losses due to the early extinguishment of debt, would be
reclassified to other losses in the statement of operations.

19

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued and
recorded as liabilities in financial statements. This statement is effective for
exit or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of this statement to determine the effect, if
any, it may have on its consolidated results of operations and financial
position.

In November 2002, the FASB released Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees it has issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Company has adopted the required disclosures of this
Interpretation and has yet to assess the impact that the valuation of future
guarantees may have on the financial statement in accordance with the
Interpretation.

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 $63.0 million outstanding under its term loan
and with any amounts outstanding under its $25-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 4.38% until March 27, 2003, when the
underlying LIBOR contract is up for renewal. At December 31, 2002 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 2002 would have resulted in a change in the
Company's interest expense of approximately $736,000. 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.

As the Company has operations outside the United States of America, it is
subject to foreign currency exchange risk. To date those risks have not had a
material impact on the Company's results of operations or financial position.

Item 8. Financial Statements and Supplementary Data

The Company's consolidated financial statements for the three years ended
December 31, 2002, together with the report of PricewaterhouseCoopers LLP dated
February 13, 2003, are included elsewhere herein. See Item 15 for a list of the
consolidated financial statements and consolidated financial statement schedule.

20

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,
2002. 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.

Name Age Position
- ------------------------------- ----------- ------------------------------------------------------------------

John S Dyson 60 Chairman of the Board of Directors of KCI and KCLLC
Clay B. Lifflander 40 Director of KCI and KCLLC. Chief Executive Officer of KCLLC.
Robert B Kay 40 Director of KCI and KCLLC. President of KCLLC.
Alan Rivera 40 Director of KCI and KCLLC, Vice President and Secretary of KCI
and KCLLC
George M. Scherer 49 Director of KCI and KCLLC, Vice President of KCI and President
of BWE
Philip E. Berney 39 Director of KCI and KCLLC
Tom R. Wall, IV 43 Director of KCI and KCLLC
Albert W. Weggeman 39 Chief Operating Officer and Vice President of KCLLC
Keith A. McGowan 40 Chief Financial Officer and Vice President of KCLLC
J. Marty O'Donohue 52 President of Marinco
Daryl A. Lilly 42 President of Gits
Michael L. Colecchi 53 President of Hudson and ESP

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.

21

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.

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. From 1986 to 1999, Mr. Berney worked
at Bear, Stearns & Co. Inc. where he was promoted to 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 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.

22

Item 11. Executive Compensation

SUMMARY COMPENSATION TABLE

Long Term
Annual Compensation Compensation
Awards

Number
Securities
Name and Principal Other Annual Underlying Options
Position Year Salary Bonus Compensation (2)
- --------------------------------------------------------------------------------------------------------------------------

Clay B. Lifflander
(1), Chief
Executive Officer 2002 $ -- $ -- $ -- --
2001 $ -- $ -- $ -- --
2000 $ -- $ -- $ -- 30,000

Robert B. Kay (3),
President 2002 $ 304,999 $ --(4) $ -- --
2001 $ 295,000 $ -- $ -- --
2000 $ 266,178 $ 138,000 $ 100,000 30,000

Alan L. Rivera (1),
Secretary 2002 $ -- $ -- $ -- --
2001 $ -- $ -- $ -- --
2000 $ -- $ -- $ -- 7,500

Albert W. Weggeman
(3), SVP of
Operations 2002 $ 216,749 $ --(4) $ -- 2,500
2001 $ 174,262 $ 54,250 $ -- 5,000
2000 $ -- $ -- $ -- --

Keith A. McGowan,
Chief Financial
Officer 2002 $ 176,249 $ --(4) $ -- 1,000
2001 $ 170,000 $ -- $ -- 192
2000 $ 143,584 $ 48,000 $ 60,000 5,250

George M. Scherer
(3), President of --
BWE 2002 $ 254,000 $ --(4) $ --
2001 $ 225,000 $ 26,144 $ -- --
2000 $ 225,000 $ 23,144 $ -- 4,000

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, 2002.

23

(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 2002 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 determined based on certain performance goals and are at the
discretion of the Board of Directors of KCLLC.

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, 2002.

- -------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates for Option
Individual Grants Term (1)
- ------------------------------------------------------------------------------ ---------------------------------
Number of
Securities Percent of
Underlying Total Options/
Options SARS Granted
/SARS to Employees Exercise Price Expiration
Name Granted (#) in Fiscal Year ($/sh) Date 5% 10%
- ------------------------------------------------------------------------------ --------------- ----------------

Albert W.
Weggeman 2,500 22.1% $100.00 1/02/12 $178,000 $463,000

Keith A.
McGowan 1,000 8.8% $100.00 1/02/12 $65,000 $166,000

(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.

24

AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 2002 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, 2002.

Number of Securities underlying Unexercised Value of Unexercised In-the-Money Options
Options at Year End at Year End (1)
-----------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------

Clay B. Lifflander 6,666 23,334 $ 50,995 $178,505
Robert B.Kay 26,666 23,334 1,850,995 178,505
George M. Scherer 888 3,112 6,793 23,807
Alan L. Rivera 1,667 5,833 12,749 44,626
Albert W. Weggeman 1,110 6,390 - 62,500
Keith A. McGowan 4,225 5,017 201,001 29,749

(1) Assumes management's estimate of fair market value of $125.00 per share of
common stock at December 31, 2002.

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 $250,000 per annum with yearly increases based on the consumer
price index, an annual incentive bonus, at the discretion of the Board of
Directors based upon Mr. Kay and the Company reaching 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. During July of 2002, the Company increased Mr. Kay's
base compensation to $315,000. 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.

25

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, 2002, options to purchase an aggregate of 51,803 shares were
outstanding under the 1998 Plan at a weighted average exercise price of
approximately $41 per share, of which options to purchase 48,945 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.

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, 2002, the Company had options for approximately 140,000 shares of
common stock at a weighted average exercise price of approximately $117 per
share outstanding under the Plan. Options for approximately 78,000 were vested
as of December 31, 2002. Options for 24,000 shares vest over the next three
years. The options for the approximately 89,000 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 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 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, the Company included in
continuing operations approximately $1.6 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.

26

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 a 401(k) plan for the employees of Acme. There is no
Company match in the plans, although the Company has the right to make
discretionary contributions. All funds, which are participant contributions, are
vested to the employee.

27

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 27, 2003 of (i) each person known to
own beneficially more than 5% of 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.

Common Stock Beneficially Owned
---------------------------------------------
Beneficial Owner Address Shares (1) % (2)
- --------------------------------------------------------------------------------------------------------------------

John S. Dyson Key Components, LLC
200 White Plains Road 223,932(3) 58.4%
Tarrytown, NY 10591

Clay B. Lifflander Key Components, LLC
200 White Plains Road 180,113 3)(4) 46.2%
Tarrytown, NY 10591

Robert B. Kay Key Components, LLC
200 White Plains Road 26,666(5) 6.5%
Tarrytown, NY 10591

Alan L. Rivera Key Components, LLC
200 White Plains Road 16,429(6) 4.3%
Tarrytown, NY 10591

George M. Scherer Key Components, LLC
200 White Plains Road 53,745(7) 14.0%
Tarrytown, NY 10591

Philip E. Berney Kelso & Co. 918,065(8) 70.5%
320 Park Avenue

New York, NY 10022

Thomas R. Wall, IV Kelso & Co. 918,065(8) 70.5%
320 Park Avenue
New York, NY 10022

Kelso & Co. Kelso & Co. 918,065(8) 70.5%
320 Park Avenue
New York, NY 10022

Albert W. Weggeman Key Components, LLC 1,387(9) 0.4%
200 White Plains Road
Tarrytown, NY 10591

Keith A. McGowan Key Components, LLC
200 White Plains Road 4,558(10) 1.2%
Tarrytown, NY 10591

All Officers and Directors (9 persons) Key Components, LLC
200 White Plains Road 1,311,617(11) 97.6%
Tarrytown, NY 10591
- --------------------------------------------------------------------------------------------------------------------

(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.

28

(2) Share values and percentages of ownership are based on share ownership
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 26,666 shares of KCI Common Stock.
See "Executive Compensation."

(6) Includes vested options to purchase 1,667 shares of KCI Common Stock. See
"Executive Compensation."

(7) Includes vested options to purchase 888 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 1,387 shares of KCI Common Stock. See
"Executive Compensation"

(10) Represents vested options to purchase 4,558 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.

The following table provides information as of December 31, 2002 about KCI's
common stock that may be acquired upon the exercise of options outstanding under
existing compensation plans.

EQUITY COMPENSATION PLAN INFORMATION

Number of securities
remaining available for future
Number of securities to be Weighted-average issuance udner equity
issued upon exercise of exercise price of compensation plan (excluding
outstanding options, outstanding options, securities referenced in
Plan category warrants and rights warrants and rights column (a))
- ---------------------------------------- --------------------------- -------------------- -------------------------------
(a) (b) (c)

Equity compensation plans approved by
security holders:

1998 Incentive Plan 51,803 $ 41 None

KCI Stock Incentive Plan 139,796 $117 65,083

Equity compensation plans not approved by
security holders: None None None
- --------------------------------------------------------------------------------------------------------------------------------
Total 191,599 $ 83 65,083
================================================================================================================================

29

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 $217,000, $213,000 and $208,000 for Fiscal 2002, 2001 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 $167,000,
$159,000 and $151,000 in Fiscal 2002, 2001 and 2000, 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 KCI. The Company
recorded management fees related to Millbrook of $175,000, $920,000 and $920,000
for Fiscal 2002, 2001 and 2000, 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,
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
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 Fiscal 2002, of $175,000 plus amounts paid to
Kelso ($325,000 per annum) under the Advisory Agreement. 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, 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.

Item 14. Control Procedures

Within 90 days prior to the date of this report, under the supervision and with
the participation of management, including KCLLC's Chief Executive Officer,
President and Chief Financial Officer, KCLLC evaluated the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to
Exchange Act Rule 15d-14. Based upon that evaluation, KCLLC's Chief Executive
Officer, President and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in timely alerting the Chief
Executive Officer, President and Chief Financial Officer to material information
relating to KCLLC (including its consolidated subsidiaries and its parent
company KCI) required to be included in its periodic SEC filings. There have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.

30

Within 90 days prior to the date of this report, under the supervision and with
the participation of management, including Finance Corp.'s Chief Executive
Officer, President and Chief Financial Officer, Finance Corp. evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14. Based upon that evaluation,
Finance Corp.'s Chief Executive Officer, President and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures are
effective in timely alerting the Chief Executive Officer, President and Chief
Financial Officer to material information relating to Finance Corp. required to
be included in its periodic SEC filings. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.

PART IV

Item 15. 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 35
Consolidated Balance Sheet at December 31, 2002 and 2001 36
Consolidated Statement of Income for the three years ended December 31, 2002 37
Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2002 38
Consolidated Statement of Cash Flows for the three years ended December 31, 2002 39
Notes to Consolidated Financial Statements 40-62

(2) Financial Statement Schedules:
Valuation and Qualifying Accounts (Schedule II) 63

(b) Reports on Form 8-K

(1) Form 8-K dated August 14, 2002 Certification of the quarterly
report on Form 10-Q of the KCLLC and Finance Corp. for the quarterly
period ended June 30, 2002 by the Chief Executive Officer, President
and Chief Financial Officer of KCLLC and Finance Corp.

(2) Form 8-K dated November 14, 2002 Certification of the quarterly
report on Form 10-Q of the KCLLC and Finance Corp. for the quarterly
period ended September 30, 2002 by the Chief Executive Officer,
President and Chief Financial Officer of KCLLC and Finance Corp.

(c) Exhibits
See list of exhibits on page 32

(d) Financial Statement Schedules
See (a)(2) above 63

31

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)
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).
10.7* 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)
10.12 Lease of Real Property, dated June 1, 1993, between ESP and Massachusetts Colony (2)
Corporation.
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.
10.24* 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.

32

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 Corp. (7)
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.
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)
10.40 First Amendment to the Credit Agreement, dated June 28, 2002, among KCLLC, the (14)
Lenders (as defined) and Wachovia Bank, National Association
10.41* Key Components, Inc. Stock Incentive Plan (15)
20.1 Notice of Merger, dated November 21, 2000. (7)
21.1 List of the Company's Subsidiaries. (15)
25.1 Form T-1 Statement of Eligibility of Trustee. (2)

* Management agreement or compensatory plan.

(1) Previously filed with the Company's Schedule 14D-1, filed on December 9,
1998 (Commission File No.5-13949) and incorporated herein by reference.
(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 and
incorporated herein by reference.
(3) Previously filed with the Company's Current Report on Form 8-K (File No.
333-58675-01), filed February 3, 1999 and incorporated herein by reference.
(4) Previously filed with the Company's Form 10-K for the year ended December
31, 1998 and incorporated herein by reference.
(5) Previously filed with the Company's Form 10-Q for the three months ended
March 31, 1999 and incorporated herein by reference.

33

(6) Previously filed with the Company's Form 10-K for the year ended December
31, 1999 and incorporated herein by reference.
(7) Previously filed with the Company's Form 8-K filed on December 6, 2000 and
incorporated herein by reference.
(8) Previously filed with the Company's Form 8-K filed on April 19, 2000 and
incorporated herein by reference.
(9) Previously filed with the Company's Form 10-Q for the six months ended June
30, 2000 and incorporated herein by reference.
(10) Previously filed with the Company's Form 10-Q for the nine months ended
September 30, 2000 and incorporated herein by reference.
(11) Previously filed with Schedule 14A of Acme, filed October 12, 2000
(Commission File No. 001-08277) and incorporated herein by reference.
(12) Previously filed with the Company's Form 10-K for the year ended December
31, 2000 and incorporated herein by reference.
(13) Previously filed with the Company's Form 10-K for the year ended December
31, 2001 and incorporated herein by reference.
(14) Previously filed with the Companys Form 10-Q for the six months ended June
30, 2002 and incorporated herein by reference.
(15) Filed herewith.

34

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 15(a)(1) on page 32 present fairly, in all material
respects, the financial position of Key Components, LLC and its subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, 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 15(a)(2) on page 32 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.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002.

PricewaterhouseCoopers LLP

Stamford, Connecticut
February 13, 2003, except for Note 13,
as to which the date is March 3, 2003.

35

Key Components, LLC
and subsidiaries

Consolidated Balance Sheets
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------------

Assets
Current:
Cash $ 2,879 $ 5,080
Accounts receivable, net of allowance for doubtful accounts of
$1,459 and $1,004 in 2002 and 2001, respectively 21,447 25,461
Inventories 29,623 30,412
Prepaid expenses and other current assets 2,800 1,986
Prepaid income taxes 3,400 1,316
Deferred income taxes 5,295 4,025
Assets held for sale - 2,250
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 65,444 70,530
Property, plant and equipment, net 23,883 25,891
Goodwill, net 95,554 119,067
Deferred financing costs, net 4,364 5,259
Prepaid pension cost 3,021 3,588
Other assets 448 1,384
- ---------------------------------------------------------------------------------------------------------------------
$192,714 $225,719
=====================================================================================================================
Liabilities and Member's Equity
Current liabilities:
Current portion of long-term debt $ 7,225 $ 6,305
Accounts payable 9,940 8,876
Accrued compensation 4,098 2,814
Accrued expenses 6,202 7,572
Accrued acquisition costs 885 1,414
Accrued interest 713 888
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 29,063 27,869

Long-term debt 136,619 159,532
Accrued lease costs 469 525
Deferred income taxes 579 5,056
Other long-term liabilities 940 1,062
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 167,670 194,044
Commitments and contingencies (Notes 2 and 8)
Member's equity 25,044 31,675
- ---------------------------------------------------------------------------------------------------------------------
$192,714 $225,719
=====================================================================================================================

See accompanying notes to consolidated financial statements.

36

Key Components, LLC
and subsidiaries

Consolidated Statements of Operations
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------

Net sales $187,943 $193,817 $160,465
Cost of goods sold 117,566 122,975 93,847
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 70,377 70,842 66,618

Selling, general and administrative expenses 38,624 41,208 30,290
Amortization of goodwill - 3,558 2,626
Cumulative adjustment for Aerospace - (721) -
Goodwill Impairment 12,350 - -
Other operating expenses 2,116 311 2,334
- ---------------------------------------------------------------------------------------------------------------------
Income from operations 17,287 26,486 31,368
Other income (expense):
Other income 168 376 799
Interest expense (13,301) (16,573) (15,159)
Recapitalization expenses - - (7,937)
- ---------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes, 4,154 10,289 9,071
discontinued operations, extraordinary item and
cumulative effect of change in accounting
principle
Provision for income taxes 2,628 5,558 5,172
- ---------------------------------------------------------------------------------------------------------------------
Income from continuing operations 1,526 4,731 3,899
- ---------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Loss from operations of the inverter business, net - - (146)
Loss on disposal of the inverter business, net - - (3,842)
- ---------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations - - (3,988)
- ---------------------------------------------------------------------------------------------------------------------
Extraordinary loss on early extinguishment of debt net of - - (1,227)
income tax benefit of $828
- ---------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle, net
of income taxes of $3,013 (8,157) - -
- ---------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (6,631) $ 4,731 $ (1,316)
=====================================================================================================================

See accompanying notes to consolidated financial statements.

37

Key Components, LLC
and subsidiaries

Consolidated Statements of Member's Equity
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------

Member's equity, beginning of year $31,675 $27,850 $ 9,411
Capital contributions - - 7,111
Capital distributions - (906) (1,420)
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)
Reclass of redeemable member's interest - - 16,187
Net (loss) income (6,631) 4,731 (1,316)
- ---------------------------------------------------------------------------------------------------------------------
Member's equity, end of year $25,044 $31,675 $27,850
=====================================================================================================================

See accompanying notes to consolidated financial statements.

38

Key Components, LLC
and subsidiaries

Consolidated Statements of Cash Flows
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net (loss) income $ (6,631) $ 4,731 $ (1,316)
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of change in accounting
principle 8,157 - -
Goodwill Impairment 12,350 - -
Loss from discontinued operations - - 3,988
Extraordinary loss on early extinguishment of debt - - 1,227
Provision for doubtful accounts 483 570 148
Depreciation and amortization 5,012 9,056 6,818
Amortization of deferred finance costs 977 933 1,016
Writedown of deferred finance costs 145 - -
Tax benefits from equity transactions - - 919
Deferred income taxes (2,740) 1,207 1,021
Option compensation charge - - 46
Stock appreciation rights - - 1,556
(Increase) decrease in (net of effects of acquisitions):
Accounts receivable 3,399 4,214 (1,935)
Inventories 789 6,985 (4,708)
Prepaid expenses and other assets 420 2,662 (670)
Increase (decrease) in (net of effects of acquisitions):
Accounts payable 816 (3,419) 722
Accrued expenses and other liabilities (801) (5,007) (1,025)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 22,376 21,932 7,807
Net cash used in discontinued operations - - (99)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,376 21,932 7,708
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business acquisitions, net of cash acquired - - (46,319)
Proceeds from business dispositions - - 10,721
Capital expenditures (2,719) (4,131) (3,089)
Cash provided by assets held for sale 364 666 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,355) (3,465) (38,687)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Payments of term debt, notes payable and other
obligations (21,993) (19,056) (67,583)
Proceeds from issuance of debt - 2,800 103,700
Deferred financing costs (229) - (3,771)
Repayment of outstanding stock appreciation rights - - (7,454)
Capital withdrawals - (906) (1,420)
Capital contributions - - 7,111
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities (22,222) (17,162) 30,583
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,201) 1,305 (396)
Cash and cash equivalents, beginning of year 5,080 3,775 4,171
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,879 $ 5,080 $ 3,775
=====================================================================================================================

See accompanying notes to consolidated financial statements.

39

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, 2002 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 turbocharger components, 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,
2002, KCLLC was wholly-owned by Key Components, Inc. ("KCI"), a New York
corporation. KCI holds no other assets other than its investment 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 accounting
principles generally accepted 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, inventory obsolecence, fair value estimates in
conjunction with the Company's fair value testing of its recorded goodwill,
warranty costs accrued, 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.

40

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major renewals and
betterments are capitalized, while maintenance and repairs that do not
improve or extend the life of the asset are expensed in the period they
occur. Depreciation is computed using the straight-line method over the
estimated 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
=============================================================================

Intangibles

Intangibles, which are included in other assets, 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 $284,000, 438,000 and $506,000 for 2002,
2001 and 2000, respectively. Accumulated amortization at December 31, 2002
and 2001 was approximately $3.9 million and $3.6 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, 2002.

In October 2001, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 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. SFAS 144 also broadens the
definition of what constitutes a discontinued operation and how such results
are to be measured and presented. SFAS 144 was effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS 144 did not have a
material impact on the earnings or financial position of the Company.

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
goodwill was being amortized on the straight-line method over thirty-five to
forty years. Goodwill amortization for the years ended December 31, 2001 and
2000 was approximately $3.6 million and $2.6 million. Accumulated
amortization at December 31, 2001 was approximately $10.3 million.

41

Key Components, LLC
and subsidiaries

Notes to 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.

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.

Upon the adoption of SFAS 142, the Company stopped recording goodwill
amortization effective January 1, 2002. In June 2002, the Company completed
the assessment of its reporting units and its initial assessment of
impairment upon adoption. As a result, the Company identified one reporting
unit in the mechanical engineered components ("MEC") business with a book
value of goodwill that exceeded its fair market value, which was estimated
using a valuation methodology that triangulates the discounted cash flows,
market multiples and transactional multiples of the reporting units. In
accordance with SFAS 142, the Company, during the second quarter 2002,
estimated the amount of the impairment and recorded a cumulative effect of
change in accounting principle, as of January 1, 2002, of approximately $7.8
million, net of taxes of approximately $3.4 million, to write down the
goodwill associated with the Company's lock product line resulting from the
market conditions of that product line. The Company, as prescribed by SFAS
142, finalized its impairment testing by comparing the implied fair value of
the reporting unit's goodwill to its carrying value during the third quarter
to determine the amount of the final impairment upon adoption of SFAS 142. As
a result, the Company reduced the tax impact of the charge by approximately
$353,000 to reflect the proper deferred tax basis of the adjusted goodwill.
No further impairment charges were taken against the Company's goodwill.

In December 2002, in accordance with SFAS 142, the Company performed its
required annual fair value testing of its recorded goodwill for its reporting
units using a valuation approach consistent with the one used upon adoption
of SFAS 142. As a result of the analysis, the Company recorded a charge of
approximately $12.4 million, related to its lock reporting unit, which
experienced a further decline of its fair value since the January 1, 2002
assessment, due to a deterioration in the current year of its results of
operations compared to its operating plan and projected future financial
results as well as a decline in the market multiple ascribed to the product
line in its fair market valuation. Through December 31, 2002, the Company's
cumulative impairment of goodwill was approximately $23.5 million, all of
which related to its lock product line.

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 $977,000, $933,000 and
$1,016,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. Accumulated amortization at December 31, 2002 and 2001 was
approximately $3.1 million and $2.2 million, respectively. In addition,
during 2002 the Company amended certain aspects of its borrowing agreement
and expensed $145,000 of deferred financing costs.

42

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Income Taxes

Prior to May 23, 2000, the members of KCLLC were responsible for the taxes
due on the income of the Company, apart from the subsidiaries that remained C
corporations. KCI, the majority member of KCLLC was an S corporation
requiring its shareolders to be personally liable for the taxes on income
passed through to KCI from KCLLC.

In order for the shareholders to pay for their tax liabilities related to the
income passed through from 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, the minority member
of KCLLC at that time, 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. KCLLC became wholly owned by KCI when
Keyhold merged into KCI effective December 31, 2000.

For the three years ended December 31, 2002 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.

Revenue Recognition

The Company recognizes revenue principally upon shipment of products to
customers, however no sooner than when title passes and all risk and rewards
of ownership have been transferred.

Warranty

The Company records a liability for its expected claims under existing
product warranty policies. The accrual is based on the Company's historical
warranty experience. For the years ended December 31, 2002 and 2001 the
Company's warranty accrual changed as follows:

Year ended December 31, 2002 2001
----------------------------------------------------------------------------
Balance, beginning of period $821 $453
Additions 200 19
Addition of Aerospace - 349
Charges (36) -
----------------------------------------------------------------------------
Balance, end of period $985 $821
============================================================================

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, heavy truck, 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, 2002.

43

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Shipping costs

The Company includes the costs of shipping to its customers as part of its
selling expenses.

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 97% of the their face
value, however the market for the notes is highly inactive.

New Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS 145 rescinds SFAS 4, which required all gains and losses
from the extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of the related income tax effect. SFAS 145
requires that most gains and losses from the extinguishment of debt no longer
be classified as extraordinary items and that they be recorded as part of the
results of operations. In additions, SFAS 145 amends SFAS 13 to require that
certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Lastly, SFAS 145 makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. This
statement is effective for all years beginning after December 15, 2002, with
early adoption allowable. The Company plans on adopting this statement
effective January 1, 2003 and does not expect the adoption of this statement
to have a material effect on its future results of operations or its
financial position. Had the Company adopted this standard, all prior
extraordinary losses due to the early extinguishment of debt, would be
reclassified to other losses in the statement of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued
and recorded as liabilities in financial statements. This statement is
effective for exit or disposal activities initiated after December 31, 2002.
The Company is currently evaluating the impact of this statement to determine
the effect, if any, it may have on its consolidated results of operations and
financial position.

In November 2002, the FASB released Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees it has issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee for guarantees issued or modified after December 31, 2002, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company has adopted the required disclosures of this
Interpretations and has yet to assess the impact of the valuation of future
guarantees will have on the financial statement in accordance with the
Interpretation.

Reclassifications

Certain reclassifications were made to conform prior periods to the current
year presentation.

44

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

2. Acquisitions and Dispositions

(a) Acme Electric Corporation

During the year ended December 31, 2000, the Company acquired Acme, which was
accounted for by the purchase method of accounting. The results of operations
of Acme have been included in the consolidated financial statements since the
date of acquisition.

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.

At the time of the acquisition, the Company decided to sell the Acme
Aerospace ("Aerospace") division and 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 was a contract electronics manufacturer for data
storage, telecommunications and medical electronic applications.

On June 1, 2001, based on the strength of the operating performance of
Aerospace, the Company decided to retain 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
=====================================================================================================================

45

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

In February 2002, the Company sold the Electronics division of Acme for
$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 could
be earned, if the Electronics division meets certain annual revenue targets
over the next 48 months following the sale. 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 received in 2002 from the tax loss generated from the
sale. Based on operating performance of Electronics subsequent to the sale,
the Company fully reserved the $300,000 note. To date, there have been no
payments of the contingent consideration, nor does the Company expect any in
the future.

As part of the Company's plan of integrating the Acme acquisition, the
Company accrued approximately $1.8 million of severance and related costs and
$266,000 of lease exit costs related to exiting Acme's corporate office
(closed in October 2001). At December 31, 2002, $1.6 million of payments had
been made related to these accruals.

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, had occurred on January 1, 2000, the
consolidated results of operations of the Company would have been as follows
for the year ended December 31, 2000:

Year ended December 31, 2000
-----------------------------------------------------------------------------
(Unaudited)

Pro forma net sales $220,615

Pro forma income from continuing operations $ 12,666

Pro forma net income $ 7,451
=============================================================================

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.

46

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

(b) Inverter business

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 a part of Valley Forge
Corporation ("VFC") which was acquired in January 1999. 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. During
2002, the escrow related to the sale of Heart and Cruising was settled with
the buyer. The Company received approximately $148,000.

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.

The summary of the operations of the power inverter business for the years
ended December 31, 2000 were as follows:

December 31, 2000
- -------------------------------------------------------------------------------------------------------------------
(in thousands)

Net sales $6,573
-----------------------------

Net loss from operations of the inverter business, net of income tax benefit of $111 $ (146)

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 $(3,988)
===================================================================================================================

3. Inventories

Inventories consist of:

December 31, 2002 2001
-----------------------------------------------------------------------------
(in thousands)
Raw materials $14,342 $15,566
Work-in-process 7,734 6,808
Finished goods 7,547 8,038
-----------------------------------------------------------------------------
Total inventory $29,623 $30,412
=============================================================================

47

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, 2002 2001
- ------------------------------------------------------------------------------------------------------------------
(in thousands)

Land, building and improvements $ 9,323 $ 9,173
Equipment 32,888 30,768
Office and computer equipment 2,241 2,094
Furniture and fixtures and leasehold improvements 1,463 1,426
Construction-in-progress 229 126
- ------------------------------------------------------------------------------------------------------------------
46,144 43,587
Less: Accumulated depreciation (22,261) (17,696)
- ------------------------------------------------------------------------------------------------------------------
Total property, plant and equipment $ 23,883 $25,891
==================================================================================================================

Depreciation expense amounted to approximately $4.7 million, $5.1 million and
$3.8 million for the years ended December 31, 2002, 2001, and 2000,
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"). EBITDA is not based on accounting principles generally accepted
in the United States of America, but is the performance measure used by
Company management to analyze and monitor the Company and is commonly used by
investors and financial analysts to compare and analyze companies. In its
calculation of EBITDA certain charges that management determines as
investment related or non-cash are excluded. Adjusted EBITDA is used in the
computation of all the financial maintenance covenants under the Company's
credit facility. Segment information is as follows:

Mechanical engineered
(In thousands) Electrical components components Total
- ----------------------------------------------------------------------------------------------------------------------

Year ended December 31, 2002:
Net sales from external customers $121,051 $66,892 $187,943
Intersegment net sales - 113 113
Segment profit - EBITDA 21,930 18,238 40,168
Segment assets 110,561 75,516 186,077
Goodwill, net 59,192 36,362 95,554
Depreciation and amortization 2,575 2,405 4,980

Year ended December 31, 2001:
Net sales from external customers $120,401 $ 73,416 $193,817
Intersegment net sales - 135 135
Segment profit - EBITDA 20,277 21,560 41,837
Segment assets 116,576 100,265 216,841
Goodwill, net 59,875 59,192 119,067
Depreciation and amortization 3,916 4,330 8,246

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
Goodwill, net 61,610 56,845 118,455
Segment assets 115,870 108,883 224,753
Depreciation and amortization 2,241 4,559 6,800
======================================================================================================================

48

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, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------

Profit or loss:
Total profit from reportable segments - EBITDA $ 40,168 $ 41,837 $ 44,210
Reconciling items:
Corporate administrative expenses (2,735) (4,261) (1,704)
Depreciation and amortization (5,012) (8,948) (6,818)
Interest expense (13,301) (16,573) (15,159)
Management fee (500) (1,265) (1,147)
Goodwill Impairment (12,350) - -
Other expenses (2,116) (501) (10,311)
- -------------------------------------------------------------------------------------------------------------
Income from continuing operations before provision for
income taxes $ 4,154 $ 10,289 $ 9,071
=============================================================================================================

In 2002 and 2001 the majority of the other expenses (approximately $1.4
million in 2002 and $288,000 in 2001) were the redundant facility costs,
startup expenses and inefficiencies related to the Company's new lock
production facility in Mexico. In 2001 the Company commenced its plan to move
most of its lock production to Mexico over a three year period. In addition,
the other expenses in 2002 include approximately $532,000 related to the Acme
pension plan, almost all of which is related to the amortization of the
deferred loss over a short useful life to match the Company's intention to
terminate the plan (See Note 10). In 2000, the other expenses are related to
the charges taken for the recapitalization and the stock appreciation rights
(See Note 9).

December 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------
(in thousands)

Assets:
Total assets for reportable segments $186,077 $216,841
Assets held for sale - 2,250
Corporate assets 6,637 6,628
- ---------------------------------------------------------------------------------------------------------------
Total consolidated assets $192,714 $225,719
===============================================================================================================

Year ended December 31, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Geographical Sales Information: (in thousands)
United States $164,650 $173,710 $144,756
Canada 3,501 4,031 4,245
China 5,011 3,841 1,617
England 4,714 3,233 3,138
Mexico 1,319 2,287 1,234
Netherlands 2,091 1,019 -
Other 6,657 5,696 5,475
- ---------------------------------------------------------------------------------------------------------------
Total $187,943 $193,817 $160,465
- ---------------------------------------------------------------------------------------------------------------
===============================================================================================================

49

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

6. Long-Term Debt

Long-term debt consists of the following:

December 31, 2002 2001
-----------------------------------------------------------------------------
(in thousands)
Senior notes $80,000 $ 80,000
Term loan and revolving credit facility 63,046 85,000
Mortgage 782 800
Other 16 37
-----------------------------------------------------------------------------
143,844 165,837
Less: Current portion (7,225) (6,305)
-----------------------------------------------------------------------------
Total long-term debt $136,619 $159,532
=============================================================================

(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, 2002 and 2001, 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 non-collateralized basis, by the subsidiaries of the Company (the
"Subsidiary Guarantors"). At December 31, 2002, 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.

The Senior Notes will be redeemable, at the Company's option, in whole or in
part, at any time and from time to time, on or after June 1, 2003, and prior
to maturity, upon not less than 30 nor more than 60 days prior notice to the
holder, plus accrued and unpaid interest to the redemption date. The
redemption price is set forth in the indenture and ranges from 105.25% at
June 30, 2003 scaling down to 100.0% of the face value beginning in 2006. The
holders of the Senior Notes can require the Company to repurchase the notes
upon a change in control, as defined in the Indenture.

The Indenture requires certain limitations of indebtedness and certain
payments related to dividends and common stock, as defined.

50

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

(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 4.25% and 1.43%, respectively, at December 31,
2002. 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, 2002 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.

In June 2002, the Company amended its credit agreement (the "Amendment") to
provide for revised financial covenant ratios from September 30, 2002 through
December 2003 from the original covenant ratios stipulated in the credit
agreement. The Company anticipated that certain of the original covenants
which become more stringent over the term of the agreement, would not be met
due to the general decline in the economy. In addition, the Amendment revised
the Company's applicable margin on borrowings, the maximum allowable capital
expenditures through 2003 and reduced the amount allowed for permitted
acquisitions (as defined in the credit agreement) from $15 million to $7.5
million through the end of 2003. Concurrent with the Amendment, the Company
voluntarily reduced the availability under its revolving credit facility by
$15 million from $40 million to $25 million through the end of 2003. At
December 31, 2002, the Company was in compliance with the covenants of the
credit agreement set forth in the Amendment. As a result of the Company
voluntarily reducing its borrowing capacity through the end of 2003, the
Company wrote off $145,000 of the deferred finance costs related to amending
the Company's credit facility.

As of December 31, 2002, the Company had no borrowings outstanding under the
revolving credit facility and had approximately $63.0 million outstanding
under the term loan. Accrued interest payable at December 31, 2002 and 2001
was approximately $8,000 and $183,000, 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, 2002, aggregate principal payments required on all amounts
due are as follows:

Year ending December 31, Amount
-----------------------------------------------------------------------------
(in thousands)
2003 $7,225
2004 16,058
2005 19,931
2006 19,937
2007 27
Thereafter 80,666
-----------------------------------------------------------------------------
$143,844
=============================================================================

7. Federal and State Income Taxes

Income tax expense (benefit) consists of the following:

Year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(in thousands)

Current:
Federal $4,002 $3,087 $2,796
State 793 748 1,356
Foreign 573 365 -
- -----------------------------------------------------------------------------------------------------------------
Current 5,368 4,200 4,152
- -----------------------------------------------------------------------------------------------------------------
Deferred:
Federal (2,341) 925 760
State (424) 333 260
Foreign 25 100 -
- -----------------------------------------------------------------------------------------------------------------
Deferred (2,740) 1,358 1,020
- -----------------------------------------------------------------------------------------------------------------
Total provision for income taxes $2,628 $5,558 $5,172
=================================================================================================================

A reconciliation between income taxes computed at the statutory federal rate
and income tax expense is as follows:

Year ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------

Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefit 7.7 7.1 7.9
Nondeductible goodwill impairment charges and goodwill
amortization 33.5 8.8 3.9
Recording of temporary differences from changes in tax
status - - 2.0
Loss (income) taxed directly to shareholders - - 3.1
Foreign income taxes, net of federal benefit (0.1) 3.3 -
Reconciliation to prior years tax filings (11.6) - -
Other permanent differences (0.2) 1.6 5.1
Other, net - (0.8) 1.0
- -----------------------------------------------------------------------------------------------------------------
63.3% 54.0% 57.0%
=================================================================================================================

52

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Taxable income earned outside the United States of America was approximately
$1.7 million and $1.0 million for the years ended December 31, 2002 and 2001,
respectively and was primarily generated from operations in Thailand. During
the fourth quarter of 2002, upon final completion and assessment of the
Company's reconciliation of prior year tax filing, the Company recognized a
benefit for the treatment of certain 2001 tax benefits, which were not
estimable at December 31, 2001.

The Company's net deferred assets and liabilities were as follows:

December 31, 2002 2001
- ----------------------------------------------------------------------------------------------------------
(in thousands)

Deferred tax assets:
Allowance for doubtful accounts $ 578 $ 355
Intangibles 2,812 -
Inventory reserves/valuation 2,590 1,628
Warranty reserve 390 290
Accrued severance and other acquisition costs 382 526
Accrued compensation costs 945 842
Supplemental retirement plan 815 769
Accrued expenses 442 709
Accrued lease costs 208 204
Other 237 282
- ----------------------------------------------------------------------------------------------------------
Total deferred tax assets 9,399 5,605
- ----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Intangibles - (2,274)
Pension (1,526) (1,573)
Excess depreciation (3,157) (2,789)
- ----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (4,683) (6,636)
- ----------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 4,716 $(1,031)
==========================================================================================================

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 expiring through 2005. The
Company recorded a 100% allowance since the Company does not believe that it
can derive a benefit from this asset at this time.

53

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

8. Commitments and Contingencies

(a) Operating leases

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 $2.3
million, $2.1 million and $1.3 million in 2002, 2001 and 2000, respectively.

At December 31, 2002 and 2001, approximately $525,000 and $576,000,
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, 2002 and 2001, approximately
$56,000 and $51,000, respectively, were included in accrued expenses.

The following is a schedule of the future minimum lease payments under
operating leases which expire through 2010.

Minimum rental
Year ended December 31, payments
-----------------------------------------------------------------------------
(in thousands)
2003 $1,865
2004 1,673
2005 1,222
2006 979
2007 837
Thereafter 1,388
-----------------------------------------------------------------------------
Total minimum lease payments $7,964
=============================================================================

(b) KCI Obligations

As 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 million of its preferred stock (including any dividends in
arrears which was approximately $2.8 million at December 31, 2002) (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, 2002
approximately 1.3 million KCI common shares plus potentially 193,000 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.

(c) Other

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.

The Company has employment agreements with certain members of management that
expire through 2006.

54

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

9. Member's 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.

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 61.1% of the
total outstanding Common Stock of KCI, on a fully diluted basis).

55

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

The Preferred Stock has a liquidation preference equal to its purchase price
plus accrued dividends (approximately $2.8 million in cumulative dividends in
arrears at December 31, 2002), 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. 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.

56

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 ExercisePrice
- --------------------------------------------------------------------------------------------------------------------------

Options outstanding at
January 1, 2000 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

Options granted - - 11,350 100

Options exercised - - - -

Options canceled (169) (95) (1,750) (117)
- --------------------------------------------------------------------------------------------------------------------------

Options outstanding at
December 31, 2002 51,803 $ 41 139,796 $117
==========================================================================================================================
Exercise prices per share - $25-$95 - $100-$125
==========================================================================================================================
Shares available for options - - 65,083 -
==========================================================================================================================

57

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

A summary of stock options at December 31, 2002 is as follows:

---------------------------------
Options Exercisable
---------------------------------
Weighted Average Weighted Average
- -----------------------------------------------------------------------------------------------------------------------
Range of Exercise
Exercise Prices Shares Life (yrs) Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------

$25-$35 44,578 4.3 $33 41,720 $33
$75-$95 7,225 6.9 $85 7,225 $85
$117-$125 139,796 7.8 $117 29,598 $118
- -----------------------------------------------------------------------------------------------------------------------
191,599 78,543
=======================================================================================================================

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, based on an independent appraisal,
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, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------

Weighted average risk-free interest rate 4.9% 5.2% 5.5%
Dividend yield None None None
Weighted average expected life 6.0 years 7.3 years 7.6 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, 2002 2000 1999
-----------------------------------------------------------------------------
(in thousands)
Net (loss) income
As reported $(6,631) $ 4,731 $(1,316)
Pro forma $(7,084) $4,367 $(1,427)
=============================================================================

58

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, the Company
included in continuing operations approximately $1.6 million, in compensation
expense related to the SARs. The SARs were exercised in connection with the
Recapitalization (Note 9(a)).

(e) 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.
During 2000 KCLLC paid capital withdrawals of approximately $1.4 million,
which $1.1 million was used to repurchase outstanding shares of its common
stock from former shareholders. The remaining withdrawals in 2000 of
approximately $300,000 were for tax distributions to the members of KCLLC.

10. Retirement Plans

(a) 401(k) Plans

At December 31, 2002, the Company had two 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 a separate 401(k) plan.
Employer contributions to the Acme plans are discretionary. Employer
contributions in the aggregate were approximately $358,000, $414,000 and
$404,000 for the years ended December 31, 2002, 2001 and 2000, 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 the year ended December 31, 2002, 2001 and 2000. In December 2002 the
plan was terminated and distributions were completed to the former
participants.

(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. Upon acquiring Acme,
management had decided to terminate the Acme Pension Plan. At December 31,
2002 and 2001, the Company had recorded against the prepaid pension asset
approximately $1.8 million and $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.

59

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

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. No funding has
been required during the three years ended December 31, 2002.

At December 31, 2002, approximately 0.4% of the plans' assets are invested in
cash and cash equivalents, 54.0% are invested in equities and 45.6% is
invested in fixed income securities and annuities. 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 (November 2000 for the Acme plans) to December 31, 2002 are shown
below (in thousands):

Pension Obligation
Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------

(In thousands)
Benefit obligation at beginning of year $18,586 $17,867 $ 1,033
Benefit obligations acquired - - 16,692
Service cost 519 513 95
Interest cost 1,104 1,055 148
Actuarial gain (loss) 504 (29) 30
Benefits paid (2,200) (820) (128)
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $18,513 $18,586 $17,867
========================================================================================================================

Plan Assets
- ------------------------------------------------------------------------------------------------------------------------

Year ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
Fair value of plan assets at beginning of year $21,996 $23,583 $ 1,343
Plan assets acquired - - 22,253
Actual return on plan assets (1,226) (733) 119
Benefits paid (2,200) (820) (128)
Other (43) (34) (4)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $18,527 $21,996 $23,583
========================================================================================================================

60

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

Reconciliation of Funded Status
Year ended December 31,
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------

(In thousands)
Over funded status $ 14 $3,410 $ 5,716
Unrecognized net actuarial loss (gain) 5,093 2,447 (136)
- --------------------------------------------------------------------------------------------------------------------------
Prepaid benefit 5,107 5,857 5,580
Recorded liability for future 401(k) contributions and
excise taxes (2,080) (2,269) (2,269)
- --------------------------------------------------------------------------------------------------------------------------
Net Prepaid asset $3,027 $3,588 $ 3,311
==========================================================================================================================

Components of Net Periodic Cost (Benefit)
Year ended December 31,
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
Service cost $ 562 $ 547 $ 99
Interest cost 1,104 1,055 149
Expected return on plan assets (1,636) (1,785) (269)
Other 531 7 (7)
- --------------------------------------------------------------------------------------------------------------------------
Net periodic cost (benefit) $ 561 $ (176) $ (28)
==========================================================================================================================

Assumption and Method Disclosures
Year ended December 31,
2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------

Discount rate 6.5% 6.00 to 6.50% 6.00 to 6.75%
Expected long-term rate of return on assets 7.5%-8.0% 7.5% to 8.50% 8.50%
Amortization method Straight - line Straight - line Straight - line
==========================================================================================================================

In December 2002 and into the first quarter of 2003, the Acme Pension Plan
paid out the current benefit obligations of the participants in the Acme
Pension Plan that were formerly employed at Acme Electronics division within
one year of the time of the sale.

(d) Other retirement liabilities

At December 31, 2002 and 2001, the Company had approximately $940,000 and
$1.1 million recorded, respectively, 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. The assets in the
trust remain a part of the books and records of the Company and are subject
to the Company's creditors.

61

Key Components, LLC
and subsidiaries

Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------

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 $167,000, $159,000 and $151,000 for the three years
ended December 31, 2002, 2001 and 2000, 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 $217,000, $213,000 and $208,000 for the
three years ended December 31, 2002, 2001 and 2000, respectively.

The Company pays management fees to Millbrook, a party related to certain
shareholders of the Company. These management fees amounted to $175,000,
$920,000 and $920,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. 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. Such costs are either recorded as part of
the respective transactions or are included in deferred financing costs.

12. Statement of Cash Flows

December 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------

Supplemental disclosures of cash flow information: (In thousands)
Cash paid during the year:
Interest $12,724 $ 15,608 $14,898
Income taxes $5,305 $ 3,050 $ 4,116
===================================================================================================================

13. Subsequent Event

On March 3, 2003, KCLLC and BWE acquired a product line of Arens Controls,
LLC for approximately $4.6 million. The product line, which manufactures push
pull cable and other components, will be integrated into the Company's
Binghamton, NY manufacturing facility. The product line acquired has
(unaudited) annual revenues of approximately $7.5 million.

62

Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to costs Charged to other Balance at
Description beginning of period and expenses accounts(2) Deductions(1) end of period
- ------------------------------------------------------------------------------------------------------------------------------------

Allowance for doubtful accounts deducted
from accounts receivable in the balance
sheet:
Year ended December 31:
2002 $1,004 $483 $ - $ (28) $1,459
2001 808 570 105 (479) 1,004
2000 510 148 235 (85) 808

Allowance for excess and obsolete inventory
deducted from inventory in the balance
sheet
Year ended December 31:
2002 $3,977 $1,684 $ 125 $(632) $5,154
2001 3,159 1,046 150 (378) 3,977
2000 2,902 439 451 (633) 3,159

====================================================================================================================================

- --------------
(1) Deductions primarily represent write-offs charged against the allowances
listed.
(2) Represents allowance account balances of companies acquired at the date of
acquisitions.

63

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: March 6, 2003 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
(Principal Executive Officer)

Dated: March 6, 2003 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
President
(Principal Executive Officer)

Dated: March 6, 2003 By: /s/ Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

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: March 6, 2003 By: /s/ John S. Dyson
-----------------
John S. Dyson
Director

Dated: March 6, 2003 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Director

Dated: March 6, 2003 By: /s/ Alan L. Rivera
------------------
Alan L. Rivera
Director

Dated: March 6, 2003 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
Director

Dated: March 6, 2003 By: /s/ George M. Scherer
---------------------
George M. Scherer
Director

Dated: March 6, 2003 By: /s/ Philip E. Berney
--------------------
Philip E. Berney
Director

Dated: March 6, 2003 By: /s/ Thomas R. Wall, IV
----------------------
Thomas R. Wall, IV
Director

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: March 6, 2003 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
(Principal Executive Officer)

Dated: March 6, 2003 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
President
(Principal Executive Officer)

Dated: March 6, 2003 By: /s/ Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)

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: March 6, 2003 By: /s/ John S. Dyson
-----------------
John S. Dyson
Director

Dated: March 6, 2003 By: /s/ Clay B. Lifflander
----------------------
Clay B. Lifflander
Director

Dated: March 6, 2003 By: /s/ Alan L. Rivera
------------------
Alan L. Rivera
Director

Dated: March 6, 2003 By: /s/ Robert B. Kay
-----------------
Robert B. Kay
Director

Dated: March 6, 2003 By: /s/ George M. Scherer
---------------------
George M. Scherer
Director

Dated: March 6, 2003 By: /s/ Philip E. Berney
--------------------
Philip E. Berney
Director

Dated: March 6, 20030 By: /s/ Thomas R. Wall, IV
----------------------
Thomas R. Wall, IV
Director

Certifications
--------------

I, Clay B. Lifflander, certify that:

1. I have reviewed this annual report on Form 10-K of Key Components LLC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 6, 2003

/s/ Clay B. Lifflander
- ----------------------
Clay B. Lifflander
Chief Executive Officer

I, Robert B. Kay, certify that:

1. I have reviewed this annual report on Form 10-K of Key Components LLC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 6, 2003

/s/ Robert B. Kay
- ----------------------
Robert B. Kay
President

I, Keith A. McGowan, certify that:

1. I have reviewed this annual report on Form 10-K of Key Components LLC;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 6, 2003

/s/ Keith A. McGowan
- ----------------------
Keith A. McGowan
Chief Financial Officer

I, Clay B. Lifflander, certify that:

1. I have reviewed this annual report on Form 10-K of Key Components Finance
Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 6, 2003

/s/ Clay B. Lifflander
- ----------------------
Clay B. Lifflander
Chief Executive Officer

I, Robert B. Kay, certify that:

1. I have reviewed this annual report on Form 10-K of Key Components Finance
Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 6, 2003

/s/ Robert B. Kay
- ----------------------
Robert B. Kay
President

I, Keith A. McGowan, certify that:

1. I have reviewed this annual report on Form 10-K of Key Components Finance
Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 6, 2003

/s/ Keith A. McGowan
- ----------------------
Keith A. McGowan
Chief Financial Officer