<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER
KEY COMPONENTS, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3425424
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
WING ROAD RR1, BOX 167D, MILLBROOK, NY 12545
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(914) 677-8383
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
KEY COMPONENTS FINANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 14-1805946
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
WING ROAD RR1, BOX 167D, MILLBROOK, NY 12545
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(914) 677-8383
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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.
[ ] Yes [X] No
At August 14, 1998, all of 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.
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<PAGE> 2
KEY COMPONENTS, LLC
Form 10-Q Index
June 30, 1998
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I
Item 1. -- Financial Statements of Key Components, Inc. (Unaudited):
Consolidated Balance Sheets................................. 2
Consolidated Statements of Operations....................... 3
Consolidated Statements of Cash Flows....................... 4
Notes to Unaudited Consolidated Financial Statements........ 5
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Signatures................................................................. 13
</TABLE>
1
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets
Cash...................................................... $10,525,174 $ 1,440,452
Accounts receivable, net of allowance for doubtful
accounts of $85,493 and $80,882 at June 30, 1998 and
December 31, 1997 respectively......................... 9,055,311 7,762,631
Inventories............................................... 8,544,155 8,432,074
Prepaid expenses and other current assets................. 527,175 576,127
----------- -----------
Total current assets.............................. 28,651,815 18,211,284
Property and equipment at cost less accumulated
depreciation.............................................. 11,865,622 11,980,074
Deferred financing costs.................................... 4,264,167 2,100,761
Goodwill.................................................... 44,638,802 45,206,386
Intangibles................................................. 1,672,155 2,197,499
Other assets................................................ 73,597 60,597
----------- -----------
Total assets...................................... $91,166,158 $79,756,601
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Current portion of notes payable.......................... $ -- $ 3,000,000
Current portion of other long term obligations............ 498,698 476,925
Accounts payable.......................................... 2,026,013 1,702,328
Accrued expenses and other current liabilities............ 2,992,663 2,351,228
----------- -----------
Total current liabilities......................... 5,517,374 7,530,481
10 1/2% Senior Notes due 2008............................... 80,000,000 --
Notes payable -- long term.................................. -- 62,094,450
Other long term obligations................................. 1,023,152 1,283,969
----------- -----------
Total liabilities................................. 86,540,526 70,908,900
----------- -----------
Stockholders' equity
Capital stock, no par value; 200 shares authorized; 102
and 100 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively.................... 1,536,254 1,036,254
Paid-in capital........................................... -- 738,600
Retained earnings......................................... 3,089,378 7,072,847
----------- -----------
Total stockholders' equity........................ 4,625,632 8,847,701
----------- -----------
Total liabilities and stockholders' equity........ $91,166,158 $79,756,601
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
1998 1997 1998 1997
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales............................... $33,015,561 $9,781,285 $16,365,131 $6,295,529
Cost of goods sold...................... 20,578,794 5,253,353 10,171,812 3,292,137
----------- ---------- ----------- ----------
Gross profit....................... 12,436,767 4,527,932 6,193,319 3,003,392
Selling, general and administrative
expenses.............................. 5,158,953 2,076,370 2,500,873 1,186,028
Related party management fees........... 400,000 280,000 210,000 165,000
----------- ---------- ----------- ----------
Income from operations............. 6,877,814 2,171,562 3,482,446 1,652,364
Other income (expense):
Other income.......................... 127,847 15,773 105,819 13,514
Interest expense...................... (3,294,345) (644,868) (1,760,561) (585,842)
----------- ---------- ----------- ----------
Income before income taxes and
extraordinary charge.................. 3,711,316 1,542,467 1,827,704 1,080,036
Provision for income taxes.............. 139,966 828,003 139,966 631,721
----------- ---------- ----------- ----------
Income before extraordinary charge...... 3,571,350 714,464 1,687,738 448,315
Extraordinary charge -- early repayment
of debt............................... 4,616,363 -- 4,616,363 --
----------- ---------- ----------- ----------
Net income (loss)....................... $(1,045,013) $ 714,464 $(2,928,625) $ 448,315
=========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
SIX MONTH PERIOD ENDED
JUNE 30,
---------------------------
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(1,045,013) $ 714,464
Adjustments to reconcile net income to net cash provided
by operating activities:
Extraordinary charge -- early repayment of debt........ 4,616,363 --
Depreciation and amortization.......................... 2,031,901 558,761
Bond discount amortization............................. 30,775 --
Deferred income taxes.................................. -- 216,435
Net increase (decrease) in cash caused by changes in
assets and liabilities:
Accounts receivable.................................. (1,292,680) (714,372)
Inventories.......................................... (112,081) 193,896
Prepaid expenses and other assets.................... 31,750 335,227
Accounts payable..................................... 323,685 (337,937)
Accrued expenses..................................... 641,435 786,384
----------- ------------
Net cash provided by operations................... 5,226,135 1,752,858
----------- ------------
Cash flows from investing activities:
Business acquisition...................................... -- (39,142,795)
Capital expenditures...................................... (674,838) (282,048)
----------- ------------
Net cash used in investing activities............. (674,838) (39,424,843)
----------- ------------
Cash flows from financing activities:
Repayment of debt......................................... (66,010,543) (2,392,282)
Costs associated with early repayment of debt............. (1,978,976) --
Sale of Senior Notes...................................... 80,000,000 --
Debt issued............................................... -- 43,838,093
Deferred financing costs.................................. (4,300,000) (1,907,116)
Sale of common stock...................................... 500,000 --
Repurchase of warrants.................................... (1,650,000) --
Dividends to stockholders................................. (2,027,056) --
----------- ------------
Net cash provided by investing activities......... 4,533,425 39,538,695
----------- ------------
Net increase in cash and cash equivalents................... 9,084,722 1,866,710
Cash and cash equivalents, beginning of period.............. 1,440,452 331,338
----------- ------------
Cash and cash equivalents, end of period.................... $10,525,174 $ 2,198,048
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 2,843,168 $ 250,335
=========== ============
Income taxes.............................................. $ 37,450 $ 237,880
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements are for Key
Components, Inc. ("KCI"), its wholly owned subsidiary, Key Components, LLC
("KCLLC") and the wholly owned subsidiaries of KCLLC, one of which is Key
Components Finance Corp. On May 28, 1998 (the "Formation Date"), KCLLC acquired
all of the assets and assumed all of the liabilities of KCI, including all
right, title and interest of KCI in and to all of the outstanding equity
securities of B.W. Elliot Manufacturing Co., Inc., Hudson Lock, Inc. and ESP
Lock Products, Inc. KCI has no assets or operations other than its investment in
KCLLC. Accordingly, the accompanying consolidated financial statements represent
the operations and financial position of KCLLC. Unless otherwise indicated, all
references to "KCI" or the "Company" refer to collectively, at all times prior
to the Formation Date, to KCI and its predecessors and subsidiaries and at all
times on and after the Formation Date, to KCLLC and its predecessors and
subsidiaries.
The accompanying unaudited financial statements of the Company contain all
adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, the Company believes that the disclosures herein
are adequate to make the information not misleading. The results of operations
for the three months and six months ended June 30, 1998, are not necessarily
indicative of the results for the full year. These statements should be read in
conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 1997.
2. ACQUISITIONS OF BUSINESSES
KCI was formed in April 1997 as a holding company for B.W. Elliot
Manufacturing Co., Inc. ("Elliot") Effective May 15, 1997, the shareholders of
Elliot (the "Shareholders") exchanged their shares of Elliot common stock for
shares of KCI's common stock. Elliot is the manufacturer and distributor of
flexible shaft products (the Company's "Flexible Shaft Business").
During 1997, the Company acquired the entities described below (the
"Acquisitions"), which were accounted for by the purchase method of accounting,
and the results of operations have been included in the consolidated financial
statements since the date of acquisition.
On May 15, 1997, the Company acquired all of the outstanding shares of
Hudson Lock, Inc. ("Hudson") for a cash purchase price of $39.1 million and
assumed liabilities of approximately $1.2 million. Hudson manufactures
medium-security custom and specialty locks, primarily for original equipment
manufacturers (the Company's "Specialty Lock Business"). The purchase price was
allocated based on estimated fair values at the date of acquisition. This
resulted in an excess of purchase price over assets acquired of $31 million,
which is being amortized on a straight-line basis over forty years.
On December 10, 1997, the Company acquired all of the outstanding shares of
ESP Lock Products, Inc. ("ESP") for a cash purchase price of $16.3 million and
assumed liabilities of approximately $10.4 million. ESP primarily manufactures
medium-security custom and specialty locks for the Specialty Lock Business. The
purchase price was allocated based on estimated fair values at the date of
acquisition and included $1.2 million for a covenant not to compete. This
resulted in an excess of purchase price over assets acquired of $14.7 million,
which is being amortized on a straight-line basis over forty years.
On an unaudited pro-forma basis, assuming the Hudson and ESP acquisitions
had occurred as of January 1, 1997, the consolidated results of the Company for
the six months and three months ended June 30, 1997 would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Pro forma net sales............................... $29,599,000 $15,259,000
Pro forma income before taxes..................... 2,175,000 1,302,000
</TABLE>
5
<PAGE> 7
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 periods presented.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
Raw materials............................................... $2,760,194 $2,810,259
Work-in-process............................................. 4,173,007 3,609,454
Finished goods.............................................. 1,610,954 2,012,361
---------- ----------
Total inventory............................................. $8,544,155 $8,432,074
========== ==========
</TABLE>
4. OPERATING SEGMENTS
The Company's operations have been classified into two reportable business
segments: the Flexible Shaft Business and the Specialty Lock Business. The
Specialty Lock Business was formed with the 1997 acquisitions of Hudson and ESP.
The Flexible Shaft Business was the single operating segment of the Company
prior to the acquisitions in 1997. Segment information for the six and three
months ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
SPECIALTY LOCK FLEXIBLE SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
-------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30, 1998:
Net sales........................ $24,485,857 $ 8,529,704 $33,015,561
Income from operations........... 5,688,704 1,736,642 $ (547,532) 6,877,814
Depreciation and amortization.... 1,626,516 404,353 1,032 2,031,901
Segment assets................... 65,321,917 21,570,261 4,273,980 91,166,158
Capital expenditures............. 282,392 381,600 10,846 674,838
Six months ended June 30, 1997:
Net sales........................ 2,411,963 7,369,322 9,781,285
Income from operations........... 911,636 1,539,926 (280,000) 2,171,562
Depreciation and amortization.... 165,497 393,264 558,761
Segment assets................... 41,792,309 13,355,813 55,148,122
Capital expenditures............. -- 282,048 282,048
Three months ended June 30, 1998:
Net sales........................ 12,124,042 4,241,089 16,365,131
Income from operations........... 3,005,515 857,701 (380,770) 3,482,446
Depreciation and amortization.... 736,594 193,356 1,032 930,982
Capital expenditures............. 205,598 173,939 10,846 390,383
Three months ended June 30, 1997:
Net sales........................ 2,411,963 3,883,566 6,295,529
Income from operations........... 911,636 905,728 (165,000) 1,652,364
Depreciation and amortization.... 165,497 203,377 368,874
Capital expenditures............. -- 109,526 109,526
</TABLE>
The adjustments represent management fees and other corporate and
administrative expenses and assets.
5. SALE OF NOTES
In May 1998, KCLLC, along with one of its wholly-owned subsidiaries, Key
Components Finance Corp. (KCFC), completed the sale (the "Initial Offering") of
$80,000,000 principal amount of unsecured 10 1/2% senior notes due 2008 (the
"Senior Notes"). The Senior Notes may be redeemed by KCLLC beginning June 1,
2003 at premiums which range from 105.25% to 100% of the principal amount. In
addition, prior to June 1, 2001 up to one-third of the notes may be redeemed by
KCLLC with the proceeds of one or more equity offerings at a premium of 110.5%
of the principal amount. There are also redemption provisions in the event of a
change in control.
6
<PAGE> 8
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net proceeds from the notes were used in part to repay certain
indebtedness, including a redemption, premium and to repurchase warrants for the
purchase of 14.2857 shares of common stock.
The Indenture relating to the Senior Notes contains certain covenants and
restrictions which limit dividends and other stockholder distributions,
transactions with affiliates, capital expenditures, rental obligations,
incurrence of indebtedness, and the issuance of preferred stock, among others.
The Senior Notes are fully and unconditionally guaranteed on a joint and
several basis by the Subsidiary Guarantors (as defined). At the date of
issuance, guarantees were provided by Elliott, Hudson and ESP (Subsidiary
Guarantors), each a wholly-owned subsidiary of the Company. At June 30, 1998,
KCI has no assets or operations other than its membership interests in KCLLC and
KCFC has no assets or operations. Accordingly, the consolidated financial
statements present the combined assets and operations of KCLLC and the
Subsidiary Guarantors.
7
<PAGE> 9
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
Net Sales: Net sales increased by approximately $23.2 million, or 237.5%,
from approximately $9.8 million for the six months ended June 30, 1997 to
approximately $30.0 million for the six months ended June 30, 1998. For the six
months ended June 30, 1998, net sales included approximately $24.5 million
attributable to the Specialty Lock Business. For the six months ended June 30,
1997, net sales included approximately $2.4 million attributable to Hudson,
which was acquired on May 15, 1998.
Net sales of the Flexible Shaft Business increased by approximately $1.1
million, or 15.7%, from approximately $7.4 million for the six months ended June
30, 1997 to approximately $8.5 million for the six months ended June 30, 1998.
Such net sales growth was primarily attributable to (i) overall growth in the
construction market, (ii) customer consolidation, increased market penetration
and new product acceptance in the lawn and garden power equipment market and
(iii) greater product acceptance in the maritime and aerospace markets.
Gross Profit: Gross profit increased by approximately $7.9 million, or
174.7%, from approximately $4.5 million for the six months ended June 30, 1997
to approximately $12.4 million for the six months ended June 30, 1998. Gross
profit for the six months ended June 30, 1998 included approximately $9.0
million attributable to the Specialty Lock Business compared to approximately
$1.3 million for the comparable period in 1997. The remainder of the increase in
gross profit was generated by the Flexible Shaft Business. Gross profit as a
percentage of net sales decreased from approximately 46.3% for the six months
ended June 30, 1997, to approximately 37.7% for the six months ended June 30,
1998, primarily due to the inclusion, for the full six month period in 1998, of
the Specialty Lock Business, which historically has produced a lower gross
margin than the Flexible Shaft Business. Gross profit from the Specialty Lock
Business as a percentage of such segment's net sales was 36.6% for the six
months ended June 30, 1998. Gross profit from the Flexible Shaft Business as a
percentage of such segment's net sales, decreased from approximately 44.4% for
the six months ended June 30, 1997 to approximately 40.9% for the six months
ended June 30, 1998. This decrease in gross profit as a percentage of net
segment sales was the result of a substantial increase in unit orders for a
particular lower margin product from customers in the lawn and garden power
equipment market.
Selling, General and Administrative Expenses ("SG&A"): SG&A increased by
approximately $3.2 million, or 135.9%, from approximately $2.4 million for the
six months ended June 30, 1997 to approximately $5.6 million for the six months
ended June 30, 1998. Included in SG&A for the six months ended June 30, 1998 is
$1.2 million of amortization of goodwill and other intangibles related to the
Acquisitions. The comparable amortization for the same period in 1997 was
$256,000. Of the remaining increase, $2.0 million is attributable to the SG&A of
the Specialty Lock Business which was not included in the results of the
comparable period in 1997 and approximately $267,000 is due to increased
corporate expenses as a result of adding professional staff, the incurrence of
corporate level professional fees and an increase in management fees in
accordance with the management agreement entered into as of May 28, 1998. SG&A
as a percentage of net sales decreased from approximately 24.1% for the six
months ended June 30, 1997 to approximately 16.8% for the six months ended June
30, 1998. This decrease is primarily attributable to the inclusion, for the full
six month period in 1998, of the Specialty Lock Business, which has lower SG&A
expenses as a percentage of net sales. SG&A of the Specialty Lock Business as a
percentage of such segment's net sales was 13.3% for the six months ended June
30, 1998. SG&A of the Flexible Shaft Business as a percentage of such segment's
net sales decreased from approximately 23.5% for the six months ended June 30,
1997 to approximately 20.5% for the comparable period in 1998. This decrease is
primarily attributable to growth in Flexible Shaft Business net sales which
exceeded growth in such segment's SG&A expenses.
Income from Operations: Income from operations increased by approximately
$4.7 million, or 216.7%, from approximately $2.2 million for the six months
ended June 30, 1997 to approximately $6.9 million for the six months ended June
30, 1998. Operating income of the Specialty Lock Business increased by $4.8
million due to its inclusion in the results for the full six month period in
1998 and its inclusion in only a portion of the comparable period in 1997.
Income from operations of the Flexible Shaft Business increased by $197,000, or
12.8%, from $1.5 million for the six months ended June 30, 1997 to $1.7 million
for the six months ended
8
<PAGE> 10
June 30, 1998, due to the factors discussed above. The increases in income from
operations, discussed above, were partially offset by the $267,000 increase in
corporate expenses, also discussed above.
Interest Expense: Interest expense increased from $645,000 for the six
months ended June 30, 1997 to approximately $3.3 million for the six months
ended June 30, 1998. This increase is primarily due to the incurrence of debt
issued in connection with the acquisition of the Specialty Lock Business.
Provision for Income Taxes: Effective May 31, 1997, the Company elected to
be treated as a subchapter S corporation which causes the Shareholders to be
personally liable for taxes due on the income of the Company. The provision for
income taxes for the six months ended June 30, 1998 is for taxes on income due
in certain states.
Net Income: Net income decreased from $714,000 for the six months ended
June 30, 1997 to a net loss of approximately $1 million for the six months ended
June 30, 1998 after an extraordinary charge of $4.6 million which resulted from
the early repayment of debt. Net income before the extraordinary charge
increased by approximately $2.9 million, from $714,000 for the six months ended
June 30, 1997 to approximately $3.6 million for the six months ended June 30,
1998. Of the total increase, $2.7 million is attributable to inclusion of the
Specialty Lock Business in the results for the full six month period in 1998 and
only a portion of the comparable period in 1997. Net income of the Flexible
Shaft Business, before the extraordinary charge increased by approximately
$500,000 due to factors discussed above and a decrease in the provision for
income taxes of approximately $800,000. Partially offsetting the aforementioned
increases was an increase in corporate expenses and income taxes totaling
approximately $400,000 for the six months ended June 30, 1998 from the
comparable period in 1997.
Three Months Ended June 30, 1998 compared to Three Months Ended June 30, 1997
Net Sales: Net sales increased by approximately $10.1 million, or 160.0%,
from approximately $6.3 million for the three months ended June 30, 1997 to
approximately $16.4 million for the three months ended June 30, 1998. For the
three months ended June 30, 1998, net sales included approximately $12.1 million
attributable to the Specialty Lock Business. For the three months ended June 30,
1997, net sales included approximately $2.4 million attributable to Hudson,
which was acquired on May 15, 1998.
Net sales of the Flexible Shaft Business increased by approximately
$358,000 million, or 9.2%, from approximately $3.9 million for the three months
ended June 30, 1997 to approximately $4.2 million for the three months ended
June 30, 1998. Such net sales growth was primarily attributable to customer
consolidation, increased market penetration and new product acceptance in the
lawn and garden power equipment market and greater product acceptance in the
maritime market.
Gross Profit: Gross profit increased by approximately $3.2 million, or
106.2%, from approximately $3.0 million for the three months ended June 30, 1997
to approximately $6.2 million for the three months ended June 30, 1998. Gross
profit for the three months ended June 30, 1998 included approximately $4.5
million attributable to the Specialty Lock Business compared to approximately
$1.3 million for the comparable period in 1997. Gross profit generated by the
Flexible Shaft Business remained almost unchanged at approximately $1.7 million.
Gross profit as a percentage of net sales decreased from approximately 47.7% for
the three months ended June 30, 1997, to approximately 37.8% for the three
months ended June 30, 1998, primarily due to the inclusion, for the full three
month period in 1998, of the Specialty Lock Business, which historically has
produced a lower gross margin than the Flexible Shaft Business. Gross profit
from the Specialty Lock Business as a percentage of such segment's net sales was
36.9% for the three months ended June 30, 1998. Gross profit from the Flexible
Shaft Business as a percentage of such segment's net sales, decreased from
approximately 45.0% for the three months ended June 30, 1997 to approximately
40.5% for the three months ended June 30, 1998. This decrease in gross profit as
a percentage of net segment sales was the result of a substantial increase in
unit orders for a particular lower margin product from customers in the lawn and
garden power equipment market.
Selling, General and Administrative Expenses: SG&A increased by
approximately $1.4 million, or 100%, from approximately $1.4 million for the
three months ended June 30, 1997 to approximately $2.8 million for the three
months ended June 30, 1998. Included in SG&A for the three months ended June 30,
1998 is $584,000 of amortization of goodwill and other intangibles related to
the Acquisitions. The comparable
9
<PAGE> 11
amortization for the same period in 1997 was $256,000. The remainder of the
increase is predominately attributable to the SG&A of the Specialty Lock
Business which was not fully included in the results of the comparable period in
1997 and an increase in corporate expenses of $216,000 due to the addition of
professional staff, the incurrence of corporate level professional fees, and an
increase in management fees in accordance with the management agreement entered
into as of May 28, 1998. SG&A as a percentage of net sales decreased from
approximately 21.5% for the three months ended June 30, 1997 to approximately
16.6% for the three months ended June 30, 1998. This decrease is primarily
attributable to the inclusion, for the full three month period of 1998, of the
Specialty Lock Business, which has lower SG&A expenses as a percentage of net
sales. SG&A of the Specialty Lock Business as a percentage of such segment's net
sales was 12.1% for the three months ended June 30, 1998. SG&A of the Flexible
Shaft Business as a percentage of such segment's net sales decreased from
approximately 21.7% for the three months ended June 30, 1997 to approximately
20.3% for the comparable period in 1998. This decrease is primarily attributable
to growth in Flexible Shaft Business net sales which exceeded growth in such
segment's SG&A expenses.
Income from Operations: Income from operations increased by approximately
$1.8% million, or 110.8% from approximately $1.7 million for the three months
ended June 30, 1997 to approximately $3.5 million for the three months ended
June 30, 1998. Approximately $2.1 million of this increase was attributable to
the inclusion of the Specialty Lock Business in the results of the full three
month period in 1998 and for only a portion of the comparable period of 1997.
Income from operations of the Flexible Shaft Business decreased by $48,000, or
5.3%, from $906,000 for the three months ended June 30, 1997 to $858,000 for the
three months ended June 30, 1998, due to the factors discussed above. Operating
income decreased by another $215,000 due to the increase in corporate SG&A, as
discussed above.
Interest Expense: Interest expense increased from $586,000 for the three
months ended June 30, 1997 to approximately $1.8 million for the three months
ended June 30, 1998. This increase is primarily due to the incurrence of debt
issued in connection with the acquisition of the Specialty Lock Business.
Provision for Income Taxes: Effective May 31, 1997, the Company elected to
be treated as a subchapter S corporation which causes the Shareholders to be
personally liable for taxes due on the income of the Company. The provision for
income taxes for the three months ended June 30, 1998 is for taxes on income due
in certain states.
Net Income: Net income decreased from $448,000 for the six months ended
June 30, 1997 to a net loss of approximately $2.9 million for the three months
ended June 30, 1998 after an extraordinary charge of $4.6 million which resulted
from the early repayment of debt. Net income before the extraordinary charge
increased by approximately $1.2 million, from $448,000 for the three months
ended June 30, 1997 to approximately $1.7 million for the three months ended
June 30, 1998. Of the total increase, $1.2 million is attributable to inclusion
of the Specialty Lock Business in the results for the full three month period in
1998 and its inclusion in only a portion of the comparable period in 1997. Net
income of the Flexible Shaft Business, before the extraordinary charge increased
by approximately $400,000 due to factors discussed above and a decrease in the
provision for income taxes of approximately $600,000. Partially offsetting the
aforementioned increases was an increase in corporate expenses and income taxes
totaling approximately $330,000 for the three months ended June 30, 1998 from
the comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historical
The Company has historically generated funds from its operations and its
working capital requirements generally do not fluctuate from quarter to quarter.
Cash flow provided by operating activities was approximately $5.2 million
and $1.8 million for the six months ended June 30, 1998 and 1997, respectively.
The operating activities of the Company for 1997 and 1998 include the operations
of the Specialty Lock Business from the dates of its acquisition.
For the six months ended June 30, 1998 and 1997, net cash used in investing
activities was $675,000 and $39.4 million, respectively. Investing activities
for the six months ended June 30, 1998 consisted of
10
<PAGE> 12
expenditures for property, plant and equipment. For the six months ended June
30, 1997, investing activities consisted of the acquisition of Hudson for $39.1
million and expenditures for property, plant and equipment for $282,000.
Financing activities provided net cash of approximately $4.5 million for
the six months ended June 30, 1998 and $39.5 million for the same period of
1997. For the six months ended June 30, 1997, financing activities were
primarily related to the acquisition of the Specialty Lock Business.
Prospective
As of June 30, 1998, the Company had a cash balance of approximately $10.5
million. In addition, in July 1998 the Company entered into a Credit and
Guaranty Agreement with certain financial institutions (the "New Credit
Facility"), which provides for revolving credit borrowings of up to $15.0
million and additional borrowings of up to $25.0 million for future
acquisitions. Among other provisions, the New Credit Facility provides that (i)
availability of revolving credit loans will be subject to a borrowing base, (ii)
availability of acquisition loans will be subject to various criteria, including
pro forma compliance with certain financial ratios and (iii) the Company will be
required to prepay outstanding balances out of excess cash flow and proceeds
from certain asset sales.
With the consummation of the Initial Offering, the Company became required
to make semiannual interest payments on the Senior Notes, together with interest
and principal payments on other existing indebtedness including indebtedness
under the New Credit Facility, if any.
The Company's remaining liquidity demands will be for capital expenditures
and other general corporate purposes. As of June 30, 1998, the Company had
outstanding commitments for capital expenditures of approximately $700,000 and
anticipates further capital expenditures of approximately $700,000 during the
remainder of 1998 and approximately $2.0 million for 1999, primarily to maintain
its facilities, expand its production capacity in order to take advantage of
profitable market opportunities and to further automate its production processes
to maximize profitability. The Company expects that capital expenditure
requirements will decrease subsequent to 1999. 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 the New Credit Facility.
Management believes that the Company's cash flow from operations, together
with borrowing availability under the New Credit Facility, will be adequate to
meet its anticipated capital requirements for the forseeable future.
INFLATION
Inflation has not been material to the Company's operations for the periods
presented.
BACKLOG
The Company's backlog of orders as of June 30, 1998 and 1997 was
approximately $10.3 million and $8.6 million, respectively. The Company includes
in its backlog only those orders for which it has accepted purchase orders.
However, backlog is not necessarily indicative of future sales. A substantial
portion of the Company's sales have a three to eight week lead time and,
therefore, only a small portion of orders, in relation to the annual sales of
the Company, are in backlog at any point in time. In addition, purchase orders
can generally be cancelled at any time without penalty.
OTHER MATTERS
Year 2000 Compliance
While the Company's computer and information systems are able to
accommodate the "year 2000" dating changes necessary to permit correct recording
of year dates for 2000 and later years, the Company's management is currently
addressing all year 2000 issues and is in the process of evaluating and
correcting all
11
<PAGE> 13
year 2000 issues. The initial assessment indicates that the Company does not
have a significant year 2000 issue, and management believes that the cost of
addressing its year 2000 issues will not be material. The Company believes it
will be able to achieve year 2000 compliance by the end of 1999, and does not
anticipate any material disruption in its operations as the result of any
failure by the Company to be in compliance, although no assurance to such effect
can be given. In the event that any of the Company's significant suppliers or
customers do not successfully and timely achieve year 2000 compliance, the
Company's business or operations could be adversely affected.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains
and losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This statement is not expected to have a material impact
on the Company's consolidated financial statements. This statement is effective
for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged.
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 regulation, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS, LLC
Date: August 14, 1998 By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
President
Date: August 14, 1998 By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS FINANCE CORP.
Date: August 14, 1998 By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
President
Date: August 14, 1998 By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
Chief Financial Officer
13
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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