<PAGE>
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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 SEPTEMBER 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 333-58675
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)
COMMISSION FILE NUMBER 333-58675-01
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 November 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
KEY COMPONENTS, LLC
FORM 10-Q INDEX
SEPTEMBER 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................................................................................................ 14
</TABLE>
1
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
(UNAUDITED)
Assets:
Current assets
Cash............................................................................ $ 12,670,873 $ 1,440,452
Accounts receivable, net of allowance for doubtful accounts of $82,608 and
$80,882 at September 30, 1998 and December 31, 1997, respectively............. 8,441,547 7,762,631
Inventories..................................................................... 9,231,232 8,432,074
Prepaid expenses and other current assets....................................... 713,137 576,127
-------------- -------------
Total current assets.......................................................... 31,056,789 18,211,284
Property and equipment at cost less accumulated depreciation...................... 12,102,681 11,980,074
Deferred financing costs.......................................................... 4,397,679 2,100,761
Goodwill.......................................................................... 44,371,761 45,206,386
Intangibles....................................................................... 1,765,307 2,197,499
Other assets...................................................................... 79,610 60,597
-------------- -------------
Total assets.................................................................. $ 93,773,827 $ 79,756,601
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities
Current portion of notes payable................................................ $ -- $ 3,000,000
Current portion of other long term obligations.................................. 508,166 476,925
Accounts payable................................................................ 1,859,290 1,702,328
Accrued expenses and other current liabilities.................................. 5,182,339 2,351,228
-------------- -------------
Total current liabilities..................................................... 7,549,795 7,530,481
10 1/2% Senior Notes due 2008..................................................... 80,000,000 --
Notes payable--long term.......................................................... -- 62,094,450
Other long term obligations....................................................... 892,683 1,283,969
-------------- -------------
Total liabilities............................................................. 88,442,478 70,908,900
-------------- -------------
Stockholders' equity
Capital stock, no par value; 200 shares authorized; 102 and 100 shares issued and
outstanding at September 30, 1998 and December 31, 1997, respectively........... 1,536,254 1,036,254
Paid-in capital................................................................... -- 738,600
Retained earnings................................................................. 3,795,095 7,072,847
-------------- -------------
Total stockholders' equity.................................................... 5,331,349 8,847,701
-------------- -------------
Total liabilities and stockholders' equity.................................... $ 93,773,827 $ 79,756,601
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
------------- ------------- ------------- ------------
Net sales............................................. $ 47,444,191 $ 17,451,286 $ 14,428,630 $ 7,670,001
Cost of goods sold.................................... 29,927,580 9,586,373 9,348,786 4,333,019
------------- ------------- ------------- ------------
Gross profit........................................ 17,516,611 7,864,913 5,079,844 3,336,982
Selling, general and administrative expenses.......... 7,429,438 3,548,465 2,270,485 1,472,095
Related party management fees......................... 600,000 465,000 200,000 185,000
------------- ------------- ------------- ------------
Income from operations.............................. 9,487,173 3,851,448 2,609,359 1,679,887
Other income (expense):
Other income........................................ 276,171 48,193 148,324 32,420
Interest expense.................................... (5,459,922) (1,681,434) (2,165,577) (1,036,566)
------------- ------------- ------------- ------------
Income before income taxes and extraordinary charge... 4,303,422 2,218,207 592,106 675,741
Provision for income taxes............................ 26,357 828,003 (113,609) --
------------- ------------- ------------- ------------
Income before extraordinary charge.................... 4,277,065 1,390,204 705,715 675,741
Extraordinary charge--early repayment
of debt............................................. 4,616,363 -- -- --
------------- ------------- ------------- ------------
Net income (loss)..................................... $ (339,298) $ 1,390,204 $ 705,715 $ 675,741
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Earnings (loss) per share:
Basic earnings (loss) per share:
Income before extraordinary charge................ $ 42,263 $ 13,902 $ 6,919 $ 6,757
Extraordinary charge.............................. (45,616) -- -- --
------------- ------------- ------------- ------------
Net income........................................ $ (3,353) $ 13,902 $ 6,919 $ 6,757
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Diluted earnings (loss) per share:
Income before extraordinary charge................ $ 39,275 $ 12,956 $ 6,919 $ 5,912
Extraordinary charge.............................. (42,391) -- -- --
------------- ------------- ------------- ------------
Net income........................................ $ (3,116) $ 12,956 $ 6,919 $ 5,912
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................ $ (339,298) $1,390,204
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary charge -- early repayment of debt................ 4,616,363 --
Depreciation and amortization.................................. 2,974,828 1,112,265
Bond discount amortization..................................... 30,775 --
Deferred income taxes.......................................... -- 216,435
Loss on disposal of fixed assets............................... -- 2,804
Net increase (decrease) in cash caused by changes in assets and
liabilities:
Accounts receivable.......................................... (678,916) (333,496)
Inventories.................................................. (799,158) (79,061)
Prepaid expenses and other assets............................ (333,247) 275,115
Accounts payable............................................. 156,962 (307,963)
Accrued expenses............................................. 2,912,356 436,830
---------- ----------
Net cash provided by operations............................ 8,540,665 2,713,133
---------- ----------
Cash flows from investing activities:
Business acquisition............................................. -- (39,142,795)
Capital expenditures............................................. (1,508,778) (419,209)
---------- ----------
Net cash used in investing activities...................... (1,508,778) (39,562,004)
---------- ----------
Cash flows from financing activities:
Repayment of debt................................................ (66,131,544) (3,897,899)
Costs associated with early repayment of debt.................... (1,978,976) --
Sale of Senior Notes............................................. 80,000,000 --
Debt issued...................................................... -- 43,750,000
Deferred financing costs......................................... (4,513,890) (1,916,966)
Sale of common stock............................................. 500,000 --
Repurchase of warrants........................................... (1,650,000) --
Dividends to stockholders........................................ (2,027,056) --
---------- ----------
Net cash provided by financing activities.................. 4,198,534 37,935,135
---------- ----------
Net increase in cash and cash equivalents.......................... 11,230,421 1,086,264
Cash and cash equivalents, beginning of period..................... 1,440,452 331,338
---------- ----------
Cash and cash equivalents, end of period........................... $12,670,873 $1,417,602
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................................... $2,839,493 $1,211,120
---------- ----------
Income taxes..................................................... $ 31,488 $ 346,380
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
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 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 that 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 nine months ended September 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.
5
<PAGE>
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS OF BUSINESSES (CONTINUED)
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 nine months and three months ended September 30, 1997 would have been as
follows:
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
------------------ ------------------
<S> <C> <C>
Pro forma net sales................................... $ 43,777,000 $ 14,178,000
Pro forma income before taxes......................... 4,110,000 1,014,000
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials................................................... $ 2,947,189 $2,810,259
Work-in-process................................................. 4,393,699 3,609,454
Finished goods.................................................. 1,890,344 2,012,361
------------- ------------
Total inventory................................................. $ 9,231,232 $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 nine and three
months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
SPECIALTY FLEXIBLE
LOCK SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Nine months ended September 30, 1998:
Net sales......................................... $35,353,930 $ 12,090,261 $ -- $ 47,444,191
Income from operations............................ 8,017,869 2,558,946 (1,089,642) 9,487,173
Depreciation and amortization..................... 2,263,019 593,434 118,375 2,974,828
Segment assets.................................... 65,796,214 13,550,792 14,426,821 93,773,827
Capital expenditures.............................. 938,788 559,144 10,846 1,508,778
Nine months ended September 30, 1997:
Net sales......................................... 6,943,784 10,507,502 17,451,286
Income from operations............................ 2,253,833 2,062,615 (465,000) 3,851,448
Depreciation and amortization..................... 505,315 606,950 1,112,265
Segment assets.................................... 41,251,893 12,720,981 53,972,874
Capital expenditures.............................. 216,435 202,774 419,209
</TABLE>
6
<PAGE>
KEY COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
SPECIALTY FLEXIBLE
LOCK SHAFT
BUSINESS BUSINESS ADJUSTMENTS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Three months ended September 30, 1998:
Net sales......................................... 10,868,073 3,560,557 14,428,630
Income from operations............................ 2,154,165 795,604 (340,410) 2,609,359
Depreciation and amortization..................... 636,503 189,081 81,510 907,094
Capital expenditures.............................. 656,396 177,544 -- 833,940
Three months ended September 30, 1997:
Net sales......................................... 4,531,821 3,138,180 7,670,001
Income from operations............................ 1,342,197 522,690 (185,000) 1,679,887
Depreciation and amortization..................... 339,818 216,467 556,285
Capital expenditures.............................. 137,161 -- -- 137,161
</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 "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.
The net proceeds from the notes were used in part to repay certain
indebtedness, including 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 (collectively The
"Subsidiary Guarantors"), each a wholly owned subsidiary of the Company. At
September 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>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
NET SALES: Net sales increased by approximately $30.0 million, or 171.9%,
from approximately $17.5 million for the nine months ended September 30, 1997 to
approximately $47.4 million for the nine months ended September 30, 1998. For
the nine months ended September 30, 1998, net sales included approximately $35.4
million attributable to the Specialty Lock Business. For the nine months ended
September 30, 1997, net sales included approximately $6.9 million attributable
to Hudson, which was acquired on May 15, 1997.
Net sales of the Flexible Shaft Business increased by approximately $1.6
million, or 15.1%, from approximately $10.5 million for the nine months ended
September 30, 1997 to approximately $12.1 million for the nine months ended
September 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 $9.7 million, or
122.7%, from approximately $7.9 million for the nine months ended September 30,
1997 to approximately $17.5 million for the nine months ended September 30,
1998. Gross profit for the nine months ended September 30, 1998 included
approximately $12.5 million attributable to the Specialty Lock Business compared
to approximately $3.2 million for the comparable period in 1997. The remainder
of the increase in gross profit, of approximately $400,000, was generated by the
Flexible Shaft Business. Gross profit as a percentage of net sales decreased
from approximately 45.1% for the nine months ended September 30, 1997, to
approximately 36.9% for the nine months ended September 30, 1998, primarily due
to the inclusion, for the full nine month period in 1998, of the Specialty Lock
Business, which historically has produced a lower gross margin percentage than
the Flexible Shaft Business. Gross profit from the Specialty Lock Business, as a
percentage of such segment's net sales was 35.3% for the nine months ended
September 30, 1998. Gross profit from the Flexible Shaft Business as a
percentage of such segment's net sales, decreased from approximately 44.1% for
the nine months ended September 30, 1997 to approximately 41.6% for the nine
months ended September 30, 1998. This decrease in gross profit as a percentage
of net segment sales was the result of a change of product mix in the lawn and
garden power equipment market, with a substantial portion of the increase in
sales attributable to lower gross margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A increased by
approximately $3.9 million, or 109.4%, from approximately $3.5 million for the
nine months ended September 30, 1997 to approximately $7.4 million for the nine
months ended September 30, 1998. Included in SG&A for the nine months ended
September 30, 1998 is $1.7 million of amortization of goodwill and other
intangibles related, primarily, to the Acquisitions. The comparable amortization
for the same period in 1997 was $581,000. The remaining increase is primarily
attributable to the inclusion of SG&A of the Specialty Lock Business for the
full 1998 period, as well as increased corporate expenses as a result of adding
professional staff and the incurrence of corporate level professional fees.
Management fees increased by $135,000 in accordance with a new management
agreement entered into as of May 28, 1998. SG&A as a percentage of net sales
decreased from approximately 20.3% for the nine months ended September 30, 1997
to approximately 15.7% for the nine months ended September 30, 1998. This
decrease is primarily attributable to the inclusion, for the full nine-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 12.6% for the nine months ended September 30,
1998. SG&A of the Flexible Shaft Business as a percentage of such segment's net
sales decreased from approximately 24.5% for the nine months ended September 30,
1997 to approximately 20.4% 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.
8
<PAGE>
INCOME FROM OPERATIONS: Income from operations increased by approximately
$5.6 million, or 146.3%, from approximately $3.9 million for the nine months
ended September 30, 1997 to approximately $9.5 million for the nine months ended
September 30, 1998. Operating income of the Specialty Lock Business increased by
$5.8 million due to its inclusion in the results for the full nine-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 $496,000, or
24.1%, from $2.1 million for the nine months ended September 30, 1997 to $2.6
million for the nine months ended September 30, 1998 due to the factors
discussed above. The increases in income from operations, discussed above, were
partially offset by an increase in corporate expenses, also discussed above.
INTEREST EXPENSE: Interest expense increased from $1.7 million for the nine
months ended September 30, 1997 to approximately $5.5 million for the nine
months ended September 30, 1998. This increase is primarily due to the
incurrence of debt issued in connection with the acquisition of the Specialty
Lock Business and the issuance of the Senior Notes in May, 1998.
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 nine months ended September 30, 1998 is for taxes on income
due in certain states.
NET INCOME: Net income decreased from $1.4 million for the nine months
ended September 30, 1997 to a net loss of approximately $339,000 for the nine
months ended September 30, 1998, after an extraordinary charge in 1998 of $4.6
million resulting from the early repayment of debt. Income before the
extraordinary charge increased by approximately $2.9 million, from $1.4 million
for the nine months ended September 30, 1997 to approximately $4.3 million for
the nine months ended September 30, 1998. Of the total increase, $4.9 million is
attributable to inclusion of the Specialty Lock Business in the results for the
full nine-month period in 1998. Net income of the Flexible Shaft Business,
before the extraordinary charge, increased by approximately $1.5 million due to
factors discussed above and a decrease in the provision for income taxes of
approximately $820,000. Offsetting the aforementioned increases was a $3.5
million increase in corporate expenses, interest and income taxes.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES: Net sales increased by approximately $6.8 million, or 88.1%,
from approximately $7.7 million for the three months ended September 30, 1997 to
approximately $14.4 million for the three months ended September 30, 1998. Of
the total increase, approximately $6.3 million is attributable to the full
inclusion of the Specialty Lock Business operations for the 1998 period.
Net sales of the Flexible Shaft Business increased by approximately
$422,000, or 13.5%, from approximately $3.1 million for the three months ended
September 30, 1997 to approximately $3.5 million for the three months ended
September 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 $1.7 million, or
52.2%, from approximately $3.3 million for the three months ended September 30,
1997 to approximately $5.1 million for the three months ended September 30,
1998. Gross profit for the three months ended September 30, 1998 included
approximately $3.5 million attributable to the Specialty Lock Business compared
to approximately $2.0 million for the same period in 1997.
Gross profit generated by the Flexible Shaft Business increased by
approximately $183,000, or 13.4%, from approximately $1.3 million for the three
months ended September 30, 1997 to approximately $1.5 million for the three
months ended September 30, 1998. Gross profit as a percentage of net sales was
43.4% of sales for both of the respective periods.
9
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: SG&A increased by
approximately $789,000, or 54.2%, from approximately $1.5 million for the three
months ended September 30, 1997 to approximately $2.3 million for the three
months ended September 30, 1998. Included in SG&A for the three months ended
September 30, 1998 is $505,000 of amortization of goodwill, deferred financing
costs and other intangibles related to the Acquisitions. The comparable
amortization for the same period in 1997 was $325,000. 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 $155,000 due to the addition of
professional staff and the incurrence of corporate level professional fees. SG&A
as a percentage of net sales decreased from 19.2% for the three months ended
September 30, 1997 to 15.7% for the three months ended September 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 12.7% for the three months ended September 30,
1998. SG&A of the Flexible Shaft Business as a percentage of such segment's net
sales decreased from 26.7% for the three months ended September 30, 1997 to
21.0% for the comparable period in 1998. This decrease is primarily attributable
to growth in Flexible Shaft Business net sales with a slight decrease in the
segment's SG&A expenses.
INCOME FROM OPERATIONS: Income from operations increased by approximately
$929,000, or 55.3% from approximately $1.7 million for the three months ended
September 30, 1997 to approximately $2.6 million for the three months ended
September30,1998 .Approximately $811,000 of this increase was attributable to
the inclusion of the full Specialty Lock Business in the results of the three
month period in 1998 and only a portion of the Specialty Lock Business for the
comparable period of 1997. Income from operations of the Flexible Shaft Business
increased by $273,000, or 52.2%, from $523,000 for the three months ended
September 30, 1997 to $796,000 for the three months ended September 30, 1998,
due to the factors discussed above. The increases in operating income were
partially offset by the $155,000 increase in corporate SG&A, as discussed above.
INTEREST EXPENSE: Interest expense increased from approximately $1.0
million for the three months ended September 30, 1997 to approximately $2.2
million for the three months ended September 30, 1998. This increase is
primarily due to the issuance of the Senior Notes in May 1998.
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 benefit from
income taxes for the three months ended September 30, 1998 is for refunds on
certain state income taxes overpaid for 1997.
NET INCOME: Net income increased slightly from $676,000 for the three
months ended September 30, 1997 to $706,000 for the three months ended September
30, 1998 due to factors discussed above.
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 $8.5 million
and $2.7 million for the nine months ended September 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 the acquisitions
of Hudson and ESP.
For the nine months ended September 30, 1998 and 1997, net cash used in
investing activities was approximately $1.5 million and $39.5 million,
respectively. Investing activities for the nine months ended
10
<PAGE>
September 30, 1998 consisted of expenditures for property, plant and equipment.
For the nine months ended September 30, 1997, investing activities consisted of
the acquisition of Hudson for $39.1 million and expenditures for property, plant
and equipment of $419,000.
Financing activities provided net cash of approximately $4.2 million for the
nine months ended September 30, 1998 and $37.9 million for the same period of
1997. For the nine months ended September 30, 1997, financing activities were
primarily related to the acquisition of the Specialty Lock Business.
PROSPECTIVE
As of September 30, 1998, the Company had a cash balance of approximately
$12.7 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 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. The Company anticipates further capital
expenditures of approximately $600,000 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 foreseeable 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 September 30, 1998 and 1997 was
approximately $12.9 million and $10.3 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
The Company is heavily dependent upon computer technology to effectively
carry out its day-to-day operations. In addition, the Company is dependent on
suppliers and customers who also use computer
11
<PAGE>
technology in the conduct of their business. The terms "Year 2000 issues" or
"Year 2000 problems," or words of a similar nature, refer to the potential for
failure of computer applications as a result of the failure of programs to
properly recognize and handle dates beyond the year 1999. In the case of the
Company, such computer applications may include customer order processing,
inventory management, shipment of products, manufacturing process controllers,
internal financial systems and other information systems, among others.
The Company's assessment of the possible consequences of Year 2000 issues on
its business, results of operations, or financial conditions is not complete,
but is continuing in accordance with a Year 2000 compliance plan (the "Year 2000
Plan"). The Year 2000 Plan includes (1) upgrading the Company's information
technology software and all applicable software and embedded technology
applications in its manufacturing equipment and systems to become year 2000
compliant, (2) assessing the Year 2000 readiness of suppliers and customers, and
(3) developing contingency plans, if practicable, for critical systems and
processes. Implementation of the Year 2000 Plan has been undertaken at the
Company's three operating subsidiaries and with respect to various operating and
information systems in varying degrees to date. The Year 2000 Plan is expected
to be fully implemented at all locations and with respect to all critical
information systems in 1999.
Progress to date includes the purchase of upgraded hardware and software
packages and reprogramming of existing systems. All internal systems are
expected to be Year 2000 compliant by mid 1999. Because the Company is dependent
on its suppliers and customers to successfully and profitably operate its
business, the Year 2000 Plan includes an assessment process with respect to
those vendors and customers deemed most critical to the operations and business
of the Company. To date, the Company has contacted certain vendors and customers
and anticipates completing this assessment process by the end of the second
quarter of 1999.
The costs of the Year 2000 Plan include the purchase price of computer
hardware and software packages, fees for contract programmers and the cost of
internal information technology resources. The costs of achieving Year 2000
compliance have not been material to date and are not expected to be material.
The Company expects no material adverse effect on its results of operations,
liquidity, or financial condition as a result of problems encountered in its own
business as a result of Year 2000 issues or as a result of the impact of Year
2000 problems on its vendors or customers. However, the risks to the Company
associated with Year 2000 issues could be significant. While the Company is
undertaking its own evaluation and testing of its information technology and
non-information technology systems, it is dependent to some extent on the
assurances and guidance provided by suppliers of technology and programming
services as to Year 2000 compliance readiness.
Similarly, the Company's Year 2000 Plan calls for an ongoing analysis of the
possible effects of Year 2000 problems on its suppliers of materials and
non-information technology goods and services as well as its customers and the
demands for its products. The Company has limited ability to independently
verify the possible effects of Year 2000 issues on its customers and suppliers.
Therefore, the Company's assumptions concerning the effect of Year 2000 issues
on its results of operations, liquidity, and financial condition relies on its
ability to analyze the business and operations of each of its critical vendors
or customers. This process, by the nature of the problem, is limited to such
persons' public statements, their responses to the Company's inquiries, and the
information available to the Company from third parties concerning the
industries or particular vendors or customers involved.
Risk also exists that despite the Company's best efforts, critical systems
may malfunction due to Year 2000 problems and disrupt its operations. The
Company is unable to determine at this time the nature or length of time for
such possible disruption and therefore the potential materiality thereof to its
business or profitability.
12
<PAGE>
Interruptions of communication services or power supply due to Year 2000
problems can cause affected locations to cease or curtail production or receipt
and shipment of materials and products. The Company is dependent on the
suppliers of power and communication services that no such disruptions occur.
As part of its Year 2000 Plan, the Company will continue to identify and
evaluate risks and possible alternatives should various contingencies arise. The
Company has prioritized remediation of its most critical information systems and
believes that they will be Year 2000 compliant by the end of the first quarter
of 1999. Should unforeseen circumstances result in substantial delay that may
lead to disruption of business, the Company will develop contingency plans where
possible and not cost prohibitive. To some extent the Company may not be able to
develop contingency plans, such as in the case of communication services or the
supply of power.
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.
13
<PAGE>
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.
<TABLE>
<S> <C> <C>
KEY COMPONENTS, LLC
Dated: November 13, 1998 By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
PRESIDENT
Dated: November 13, 1998 By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
CHIEF FINANCIAL OFFICER
</TABLE>
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.
<TABLE>
<S> <C> <C>
KEY COMPONENTS FINANCE CORP.
Dated: November 13, 1998 By: /s/ CLAY B. LIFFLANDER
------------------------------------
Clay B. Lifflander
PRESIDENT
Dated: November 13, 1998 By: /s/ JAMES D. WILCOX
------------------------------------
James D. Wilcox
CHIEF FINANCIAL OFFICER
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF 9/30/98 (UNAUDITED) AND 12/31/97 AND THE
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE NINE MONTHS ENDED 9/30/98
AND 9/30/97 AND THE THREE MONTHS ENDED 9/30/98 AND 9/30/97 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001065418
<NAME> KEY COMPONENTS LLC
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<PERIOD-END> SEP-30-1998 SEP-30-1997 SEP-30-1998 SEP-30-1997 DEC-31-1997
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<CURRENT-ASSETS> 31,057 0 0 0 18,211
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</TABLE>
