<PAGE> 1
================================================================================
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-58675
KEY COMPONENTS, LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-3425424
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
200 WHITE PLAINS ROAD, TARRYTOWN, NY 10591
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(914) 332-8088
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
KEY COMPONENTS FINANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1805946
------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
200 WHITE PLAINS ROAD, TARRYTOWN, NY 10591
- ---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(914) 332-8088
(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.
[X] Yes [ ] No
As of August 10, 1999, 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> 2
KEY COMPONENTS, LLC
FORM 10-Q INDEX
JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. -- Consolidated Financial Statements:
Balance Sheets................................................ 3
Statements of Operations...................................... 4
Statements of Cash Flows...................................... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 11
Item 3. -- Quantitative and Qualitative Disclosures about Market Risk ... 18
PART II - OTHER INFORMATION
Item 6. -- Exhibits and Reports on Form 8-K.............................. 18
Signatures............................................................... 19
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
KEY COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS: (UNAUDITED)
Current
Cash and cash equivalents $ 6,870 $ 13,119
Accounts receivable, net of allowance for doubtful
accounts of $655 and $175, respectively 25,477 7,989
Inventories 30,187 8,487
Prepaid expenses and other current assets 2,275 441
------------ ------------
Total current assets 64,809 30,036
Property and equipment, net 22,190 12,222
Goodwill, net 97,358 44,378
Deferred financing costs, net 6,402 4,616
Intangibles, net 1,782 1,620
Other assets 4,864 272
------------ ------------
$ 197,405 $ 93,144
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current
Current portion of long-term debt and other
long-term obligations $ 5,771 $ 518
Accounts payable 10,294 1,465
Accrued interest 1,673 750
Accrued wages and related benefits 2,397 1,205
Accrued income taxes 1,609 -
Accrued expenses and other current liabilities 5,496 772
------------ ------------
Total current liabilities 27,240 4,710
10 1/2% senior notes due 2008 80,000 80,000
Notes payable -- long term 71,250 -
Other long-term obligations 3,917 760
Deferred income taxes 856 -
------------ ------------
Total liabilities 183,263 85,470
------------ ------------
Stockholders' Equity:
Capital stock, no par value; 5,000 shares
authorized; 1,113 and 1,020 shares issued and
outstanding, respectively 4,795 1,536
Retained earnings 9,347 6,138
------------ ------------
Total stockholders' equity 14,142 7,674
------------ ------------
$ 197,405 $ 93,144
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
KEY COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 80,914 $ 33,016 $ 45,838 $ 16,683
Cost of goods sold 49,242 20,479 27,687 10,281
---------- ---------- ---------- ----------
Gross profit 31,672 12,537 18,151 6,402
Selling, general and
administrative expenses 18,095 5,127 10,281 2,577
Related party management fees 400 400 200 210
---------- ---------- ---------- ----------
Income from operations 13,177 7,010 7,670 3,615
Other income (expense):
Other income (expense) 153 (5) 39 (27)
Interest expense (7,277) (3,294) (3,771) (1,761)
---------- ---------- ---------- ----------
Income before provision for income taxes
and extraordinary item 6,053 3,711 3,938 1,827
Provision for income taxes 2,140 140 1,459 140
Extraordinary item from early retirement
of debt - 4,616 - 4,616
---------- ---------- ---------- ----------
Net income (loss) $ 3,913 $ (1,045) $ 2,479 $ (2,929)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
KEY COMPONENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,913 $ (1,045)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Allowance for doubtful accounts 190 -
Depreciation and amortization 3,918 2,063
Extraordinary item- early retirement of debt - 4,616
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (3,253) (1,293)
Inventories (699) (112)
Prepaid expenses and other assets 330 32
Accounts payable 2,099 324
Accrued expenses 2,388 641
------------ ------------
Net cash provided by operating activities 8,886 5,226
------------ ------------
Cash flows from investing activities:
Acquisition of Valley Forge Corporation (82,452) -
Acquisition of G&H Technology, Inc. (3,988) -
Proceeds from sale of Multiplex Technology,
Inc and Force 10 Marine Company 5,680 -
Funding of assets held for sale (503) -
Capital expenditures (1,530) (674)
------------ ------------
Net cash used in investing activities (82,793) (674)
------------ ------------
Cash flows from financing activities:
Payments of long-term debt and capital lease
obligations (15,394) (66,011)
Costs associated with early retirement of debt - (1,979)
Proceeds from debt issued 82,638 80,000
Deferred financing costs (2,142) (4,300)
Sale of common stock 3,259 500
Repurchase of warrants - (1,650)
Distributions to stockholders (703) (2,027)
------------ ------------
Net cash provided by financing activities 67,658 4,533
------------ ------------
Net (decrease) increase in cash and cash equivalents (6,249) 9,085
Cash and cash equivalents, beginning of period 13,119 1,440
------------ ------------
Cash and cash equivalents, end of period $ 6,870 $ 10,525
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
KEY COMPONENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements include Key Components, Inc.
("KCI"), a parent holding company of the wholly owned subsidiary, Key
Components, LLC ("KCLLC"), a parent holding company of the wholly and majority
owned subsidiaries, B.W. Elliott Manufacturing Co., Inc. ("Elliott"), Hudson
Lock, Inc. ("Hudson"), ESP Lock Products, Inc. ("ESP"), Key Components Finance
Corp. ("Finance Corp") and the related entities acquired as part of the Valley
Forge Corporation and its subsidiaries (collectively, "VFC") acquisition (Note
2), collectively, the "Company." All significant intercompany transactions have
been eliminated.
KCLLC and Finance Corp were formed on April 1, 1998 to facilitate a debt
offering. KCI and KCLLC have de minimis assets and no operations other than
their investments in their respective subsidiaries. Finance Corp has no assets
or operations.
Effective May 12, 1999, the Company effected a 10,000-to-1 split of its
outstanding capital stock. All references to capital stock shares and amounts
have been restated to retroactively reflect the capital stock split.
Certain reclassifications were made to conform the prior periods to the current
year presentation.
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 interim periods are not necessarily indicative of the results for full
years. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1998 included in the Company's Form 10-K and the unaudited proforma
consolidated financial statements included in the Company's Form 8-K/A filed
April 1, 1999.
2. ACQUISITIONS
During the six months ended June 30, 1999, the Company acquired the entities
described below, which were accounted for by the purchase method of accounting.
The results of their operations have been included in the consolidated financial
statements since their respective dates of acquisition.
On January 19, 1999, the Company acquired all of the outstanding shares of VFC
for a purchase price of approximately $83.6 million (including stock
appreciation rights of approximately $1.2 million) and assumed liabilities of
approximately $23.9 million. In conjunction with the acquisition, the Company
repaid $8.9 million of VFC's outstanding long-term debt out of the $23.9 million
of liabilities assumed as part of the acquisition. VFC manufactures electrical
and mechanical engineered components sold to original equipment manufacturers
("OEM"), dealers, and distributors. The Company recorded the excess purchase
price over net assets acquired of approximately $52.0 million as unallocated
purchase price, which is included in goodwill. The Company is currently
amortizing the unallocated purchase price over a period of thirty years. The
value ascribed to the unallocated purchase price is preliminary and is subject
to change. At the time of the acquisition, the Company decided to sell two VFC
subsidiaries, Force 10 Marine Company ("Force 10") and Multiplex Technology,
Inc. ("Multiplex"). The sale of Force 10 was completed on February 26, 1999 for
$1.7 million in cash. Multiplex was sold on May 28, 1999 for net proceeds of
approximately $4.0 million. It is anticipated that the Company will receive
additional proceeds
6
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ranging from $500,000 to $1.0 million in the third quarter after the final
accounting for the transaction has been completed. Goodwill will be adjusted to
the extent actual proceeds differ from the Company's current estimate.
On February 5, 1999, the Company acquired G&H Technology, Inc. ("G&H") for $3.9
million in cash and the assumption of certain liabilities. The agreement calls
for the Company to pay up to an additional $500,000 in purchase price if certain
contingencies are met. To date, those contingencies are not assured. The
acquired product lines are compatible with the Company's mechanical engineered
component business and the assets and product lines of G&H were integrated into
Elliott's main facility in Binghamton, New York. The Company recorded goodwill
of $2.2 million in connection with the acquisition. The pro forma effect of this
transaction was not material.
The acquisitions were financed with available Company resources and
approximately $82 million from a new $60-million term loan and a $40-million
revolving credit facility. The term loan is payable in quarterly installments
through January 19, 2005. Current maturities of long-term debt at June 30, 1999
included approximately $5.2 million related to the term loan. The revolving
credit facility commitment (of which approximately $17.8 million was outstanding
at June 30, 1999) is for six years. The Company has temporarily waived $5
million of the revolving credit facility commitment. The term loan and revolving
credit facility bear interest at fluctuating interest rates determined by
reference to a base rate plus an applicable margin which will vary from 1.50% to
2.25%. The revolving credit facility also calls for a fee of 0.50% on the unused
portion of the facility. These facilities amended the former acquisition loan
and revolving credit facility.
On an unaudited pro forma basis, assuming the VFC acquisition had occurred as of
the beginning of the periods presented, and excluding the results of operations
of Force 10 and Multiplex, the consolidated results of the Company would have
been as follows:
<TABLE>
<CAPTION>
(In thousands) SIX MONTHS ENDED
JUNE 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Pro forma net sales $88,559 $81,840
Pro forma income before extraordinary item $4,464 $ 1,134
Net Income (loss) $ 4,464 $(3,482)
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Raw materials $12,839 $2,642
Work-in-process 9,014 3,982
Finished goods 8,334 1,863
------- ------
Total inventories $30,187 $8,487
======= ======
</TABLE>
7
<PAGE> 8
4. OPERATING SEGMENTS
Through 1998, the Company operated in two business segments, both of which were
involved in the manufacture of mechanical engineered components. These
businesses were comprised of the manufacturing of specialty locks and related
accessories and of flexible shaft products. Concurrent with the VFC acquisition,
the Company reorganized its operating segments into mechanical engineered
components and electrical components. The VFC acquisition resulted in the
Company expanding its mechanical engineered component business from its two
original business lines to include the manufacturing of turbocharger actuators
and related accessories. Further, the VFC acquisition resulted in the Company
entering into the business of manufacturing electrical components. The
electrical components business produces an array of electrical componentry items
for marine, recreational and industrial applications. It also produces switches
for utility companies and power inverters, which are utilized in both the
consumer and industrial markets.
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest, taxes and depreciation and amortization
("EBITDA"). In its calculation of EBITDA certain charges that management
determines as non-recurring are excluded. Segment information for the six and
three months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
(In thousands) MECHANICAL
ENGINEERED ELECTRICAL
COMPONENTS COMPONENTS TOTAL
---------- ---------- --------
<S> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999:
Net sales from external customers $ 40,879 $ 40,035 $ 80,914
Intersegment net sales 233 2,471 2,704
Segment profit - EBITDA 12,296 6,450 18,746
Segment assets 96,563 48,854 145,417
Depreciation and amortization 2,033 1,440 3,473
Interest expense 4,259 3,018 7,277
SIX MONTHS ENDED JUNE 30, 1998:
Net sales from external customers $ 33,016 $ - $ 33,016
Intersegment net sales - - -
Segment profit - EBITDA 9,918 - 9,918
Segment assets 91,156 - 91,156
Depreciation and amortization 2,031 - 2,031
Interest expense 3,264 - 3,264
</TABLE>
8
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<TABLE>
<CAPTION>
(In thousands) MECHANICAL
ENGINEERED ELECTRICAL
COMPONENTS COMPONENTS TOTAL
---------- ---------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999:
Net sales from external customers $ 21,173 $ 24,665 $ 45,838
Intersegment net sales 103 1,576 1,679
Segment profit - EBITDA 6,457 4,309 10,766
Segment assets 96,563 48,854 145,417
Depreciation and amortization 1,047 866 1,913
Interest expense 2,030 1,741 3,771
THREE MONTHS ENDED JUNE 30, 1998:
Net sales from external customers $ 16,683 $ - $ 16,683
Intersegment net sales - - -
Segment profit - EBITDA 5,085 - 5,085
Segment assets 91,156 - 91,156
Depreciation and amortization 930 - 930
Interest expense 1,731 - 1,731
</TABLE>
RECONCILIATION OF SELECTED SEGMENT INFORMATION TO THE COMPANY'S CONSOLIDATED
TOTALS:
<TABLE>
<CAPTION>
(In thousands) SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES:
Net sales from reportable segments $ 83,618 $ 33,016 $ 47,517 $ 16,683
Elimination of intersegment net sales (2,704) - (1,679) -
--------- --------- --------- ---------
Total consolidated net sales $ 80,914 $ 33,016 $ 45,838 $ 16,683
========= ========= ========= =========
PROFIT OR LOSS:
Total profit from reportable segments $ 18,746 $ 9,918 $ 10,766 $ 5,085
Reconciling items:
Corporate expenses (1,016) (312) (675) (187)
Depreciation and amortization (3,918) (2,068) (2,135) (967)
Interest expense (7,277) (3,295) (3,772) (1,762)
Management fee (400) (400) (200) (210)
Non-recurring charges (82) (131) (46) (131)
--------- --------- --------- ---------
Total consolidated income before
taxes and extraordinary item $ 6,053 $ 3,712 $ 3,938 $ 1,828
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
ASSETS: JUNE 30,
----------------------------- DECEMBER 31,
1999 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
Total assets for reportable segments $ 145,417 $ 91,156 $ 78,184
Unallocated amounts:
Corporate assets 4,749 10 14,960
Unallocated goodwill 47,239 - -
--------- --------- ---------
Total consolidated assets $ 197,405 $ 91,166 $ 93,144
========= ========= =========
</TABLE>
9
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5. CAPITAL STOCK
During the first quarter of fiscal 1999, the Company sold approximately 93,000
shares of its capital stock for approximately $3.3 million. The stock was sold
principally to existing stockholders and management of the Company.
6. PROVISION FOR INCOME TAXES
For the six and three months ended June 30, 1999, the Company's provision for
income taxes relates primarily to VFC's consolidated taxable income for the
quarter. VFC is currently a C corporation and is responsible for taxes on
income. It is anticipated that the Company will elect limited liability status
("LLC") for all of its subsidiaries. Upon election of LLC status the
stockholders of the Company would be personally responsible for all taxes due on
income of the Company.
10
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Key Components, Inc. ("KCI"), is a parent holding company of the wholly owned
subsidiary, Key Components, LLC ("KCLLC"). KCLLC is a parent holding company of
wholly and majority owned subsidiaries (collectively, the "Company"). Through
its operating subsidiaries, 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. Through 1998, the Company operated in two business segments, both
of which were involved in the manufacture of mechanical engineered components.
These businesses were comprised of the manufacturing of specialty locks and
related accessories and of flexible shaft products.
On January 19, 1999, the Company consummated the acquisition of all the
outstanding shares of Valley Forge Corporation ("VFC"), a public company, with
over $100 million in annual revenues, for a purchase price of approximately
$83.6 million (including stock appreciation rights of approximately $1.2
million) and assumed liabilities of approximately $23.9 million. The Company
recorded the excess purchase price over net assets acquired of approximately
$52.0 million as unallocated purchase price, which is included in goodwill. The
Company is currently amortizing the unallocated purchase price over a period of
thirty years. The value ascribed to the unallocated purchase price is
preliminary and is subject to change. At the time of the acquisition, the
Company decided to sell two VFC subsidiaries, Force 10 Marine Company ("Force
10") and Multiplex Technology, Inc. ("Multiplex"). The sale of Force 10 was
completed on February 26, 1999 for $1.7 million in cash. Multiplex was sold on
May 28, 1999 for net proceeds of approximately $4.0 million. It is anticipated
that the Company will receive additional proceeds of approximately $500,000 in
the third quarter after the final accounting for the sale of Multiplex has been
completed.
Concurrent with the VFC acquisition, the Company reorganized its operating
segments into mechanical engineered components and electrical components. The
acquisition of VFC resulted in the Company expanding its mechanical engineered
component business from its two original business lines to include the
manufacturing of turbocharger actuators and related accessories. Further, the
VFC acquisition resulted in the Company entering into the business of
manufacturing electrical components. The electrical components business produces
an array of electrical componentry items for marine, recreational, and
industrial applications. It also produces switches for utility companies and
power inverters, which are utilized in both the consumer and industrial markets.
Simultaneously with the acquisition of VFC, the Company replaced its former
acquisition and revolving loans with a new $60-million term loan and a
$40-million revolving credit facility. The term loan is payable in quarterly
installments through January 19, 2005. The current maturities of long-term debt
at June 30, 1999 included approximately $5.2 million related to the term loan.
The revolving credit facility commitment (of which approximately $17.8 million
was outstanding at June 30, 1999) is for six years. The Company has temporarily
waived $5 million of the revolving credit facility commitment. The term loan and
revolving credit facility bear interest at fluctuating interest rates determined
by reference to a base rate plus an applicable margin which will vary from 1.50%
to 2.25%.
On February 5, 1999, the Company acquired G&H Technology, Inc. ("G&H") for $3.9
million in cash as well as the assumption of certain liabilities. The agreement
calls for the Company to pay up to an additional $500,000 in purchase price if
certain contingencies are met. To date, those contingencies are not
11
<PAGE> 12
assured. The acquired assets and product lines are compatible with and were
integrated into the Company's existing mechanical engineered components
business.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales: Net sales of approximately $80.9 million for the six months ended
June 30, 1999 increased by approximately $47.9 million, or 145.1%, from
approximately $33.0 million for the six months ended June 30, 1998. Net sales of
the mechanical engineered components business of $40.9 million for the six
months ended June 30, 1999 increased by approximately $7.9 million from
approximately $33.0 million for the six months ended June 30, 1998. Net sales of
the electrical components business, which was acquired in the first quarter of
fiscal 1999, were approximately $40.0 million for the six months ended June 30,
1999. The increase in the total and segment net sales is primarily attributable
to the acquisitions of VFC and G&H.
Gross Profit: Gross profit of approximately $31.7 million for the six months
ended June 30, 1999 increased by approximately $19.1 million, or 152.6%, from
approximately $12.6 million for the six months ended June 30, 1998. Gross profit
for the mechanical engineered components business of approximately $16.0 million
for the six months ended June 30, 1999 increased by approximately $3.4 million
or 27.4% from approximately $12.6 million for the six months ended June 30,
1998. Gross profit for the electrical components business was approximately
$15.7 million for the six months ended June 30, 1999. Gross profit, as a
percentage of net sales, was 39.1% and 38.0% for the six months ended June 30,
1999 and 1998, respectively. Gross profit, as a percentage of net sales, for the
mechanical engineered components business were 39.1% and 38.0% for the six
months ended June 30, 1999 and 1998, respectively. Gross profit, as a percentage
of net sales, for the electrical component business was 39.2% for the six months
ended June 30, 1999. The increase in total gross profit and total gross profit
percentage are primarily related to the acquisition of VFC and the correlated
entry into the electrical components business where the Company experiences
higher gross margins than in its mechanical components business. The margins for
the electrical components business are generally higher as a result of the
nature of the customer base to which the electrical components business targets
a significant amount of its products.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses of approximately $18.1 million for the six
months ended June 30, 1999 increased by approximately $13.0 million or 252.9%,
from approximately $5.1 million for the six months ended June 30, 1998.
Depreciation and amortization expense increased by approximately $1.9 million
for the six months ended June 30, 1999. Corporate expenses also increased for
the six months ended June 30, 1999 by approximately $704,000. The Company is in
the process of merging the responsibilities of the corporate office of Valley
Forge into its corporate office. This has resulted in certain redundant costs of
approximately $152,000. The corporate office of Valley Forge is expected to
close by September 30, 1999. These increases as well as the remainder of the
increase in SG&A expenses are predominantly attributable to the acquisition of
VFC, which added approximately $12.3 million (or 94.6% of the total increase in
SG&A expenses) to SG&A for the six months ended June 30, 1999. SG&A expenses for
the mechanical engineered components business of approximately $5.9 million for
the six months ended June 30, 1999 increased by approximately $1.1 million or
23.6%, from approximately $4.8 million for the six months ended June 30, 1998.
This increase was partially related to the integration of G&H and predominantly
related to the expansion of the mechanical engineered components business as a
result of the VFC acquisition. The electrical components business had SG&A
expenses of approximately $10.4 million for the six months ended June 30, 1999.
SG&A, as a percentage of net sales, was 22.4% for the six months ended June 30,
1999, which increased by 6.9% from 15.5% for the six months ended June 30, 1998.
SG&A, as a percentage of net sales, for the mechanical engineered components
business was 14.5% for the six months ended June 30, 1999 and 1998. SG&A, as a
percentage of net sales, for the electrical components business was 26.1% for
the six months ended June 30, 1999. The overall increase in the percentage of
SG&A is directly related to the electrical components business, which maintains
higher levels of sales and marketing expenses due to the businesses to which it
targets its products.
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<PAGE> 13
Income from Operations: Income from operations of approximately $13.2 million
for the six months ended June 30, 1999 increased by approximately $6.2 million,
or 88.0% from approximately $7.0 million for the six months ended June 30, 1998.
This increase is related primarily to the acquisition of VFC.
Interest Expense: Interest expense of approximately $7.3 million for the six
months ended June 30, 1999 increased by approximately $4.0 million, or 120.8%
from approximately $3.3 million for the six months ended June 30, 1998. This
increase is due to the issuance of $80.0 million of 10 1/2% senior notes in May
1998 as well as the issuance of debt outstanding under the Company's new credit
facilities.
Provision for Income Taxes: Effective May 31, 1997, the Company elected to be
treated as a subchapter S corporation, which causes the stockholders to be
personally liable for taxes due on the income of the Company. The provision for
income taxes is primarily related to the taxable income of the companies
acquired with the acquisition of VFC. VFC is a C corporation for tax purposes.
It is anticipated that the Company will elect limited liability corporation
status for all of its subsidiaries, which would then be taxed in a manner
similar to subchapter S corporations.
Net Income: Net income of approximately $3.9 million for the six months ended
June 30, 1999 increased by approximately $4.9 million from a net loss of
approximately $1.0 million for the six months ended June 30, 1998. This increase
is the result of an increase in income from operations of approximately $6.2
million which was partially offset by increases in interest expense of
approximately $4.0 million and the provision for income taxes of $2.0 million,
all due to the factors discussed above. Additionally, the results of operations
for the six and three months ended June 30, 1998 were impacted by a $4.6 million
extraordinary charge resulting from the early repayment of debt in connection
with the Company's senior notes, which were issued in May 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales: Net sales of approximately $45.9 million for the three months ended
June 30, 1999 increased by approximately $29.2 million, or 174.8%, from
approximately $16.7 million for the three months ended June 30, 1998. Net sales
of the mechanical engineered components business of $21.2 million for the three
months ended June 30, 1999 increased by approximately $4.5 million from
approximately $16.7 million for the three months ended June 30, 1998. Net sales
of the electrical components segment, which was acquired in the first quarter of
fiscal 1999, were approximately $24.7 million for the three months ended June
30, 1999. The increase in the total and segment net sales is primarily
attributable to the acquisitions of VFC and G&H.
Gross Profit: Gross profit of approximately $18.2 million for the three months
ended June 30, 1999 increased by approximately $11.8 million, or 183.5%, from
approximately $6.4 million for the three months ended June 30, 1998. Gross
profit for the mechanical engineered components of approximately $8.4 million
for the three months ended June 30, 1999 increased by approximately $2.0 million
or 31.6% from approximately $6.4 million for the three months ended June 30,
1998. Gross profit for the electrical components business was approximately $9.7
million for the three months ended June 30, 1999. Gross profit, as a percentage
of net sales, was 39.6% and 38.4% for the three months ended June 30, 1999 and
1998, respectively. Gross profit, as a percentage of net sales, for the
mechanical engineered components business was 39.8% and 38.4% for the three
months ended June 30, 1999 and 1998, respectively. Gross profit, as a percentage
of net sales, for the electrical component business was 39.5% for the three
months ended June 30, 1999. The increase in total gross profit and total gross
profit percentage are primarily related to the acquisition of VFC and the
correlated entry into the electrical components business where the Company
experiences higher gross margins than in its mechanical components business. The
margins for the electrical components business are generally higher as a result
of the nature of the customer base to which the electrical components business
targets a significant amount of its products.
Selling, General and Administrative Expenses: SG&A expenses of approximately
$10.3 million for the three months ended June 30, 1999 increased by
approximately $7.7 million or 299.0%, from approximately
13
<PAGE> 14
$2.6 million for the three months ended June 30, 1998. Depreciation and
amortization expense increased by approximately $1.2 million for the three
months ended June 30, 1999. Corporate expenses also increased for the three
months ended June 30, 1999 by approximately $488,000. The Company is in the
process of merging the responsibilities of the corporate office of Valley Forge
into its corporate office. This has resulted in certain redundant costs of
approximately $42,000. These increases as well as the remainder of the increase
in SG&A expenses are predominantly attributable to the acquisition of VFC, which
added approximately $7.3 million (or 95.0% of the total increase in SG&A
expenses) to SG&A for the three months ended June 30, 1999. SG&A expenses for
the mechanical engineered components business of approximately $3.1 million for
the three months ended June 30, 1999 increased by approximately $773,000 or
32.9%, from approximately $2.4 million for the three months ended June 30, 1998.
This increase was partially related to the integration of G&H and predominantly
related to the expansion of the mechanical engineered components business as a
result of the VFC acquisition. The electrical components business had SG&A
expenses of approximately $6.2 million for the three months ended June 30, 1999.
SG&A, as a percentage of net sales, was 22.4% for the three months ended June
30, 1999, which increased by 6.9% from 15.5% for the three months ended June 30,
1998. SG&A, as a percentage of net sales, for the mechanical engineered
components business was 14.8% and 14.1% for the three months ended June 30, 1999
and 1998, respectively. SG&A, as a percentage of net sales, for the electrical
components business was 25.3% for the three months ended June 30, 1999. The
overall increase in the percentage of SG&A is directly related to the electrical
components business, which maintains higher levels of sales and marketing
expenses due to the businesses to which it targets its products.
Income from Operations: Income from operations of approximately $7.7 million for
the three months ended June 30, 1999 increased by approximately $4.1 million, or
112.2% from approximately $3.6 million for the three months ended June 30, 1998.
This increase is related primarily to the acquisition of VFC.
Interest Expense: Interest expense of approximately $3.8 million for the three
months ended June 30, 1999 increased by approximately $2.0 million, or 114.2%
from approximately $1.8 million for the three months ended June 30, 1998. This
increase is due to the issuance of $80.0 million of 10 1/2% senior notes in May
1998, which only partially affected the results of operations for the three
months ended June 30, 1998, as well as the issuance of debt outstanding under
the Company's new credit facilities.
Provision for Income Taxes: Effective May 31, 1997, the Company elected to be
treated as a subchapter S corporation, which causes the stockholders to be
personally liable for taxes due on the income of the Company. The provision for
income taxes is primarily related to the taxable income of the companies
acquired with the acquisition of VFC. VFC is a C corporation for tax purposes.
It is anticipated that the Company will elect limited liability corporation
status for all of its subsidiaries, which would then be taxed in a manner
similar to subchapter S corporations.
Net Income: Net income of approximately $2.5 million for the three months ended
June 30, 1999 increased by $5.4 million from a net loss of approximately $2.9
million for the three months ended June 30, 1998. This increase is the result of
an increase in income from operations of approximately $4.1 million which was
partially offset by increases in interest expense of approximately $2.0 million
and the provision for income taxes of $1.3 million, all due to the factors
discussed above. Additionally, the results of operations for the three months
ended June 30, 1998 were impacted by a $4.6 million extraordinary charge
resulting from the early repayment of debt in connection with the Company's
senior notes, which were issued in May 1998.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated funds from its operations, and its
working capital requirements generally have not fluctuated from quarter to
quarter. The Company's other main source of liquidity is derived from the
Company's term loan and revolving credit facility described above.
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 $80.0 million of senior notes require semiannual
interest payments on the outstanding principal. The term loan requires quarterly
principal and interest payments. Under its new revolving credit facility, the
Company has the option to lock in a specified interest rate by entering into a
contract, which rolls over at different time intervals ranging from 30 to 180
days. As the underlying contract comes up for renewal, the interest associated
with the contract becomes due. As of June 30, 1999, the Company had no
outstanding commitments for capital expenditures and anticipates further capital
expenditures of approximately $3.0 million for the remainder of fiscal 1999. The
expenditures are 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. 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.
Cash flows provided by operating activities were approximately $8.9 million and
$5.2 million for the six months ended June 30, 1999 and 1998, respectively. The
net increase of $3.7 million over the prior period resulted primarily from the
Company's increase in accrued expenses and accounts payable of approximately
$3.5 million and an increase in depreciation and amortization of $1.8 million,
which was partially offset by an increase in accounts receivable of
approximately $2.0 million. The increase in accounts payable and accrued
expenses was primarily due to the Company's accrued interest related to its
financing arrangements. As described above, the Company primarily pays interest
on a semi-annual and quarterly basis. The increase in accounts receivable was
principally due to the increase in sales for six months ended June 30, 1999.
Cash flows used in investing activities were approximately $82.8 million and
$674,000 for the six months ended June 30, 1999 and 1998, respectively. The
primary reason for the increase in investing activities was the acquisitions of
VFC and G&H described above. The Company also sold Force 10 and Multiplex, which
it had acquired as part of VFC, for a total of $5.7 million in cash. Capital
expenditures for the six months ended June 30, 1999 and 1998 totaled $1.5
million and $674,000 respectively.
Cash flows from financing activities provided net cash of approximately $67.7
million and $4.5 million for the six months ended June 30, 1999 and 1998,
respectively. The primary reasons for the net increase $63.2 million of
financing activities for the six months ended June 30, 1999 were the new term
loan and credit facility, whose proceeds were used to finance the Valley Forge
acquisition during the six months ended June 30, 1999 as opposed to the six
months ended June 30, 1998 when the proceeds received from the issuance of the
senior notes were primarily used to repay other outstanding debt. An aggregate
of approximately $82.6 million of proceeds were received under this new term
loan and credit facility. This was offset by the repayment of approximately
$15.3 million on long-term debt and other long-term obligations, the most
significant portion being the repayment of approximately $8.9 million of VFC's
long-term debt, which was made in conjunction with the acquisition. In
connection with the new debt facilities, the Company incurred approximately $2.2
million of deferred financing costs during the six months ended June 30, 1999.
During the six months ended June 30, 1998, the Company received $80.0 million of
proceeds from the issuance of the senior notes, which was used to repay
approximately $66.0 of outstanding debt.
15
<PAGE> 16
During the six months ended June 30, 1999, the Company also realized proceeds of
approximately $3.3 million from the sale of its capital stock during the six
months ended June 30, 1999. During the six months ended June 30, 1999 and 1998,
the Company made distributions to the stockholders of the Company of
approximately $703,000 and $2.0 million, respectively, for the payment of income
taxes.
Management believes that the Company's cash flow from operations, together with
its borrowing availability under the new credit facilities, will be adequate to
meet its anticipated capital requirements for the foreseeable future.
RECENT 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.
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, 1999 was approximately $28.7
million. 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 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.
The Company's assessment of the possible consequences of Year 2000 issues on its
business, results of operations, or financial condition 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 practical, for critical systems and
processes. Implementation of the Year 2000 Plan has been undertaken at the
Company's operating subsidiaries with respect to various operating and
information systems in varying degrees to date.
16
<PAGE> 17
The Year 2000 Plan is expected to be fully implemented at all locations and with
respect to all critical information systems by August 31, 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 August 31, 1999. Because the Company is
dependent upon 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 August 31,
1999.
The cost of the Year 2000 Plan includes 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 has
performed 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 rely 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.
Interruptions of communication services or power supply due to Year 2000
problems may 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 August 31, 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.
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
17
<PAGE> 18
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 3 -- 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 new $60-million term loan and the $40-million
revolving credit facility. Under both the term loan and the revolving credit
facility, the Company has the option to lock in a certain interest rate based on
either the base rate, which is equivalent to prime, or LIBOR plus an applicable
margin specified in the agreement. Principally all of the borrowings under the
term loan are locked in at approximately 8.9% until January 2000, when the
underlying LIBOR contract is up for renewal. The Company's borrowings under the
revolving line of credit are currently at approximately 8.5%. The senior notes
bear a fixed rate of interest and therefore are not subject to market risk. The
Company does not trade in derivative financial instruments.
PART II - OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(1) Exhibit 27 - Financial Data Schedule
18
<PAGE> 19
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 10, 1999 By: /s/ CLAY B. LIFFLANDER
--------------------------------------
Clay B. Lifflander
President
Date: August 10, 1999 By: /s/ ROBERT B. KAY
--------------------------------------
Robert B. Kay
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 10, 1999 By: /s/ CLAY B. LIFFLANDER
--------------------------------------
Clay B. Lifflander
President
Date: August 10, 1999 By: /s/ ROBERT B. KAY
--------------------------------------
Robert B. Kay
Chief Financial Officer
19
<PAGE> 20
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,870
<SECURITIES> 0
<RECEIVABLES> 25,477
<ALLOWANCES> 655
<INVENTORY> 30,187
<CURRENT-ASSETS> 64,809
<PP&E> 22,190
<DEPRECIATION> 7,262
<TOTAL-ASSETS> 197,405
<CURRENT-LIABILITIES> 27,240
<BONDS> 151,250
0
0
<COMMON> 4,795
<OTHER-SE> 9,347
<TOTAL-LIABILITY-AND-EQUITY> 197,405
<SALES> 80,914
<TOTAL-REVENUES> 80,914
<CGS> 49,242
<TOTAL-COSTS> 49,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 190
<INTEREST-EXPENSE> 7,277
<INCOME-PRETAX> 6,053
<INCOME-TAX> 2,140
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,913
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
