<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
(MARK ONE) FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND 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)
WING ROAD RR1, BOX 167D, MILLBROOK, NY 12545
-------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(914) 677-8383
--------------
(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)
WING ROAD RR1, BOX 167D, MILLBROOK, NY 12545
-------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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.
[X] Yes [ ] No
As of May 12, 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
MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I
Item 1. -- Consolidated Financial Statements:
Balance Sheets.................................................. 3
Statements of Income............................................ 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....................................... 10
Item 3. -- Quantitative and Qualitative Disclosures about Market Risk ..... 15
PART II
Item 6. -- Exhibits and Reports on Form 8-K ............................... 16
Signatures................................................................. 17
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS
KEY COMPONENTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- -------
ASSETS: (UNAUDITED)
<S> <C> <C>
Current
Cash and cash equivalents $ 5,329 $13,119
Accounts receivable, net of allowance for doubtful
accounts of $572 and $175 at March 31, 1999 and
December 31, 1998, respectively 26,506 7,989
Inventories 29,662 8,487
Prepaid expenses and other current assets 2,847 441
-------- -------
Total current assets 64,344 30,036
Property and equipment, net 22,285 12,222
Goodwill, net 96,877 44,378
Deferred financing costs, net 6,524 4,616
Intangibles, net 1,760 1,620
Assets held for sale 4,310 --
Other assets 4,585 272
-------- -------
$200,685 $93,144
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current
Current portion of long-term debt and other
long-term obligations $ 5,621 $ 518
Accounts payable 9,642 1,465
Accrued interest 3,872 750
Accrued wages and related benefits 2,918 1,205
Accrued expenses and other current liabilities 5,304 772
-------- -------
Total current liabilities 27,357 4,710
10 1/2% senior notes due 2008 80,000 80,000
Notes payable -- long term 76,138 --
Other long-term obligations 3,978 760
Deferred income taxes 856 --
-------- -------
Total liabilities 188,329 85,470
-------- -------
Stockholders' Equity:
Capital stock, no par value; 5,000 shares
authorized; 1,113 and 1,020 shares issued and
outstanding at March 31, 1999 and December 31,
1998, respectively 4,795 1,536
Retained earnings 7,561 6,138
-------- -------
Total stockholders' equity 12,356 7,674
-------- -------
$200,685 $93,144
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 35,076 $ 16,333
Cost of goods sold 21,555 10,198
-------- --------
Gross profit 13,521 6,135
Selling, general and administrative expenses 7,814 2,550
Related party management fees 200 190
-------- --------
Income from operations 5,507 3,395
Other income (expense):
Other income 114 22
Interest expense (3,506) (1,533)
-------- --------
Income before provision for income taxes 2,115 1,884
Provision for income taxes 681 --
-------- --------
Net income $ 1,434 $ 1,884
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
KEY COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,434 $ 1,884
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowance for doubtful accounts 106 --
Depreciation and amortization 1,783 1,123
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (4,198) (1,157)
Inventories (173) (108)
Prepaid expenses and other assets (135) 13
Accounts payable 1,446 (39)
Accrued expenses 4,298 6
-------- -------
Net cash provided by operating activities 4,561 1,722
-------- -------
Cash flows from investing activities:
Acquisition of Valley Forge Corporation (82,441) --
Acquisition of G&H Technology, Inc. (3,900) --
Proceeds from sale of Force 10 Marine Company 1,700 --
Funding of assets held for sale (210) --
Capital expenditures (631) (284)
-------- -------
Net cash used in investing activities (85,482) (284)
-------- -------
Cash flows from financing activities:
Payments of long-term debt and capital lease
obligations (10,598) (960)
Proceeds from debt issued 82,639 --
Deferred financing costs (2,158) --
Sale of common stock 3,259 --
Dividends to stockholders (11) --
-------- -------
Net cash provided by (used in)
financing activities 73,131 (960)
-------- -------
Net (decrease) increase in cash and cash equivalents (7,790) 478
Cash and cash equivalents, beginning of period 13,119 1,440
-------- -------
Cash and cash equivalents, end of period $ 5,329 $ 1,918
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
KEY COMPONENTS, INC.
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 retroactively restated to reflect the capital stock split.
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 consolidated
financial statements included in the Company's Form 8-K/A filed April 1, 1999.
2. ACQUISITIONS
During the three months ended March 31, 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
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 $50.9 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 purchase price is
preliminary and 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
6
<PAGE> 7
completed on February 26, 1999 for $1.7 million in cash. It is anticipated that
the sale of Multiplex will be completed in the second quarter of 1999.
Multiplex designs and manufactures high performance multi-room video, audio,
data and voice control systems. In accordance with Emerging Issues Task Force
Issue No. 87-11, "Allocation of Purchase Price of Assets to be Sold," the assets
of Multiplex are being carried at expected net sales price based on industry
benchmarks of sales of privately held companies. The estimated carrying value is
classified as assets held for sale. Goodwill will be adjusted to the extent
actual proceeds differ from the assigned carrying value.
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
Elliot'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 March 31, 1999
included $5 million related to the term loan. The revolving credit facility
commitment (of which approximately $21 million was outstanding at March 31,
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
the agent's 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 revolver.
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 operating
of Force 10 and Multiplex, the consolidated results of the Company would have
been as follows:
<TABLE>
<CAPTION>
(In thousands) THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
------- -------
<S> <C> <C>
Pro forma net sales $42,721 $39,465
Pro forma income before taxes and
extraordinary items $ 2,425 $ 1,853
</TABLE>
7
<PAGE> 8
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) MARCH 31, DECEMBER 31,
1999 1998
------- ------
<S> <C> <C>
Raw materials $12,781 $2,642
Work-in-process 9,424 3,982
Finished goods 7,457 1,863
------- ------
Total inventory $29,662 $8,487
======= ======
</TABLE>
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 three months
ended March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
(In thousands) MECHANICAL
ENGINEERED ELECTRICAL
COMPONENTS COMPONENTS TOTAL
---------- ---------- -----
<S> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999:
Net sales from external customers $19,706 $15,370 $ 35,076
Intersegment net sales 130 895 1,025
Segment profit - EBITDA 5,839 2,321 8,160
Segment assets 95,552 49,361 144,913
Depreciation and amortization 986 574 1,560
Interest expense 2,229 1,277 3,506
THREE MONTHS ENDED MARCH 31, 1998:
Net sales from external customers $16,333 -- $16,333
Intersegment net sales -- -- -
Segment profit - EBITDA 4,833 -- 4,833
Segment assets 80,657 -- 80,657
Depreciation and amortization 1,101 -- 1,101
Interest expense 1,533 -- 1,533
</TABLE>
8
<PAGE> 9
RECONCILIATION OF SELECTED SEGMENT INFORMATION TO THE COMPANY'S CONSOLIDATED
TOTALS:
<TABLE>
<CAPTION>
(In thousands) THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
NET SALES:
Net sales from reportable segments $ 36,101 $ 16,333
Elimination of intersegment net sales (1,025) --
--------- ---------
Total consolidated net sales $ 35,076 $ 16,333
========= =========
PROFIT OR LOSS:
Total profit from reportable segments $ 8,160 $ 4,833
Reconciling items:
Corporate expenses (521) (125)
Depreciation and amortization (1,783) (1,101)
Interest expense (3,506) (1,533)
Management fee (200) (190)
Non-recurring charges (35) --
--------- ---------
Total consolidated income before taxes $ 2,115 $ 1,884
========= =========
ASSETS:
Total assets for reportable segments $ 144,913 $ 80,657
Unallocated amounts:
Corporate assets 5,126 13
Unallocated goodwill 50,646 --
--------- ---------
Total consolidated assets $ 200,685 $ 80,670
========= =========
</TABLE>
5. CAPITAL STOCK
During the three months ended March 31, 1999 the Company sold approximately
93,000 shares of its capital stock for approximately $3.3 million. The stock
was sold principally to existing shareholders and management of the Company.
6. PROVISION FOR INCOME TAXES
For the three months ended March 31, 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 ("LLC") status for all
of its subsidiaries. Upon election of LLC status, the shareholders of the
Company would be personally responsible for all taxes due on income of the
Company.
9
<PAGE> 10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
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 $50.9 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. It is anticipated that
the sale of Multiplex will be completed in the second quarter of 1999.
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. Current maturities of long-term debt at
March 31, 1999 included $5 million related to the term loan. The revolving
credit facility commitment (of which approximately $21 million was outstanding
at March 31, 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 the agent's 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 assured. The
acquired assets and product lines are compatible with and were integrated into
the Company's existing mechanical engineered components business.
10
<PAGE> 11
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net Sales: Net sales increased by approximately $18.7 million, or 114.8%, from
approximately $16.3 million for the three months ended March 31, 1998 to
approximately $35.0 million for the three months ended March 31, 1999. Net sales
of the mechanical engineered components business increased by approximately $3.4
million from approximately $16.3 million for the three months ended March 31,
1998 to approximately $19.7 million for the three months ended March 31, 1999.
Net sales of the electrical components segment, which was acquired in the first
quarter of fiscal 1999, was approximately $15.3 million of net sales for the
three months ended March 31, 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 increased by approximately $7.4 million, or 120.4%,
from approximately $6.1 million for the three months ended March 31, 1998 to
approximately $13.5 million for the three months ended March 31, 1999. Gross
profit for the mechanical engineered components business increased by
approximately $1.4 million or 23.1% from approximately $6.1 million for the
three months ended March 31, 1998 to approximately $7.5 million for the three
months ended March 31, 1999. Gross profit for the electrical components business
was approximately $6.0 million for the three months ended March 31, 1999. Gross
profit, as a percentage of net sales, was 38.6% and 37.6% for the three months
ended March 31, 1999 and 1998, respectively. Gross profit, as a percentage of
sales, for the mechanical engineered components business was 38.3% and 37.6% for
the three months ended March 31, 1999 and 1998, respectively. Gross profit, as a
percentage of sales, for the electrical component business was 38.9% for the
three months ended March 31, 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 increased by
approximately $5.3 million or 206.4%, from approximately $2.5 million for the
three months ended March 31, 1998 to approximately $7.8 million for the three
months ended March 31, 1999. Depreciation and amortization expense increased by
approximately $414,000 for the three months ended March 31, 1999. Corporate
expenses also increased for the three months ended March 31, 1999 by
approximately $396,000. These increases as well as the remainder of the increase
in SG&A expenses are predominately attributable to the acquisition of VFC, which
added approximately $5.0 million (or 94.3% of the total increase in SG&A
expenses) to SG&A for the three months ended March 31, 1999. SG&A expenses for
the mechanical engineered components business increased by approximately
$356,000 or 14.7%, from approximately $2.4 million for the three months ended
March 31, 1998 to approximately $2.7 million for the three months ended March
31, 1999. 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 $4.2 million for the three months ended March
31, 1999.
SG&A, as a percentage of net sales, increased from 15.6% for the three months
ended March 31, 1998 to 22.3% for the three months ended March 31, 1999. SG&A,
as a percentage of net sales, for the mechanical engineered components business
was 14.1% and 14.9% for the three months ended March 31, 1999 and 1998,
respectively. SG&A, as a percentage of net sales, for the electrical components
business was 27.4% for the three months ended March 31, 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.
11
<PAGE> 12
Income from Operations: Income from operations increased by approximately $2.1
million, or 62.2% from approximately $3.4 million for the three months ended
March 31, 1998 to approximately $5.5 million for the three months ended March
31, 1999. This increase is related primarily to the acquisition of VFC.
Interest Expense: Interest expense increased by approximately $2.0 million, or
128.5% from approximately $1.5 million for the three months ended March 31, 1998
to approximately $3.5 million for the three months ended March 31, 1999. This
increase is due to the issuance of $80 million of 10 1/2% senior notes in May
1998 as well as the debt issuance 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 shareholders 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 decreased from approximately $1.9 million for the three
months ended March 31, 1998 to approximately $1.4 million for the three months
ended March 31, 1999. This decrease is the result of an increase in income from
operations of approximately $2.1 million, offset by increased interest expense
of approximately $2.0 million and the provision for income taxes of $681,000,
all due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated funds from its operations, and its
working capital requirements generally have not 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 million of senior notes requires semiannual
interest payments on the outstanding principal. Beginning in April 1999, 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, usually within 90 days. As the underlying contract comes up for
renewal, the interest associated with the contract becomes due. As of March 31,
1999, the Company had no outstanding commitments for capital expenditures and
anticipates further capital expenditures of approximately $3.2 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 $4.6 million and
$1.7 million for the three months ended March 31, 1999 and 1998, respectively.
The net increase of $2.9 million over the prior period resulted primarily from
the Company's increase in accrued expenses and accounts payable of approximately
$5.8 million, which was offset by a net increase in accounts receivable of
approximately $3.0 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
12
<PAGE> 13
primarily pays interest on a semi-annual and quarterly basis. The increase in
accounts receivable was principally due to the increase in sales for March 1999.
Cash flows used in investing activities were approximately $85.5 million and
$284,000 for the three months ended March 31, 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, which it had
acquired as part of VFC, for $1.7 million in cash. Capital expenditures for the
three months ended March 31, 1999 totaled $631,000.
Cash flows from financing activities provided net cash of approximately $73.1
million for the three months ended March 31, 1999 and used approximately $1.0
million for the three months ended March 31, 1998. Of the $74.1 million net
increase, approximately $82.6 million was attributable to proceeds received
under the Company's new term loan and revolving credit facility. This was offset
by the repayment of approximately $10.6 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 three months ended March 31, 1999. The Company also realized proceeds
of approximately $3.3 million due to the sale of its capital stock during the
quarter.
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 March 31, 1999 was approximately $26
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.
13
<PAGE> 14
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 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 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. The Year 2000 Plan is expected
to be fully implemented at all locations and with respect to all critical
information systems by mid-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
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 before the end of the second
quarter of 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 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 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.
14
<PAGE> 15
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 the end of the second 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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.
ITEM 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 agent's 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 8.2% until July 1999, when
the underlying LIBOR contract is up for renewal. The Company's borrowings under
the revolving line of credit are currently at approximately 8.2%. 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(1) Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
(1) Form 8-K, dated January 19, 1999, relating to the acquisition by
the Company of the common stock of Valley Forge Corporation. This
report included Valley Forge Corporation consolidated financial
statements for the three years ended December 31, 1997 and the
nine months ended September 30, 1998, which were incorporated by
reference to the Form 10-K for the year ended December 31, 1997
and Form 10-Q for the quarter ended September 30, 1998 previously
filed with the Securities and Exchange Commission by Valley Forge
Corporation.
(2) Form 8-K/A, dated April 1, 1999, amended the Form 8-K dated
January 19, 1999 to include the unaudited pro forma consolidated
financial data regarding the acquisition of Valley Forge
Corporation by the Company. The consolidated financial statements
for the years ended December 31, 1998 and 1997 of Valley Forge
Corporation were filed as part of Form 8-K/A.
16
<PAGE> 17
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: May 14, 1999 By: /s/ CLAY B. LIFFLANDER
------------------------------
Clay B. Lifflander
President
Date: May 14, 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: May 14, 1999 By: /s/ CLAY B. LIFFLANDER
------------------------------
Clay B. Lifflander
President
Date: May 14, 1999 By: /s/ ROBERT B. KAY
------------------------------
Robert B. Kay
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C> <C>
Exhibit 27 Financial Data Schedule
</TABLE>
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001065418
<NAME> Key Components LLC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,329
<SECURITIES> 0
<RECEIVABLES> 26,506
<ALLOWANCES> 572
<INVENTORY> 29,662
<CURRENT-ASSETS> 64,344
<PP&E> 22,285
<DEPRECIATION> 6,283
<TOTAL-ASSETS> 200,685
<CURRENT-LIABILITIES> 27,357
<BONDS> 80,000
0
0
<COMMON> 4,795
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,356
<SALES> 35,076
<TOTAL-REVENUES> 35,076
<CGS> 21,555
<TOTAL-COSTS> 21,555
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 106
<INTEREST-EXPENSE> 3,506
<INCOME-PRETAX> 2,115
<INCOME-TAX> 681
<INCOME-CONTINUING> 1,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,434
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
