<PAGE>
================================================================================
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, 2000
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
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(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 11, 2000, all of the membership interests in Key Components,
LLC were owned by Key Components, Inc. and Keyhold, Inc., privately-held New
York corporations. All of the shares of common stock of Key Components Finance
Corp. were owned by Key Components, LLC.
================================================================================
<PAGE>
KEY COMPONENTS, LLC
Form 10-Q Index
June 30, 2000
Page
Number
------
PART I
Item 1. -- Consolidated Financial Statements:
Balance Sheets................................................ 2
Statements of Operations...................................... 3
Statements of Cash Flows...................................... 4
Statements of Members' Equity................................. 5
Notes to Consolidated Financial Statements.................... 6
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 3. -- Quantitative and Qualitative Disclosures about Market Risk.... 20
PART II
Item 6. -- Exhibits and Reports on Form 8-K.............................. 21
Signatures .............................................................. 22
1
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
Assets:
Current
Cash and cash equivalents $ 11,867 $ 4,171
Accounts receivable, net of allowance for doubtful accounts
of $516 and $511 at June 30, 2000 and December 31, 1999,
respectively 21,398 18,944
Inventories 25,309 22,372
Prepaid expenses and other current assets 880 1,140
Net assets of discontinued operations 2,858 14,610
-------- --------
Total current assets 62,312 61,237
Property and equipment, net 18,988 19,038
Goodwill, net 90,894 92,098
Deferred financing costs, net 5,830 5,965
Intangibles, net 974 1,251
Other assets 851 969
-------- --------
$179,849 $180,558
======== ========
Liabilities and Members' Equity:
Current
Current portion of long-term debt and other long-term
obligations $ 4,597 $ 4,759
Accounts payable 8,143 6,372
Accrued interest 1,621 1,660
Accrued compensation 7,128 3,881
Accrued expenses and other current liabilities 5,380 3,529
-------- --------
Total current liabilities 26,869 20,201
Long term debt 128,335 131,362
Accrued stock appreciation rights liability -- 5,898
Accrued lease costs 570 586
-------- --------
Total liabilities 155,774 158,047
Redeemable member's equity -- 13,100
Members' equity 24,075 9,411
-------- --------
$179,849 $180,558
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
KEY COMPONENTS, LLC 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,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 79,934 $ 69,824 $ 40,405 $ 38,989
Cost of goods sold 46,442 41,767 23,324 23,041
-------- -------- -------- --------
Gross profit 33,492 28,057 17,081 15,948
Selling, general and
administrative
expenses 16,430 15,573 8,367 8,729
Stock appreciation compensation and other 2,000 82 2,000 62
-------- -------- -------- --------
Income from operations 15,062 12,402 6,714 7,157
Other income (expense):
Other income 411 176 201 62
Recapitalization fees (7,316) -- (7,316) --
Interest expense (6,848) (7,275) (3,420) (3,772)
-------- -------- -------- --------
Income before provision for income taxes and
extraordinary item 1,309 5,303 (3,821) 3,447
Provision for income taxes 1,026 1,811 723 1,082
-------- -------- -------- --------
Income (loss) from continuing operations 283 3,492 (4,544) 2,365
Discontinued Operations:
(Loss) income from operations of the
inverter business (less income taxes of
$0, $350, $0 and $319, respectively) (208) 421 (185) 113
Loss on disposal of Heart and Cruising (3,317) -- (262) --
-------- -------- -------- --------
(Loss) income from discontinued
operations (3,525) 421 (447) 113
-------- -------- -------- --------
Net (loss) income ($ 3,242) $ 3,913 ($ 4,991) $ 2,478
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($ 3,242) $ 3,913
Adjustments to reconcile net income to net cash
provided by operating activities
Loss (income) of discontinued operations 3,525 (421)
Depreciation and amortization 3,819 3,706
Stock appreciation rights compensation 1,556 --
Compensation charge for exercised options 45 --
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable (2,454) (2,355)
Inventories (2,937) (1,167)
Prepaid expenses and other assets 378 (1,567)
Accounts payable 1,665 2,245
Accrued expenses 5,105 3,699
--------- --------
Net cash provided by continuing operations 7,460 8,053
Net cash (used in) provided by discontinued
operations (163) 257
--------- --------
Net cash provided by operating activities 7,297 8,310
--------- --------
Cash flows from investing activities;
Acquisition of Valley Forge Corporation -- (82,452)
Acquisition of G&H Technology, Inc. -- (3,988)
Proceeds from divestitures 8,390 5,680
Funding of assets held for sale -- (503)
Capital expenditures (1,735) (1,401)
--------- --------
Net cash provided by (used in) investing activities 6,655 (82,664)
--------- --------
Cash flows from financing activities:
Payments of long-term debt and capital lease
obligations (3,145) (15,182)
Proceeds from debt issued -- 82,638
Payment of stock appreciation rights (7,454) --
Deferred financing costs (418) (2,142)
Capital contributions 7,111 3,259
Member withdrawals (2,350) (703)
--------- --------
Net cash (used in) provided by financing activities (6,256) 67,870
--------- --------
Net increase (decrease) in cash and cash equivalents 7,696 (6,484)
Cash and cash equivalents, beginning of period 4,171 13,119
--------- --------
Cash and cash equivalents, end of period $ 11,867 $ 6,635
--------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
For the Six For the Year
Months Ended Ended December
June 30, 2000 31, 1999
------------- --------------
(unaudited)
<S> <C> <C>
Members' Equity, beginning of period $ 9,411 $ 7,674
Capital contributions 7,111 3,336
Capital withdrawals (2,350) (2,317)
Redeemable member's interest accretion to market
value (3,087) (4,097)
Reclass of redeemable member's interest 16,187 --
Exercise of options 45 --
Net (loss) income (3,242) 4,815
------------- --------------
Members' Equity, end of period $ 24,075 $ 9,411
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
KEY COMPONENTS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements for all periods presented include the
financial statements of Key Components, LLC ("KCLLC"), and its wholly-owned
subsidiaries (collectively the "Company") from their respective dates of
acquisition. All significant intercompany transactions have been eliminated.
The Company is in the business of the manufacture and sale of custom engineered
essential componentry in a diverse array of end use markets. Through its two
business segments, mechanical engineered components and electrical components,
the Company targets its products to original equipment manufacturers. The
Company's mechanical engineered components business, whose product offerings
consist primarily of medium security lock products and accessories, flexible
shaft and remote valve control components and turbo-charger actuators, are
manufactured by Hudson Lock, LLC ("Hudson"), ESP Lock Products, LLC ("ESP"),
B.W. Elliott Manufacturing, LLC ("BWE") and Gits Manufacturing, LLC ("Gits").
The Company's electrical components business, whose product offerings include
specialty electrical components including, but not limited to, weather- and
corrosion-resistant wiring devices and battery chargers and high-voltage utility
switches, are manufactured by Marine Industries, LLC ("Marinco"), Atlantic
Guest, Inc. ("Guest") and Turner Electric, LLC ("Turner").
The Company has an ownership interest of approximately 47% in a Dutch enterprise
in the business of manufacturing and selling power inverters and related
instrumentation. In November 1999, the Company had determined to sell its
interests in the inverter business and has classified the net assets of and
operations related to this entity as discontinued (Note 2).
Key Components, Inc. ("KCI"), a New York corporation, holds directly and
indirectly (Note 5) all of the membership interests in KCLLC. KCI holds no other
assets other than its investment in KCLLC and has no operations. As a result,
all transactions of or obligations related to KCI are reflected in the
consolidated financial statements of KCLLC.
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, 1999 included in the Company's Form 10-K.
2. Acquisitions and Dispositions
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
Valley Forge Corporation ("VFC") for a purchase price of approximately $84.0
million (including the issuance of stock appreciation rights of approximately
$1.4 million) and assumed liabilities of approximately $21.7 million. In
conjunction with the acquisition, the Company repaid approximately $8.9 million
of VFC's
<PAGE>
outstanding long-term debt out of the approximately $21.7 million of liabilities
assumed as part of the acquisition. VFC manufactured 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 $52.5 million as goodwill. The Company ascribed a
thirty-five year useful life to this goodwill.
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"). In accordance with Emerging Issues Task Force ("EITF")
Bulletin 87-11, the Company recorded the anticipated net proceeds from the sale
of these subsidiaries adjusted for the anticipated net cash outflows during the
holding period (date of acquisition to date of sale) as assets held for sale. In
addition, the net earnings from these subsidiaries during the holding period
were excluded from the operations of the Company, in accordance with EITF 87-11.
Such results and sale proceeds have been included in goodwill. The sale of Force
10 was completed on February 26, 1999 for proceeds before taxes of $1.7 million
in cash. Multiplex was sold on May 28, 1999 for proceeds before taxes of
approximately $4.3 million. The tax liability for the sales of Force 10 and
Multiplex was approximately $144,000.
In November 1999, management of the Company decided to withdraw from the
business of manufacturing and selling power inverters and related
instrumentation by selling its interests in Heart Interface Corporation
("Heart"), Cruising Equipment Company ("Cruising") and Mastervolt International
B.V. ("Mastervolt"), all of which were acquired as part of the VFC acquisition.
In accordance with Accounting Principles Board Opinion 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the Company recorded the net assets of Heart, Cruising, and
Mastervolt as net assets of discontinued operations and reported the results of
operations as loss from discontinued operations. In April 2000, the Company
consummated the sale of Heart and Cruising. The Company received approximately
$9.0 million in proceeds before any transaction related expenses. Of the $9.0
million of proceeds, $600,000 was placed in escrow in accordance with the
agreement. The Company recorded a loss on disposal of Heart and Cruising of
approximately $3.3 million. To the extent that cash is released from escrow
following the termination of the Company's obligations as defined in the
agreement, such funds will be recorded as a gain at that time.
The Company believes it will sell its interest in Mastervolt for book value,
however no definitive agreement has been signed to date.
The summary of the operations of the power inverter business for the six and
three months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands) Six Months Ended Three Months ended
June 30, June 30,
------------------------------------
2000 1999 2000 1999
------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 6,573 $11,088 $ 781 $6,847
------------------------------------
(Loss) income from operations of the inverter
business (less income taxes of $0, $350, $0,
$319, respectively) (208) 421 (185) 113
Loss on disposal of Heart and Cruising (3,317) -- (262) --
------------------------------------
Net (loss) income of discontinued operations $(3,525) $ 421 $(447) $ 113
====================================
</TABLE>
<PAGE>
On February 5, 1999, the Company acquired all of the assets of G&H Technology,
Inc. ("G&H") for $4.0 million in cash and the assumption of certain liabilities.
The Company recorded goodwill of approximately $3.0 million in connection with
the acquisition. The Company integrated the G&H acquisition into its flexible
shaft product line.
The acquisitions were financed with available Company resources and
approximately $82 million from the Company's $60 million term loan and a $40
million revolving credit facility (Note 7). The term loan is payable in
quarterly installments through January 19, 2005. Current maturities of long-term
debt at June 30, 2000 included $4.5 million related to the term loan. The
revolving credit facility commitment (of which there were no borrowings
outstanding at June 30, 2000) is for six years. 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.
3. Inventories
Inventories consist of the following:
(In thousands) June 30, December 31,
2000 1999
------- -------
Raw materials $12,574 $10,774
Work-in-process 7,546 6,401
Finished goods 5,189 5,197
------- -------
Total inventory $25,309 $22,372
======= =======
4. Operating Segments
The Company conducts its operations through two businesses, the manufacture and
sale of mechanical engineered components and electrical components. The
mechanical engineered components business manufactures flexible shaft products,
specialty locks and related accessories and turbo charger actuators and related
componentry. The electrical components business produces an array of electrical
componentry items for recreational and industrial applications and switches for
utility companies, which are utilized in industrial markets.
<PAGE>
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 six and three
months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
(In thousands) Mechanical
Engineered Electrical
Components Components Total
-------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Six months ended June 30, 2000:
Net sales from external customers $ 45,183 $ 34,751 $ 79,934
Intersegment net sales 314 - 314
Segment profit - EBITDA 14,912 7,706 22,618
Segment assets 108,456 53,978 162,434
Depreciation and amortization 2,286 1,039 3,325
Six months ended June 30, 1999:
Net sales from external customers $ 40,879 $ 28,945 $ 69,824
Intersegment net sales 233 - 233
Segment profit - EBITDA 12,296 5,486 17,782
Segment assets 96,563 30,106 126,669
Depreciation and amortization 2,033 1,440 3,473
Three months ended June 30, 2000:
Net sales from external customers $ 22,430 $ 17,975 $ 40,405
Intersegment net sales 253 - 253
Segment profit - EBITDA 7,575 4,063 11,638
Segment assets 108,456 53,978 162,434
Depreciation and amortization 1,123 540 1,663
Three months ended June 30, 1999:
Net sales from external customers $ 21,173 $ 17,816 $ 38,989
Intersegment net sales 130 - 130
Segment profit - EBITDA 6,457 3,526 9,983
Segment assets 96,563 30,106 126,669
Depreciation and amortization 1,047 950 1,997
December 31, 1999:
Segment assets $ 91,037 $ 71,534 $ 162,571
</TABLE>
<PAGE>
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,
------------------------- ---------------------------
2000 1999 2000 1999
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Profit or loss:
Total profit from reportable segments $ 22,618 $ 17,782 $ 11,638 $ 9,983
Reconciling items:
Corporate expenses (991) (1,016) (504) (495)
Depreciation and amortization (3,819) (3,706) (1,909) (2,007)
Interest expense (6,848) (7,275) (3,420) (3,772)
Management fee (535) (400) (310) (200)
Non-recurring charges (9,116) (82) (9,316) (62)
-------- -------- -------- -------
Total consolidated income before taxes and
extraordinary item $ 1,309 $ 5,303 ($ 3,821) $ 3,447
======== ======== ======== =======
</TABLE>
Assets: June 30, December 31,
-------- --------
2000 1999
-------- --------
Total assets for reportable segments $162,434 $162,571
Unallocated amounts:
Corporate assets 14,557 3,377
Net assets of discontinued operations 2,858 14,610
-------- --------
Total consolidated assets 179,849 $180,558
======== ========
5. Recapitalization
In May 2000, KCI and its shareholders consummated a Recapitalization (the
"Recapitalization") with affiliates of Kelso & Company ("Kelso") pursuant
to which, among other things:
o KCI was recapitalized with Common Stock and Preferred Stock;
o KCI shareholders exchanged approximately 862,000 shares of their Common
Stock for Preferred Stock and KCI optionholders exercised options to
purchase 20,533 shares of Common Stock, all of which were then exchanged
for shares of Preferred Stock. All such Preferred Stock was immediately
sold to Kelso for cash at approximately $117 per share;
o SGC Partners II LLC ("SG"), which owned all of the stock of Keyhold,
Inc. ("Keyhold"), which owned approximately 11.1% of the membership
interests of KCLLC prior to the Recapitalization, exchanged all of its
Keyhold stock for shares of Preferred Stock which were immediately sold to
Kelso for cash at approximately $117 per share, terminating Keyhold's
right to require KCLLC to repurchase Keyhold's outstanding investment in
KCLLC at the then current market value thereof;
o Holders of KCI stock appreciation rights ("SARs") exercised their SARs
and with a substantial portion of their after-tax proceeds from the
exercise, purchased Common Stock;
o Kelso purchased an aggregate of approximately 35,000 shares of Preferred
Stock from KCI at approximately $117 per share.
<PAGE>
At the closing of the Recapitalization, KCI, Kelso and certain shareholders of
KCI entered into a Shareholders Agreement and a Registration Rights Agreement
and KCI and Kelso entered into an Advisory Agreement.
Effective upon the consummation of the Recapitalization, Kelso owns all of the
Preferred Stock. The Preferred Stock is not entitled to vote for the election of
directors but is entitled to designate two members of KCI's seven member Board
of Directors. In addition, the Preferred Stock has certain approval rights and
is convertible into Common Stock at the holder's option (upon conversion would
constitute approximately 67.2% of the total outstanding common equity of KCI on
a fully diluted basis). The Preferred Stock has a liquidation preference equal
to its purchase price plus accrued dividends, bears a 1% dividend payable in
kind and is redeemable at the option of the holder after June 2, 2009. All of
the outstanding Common Stock and options to purchase Common Stock of KCI
continue to be held by parties that held such securities prior to the
Recapitalization and by the parties who purchased KCI Common Stock with the
after-tax proceeds from the exercise of their SARs. The aggregate purchase price
of the Preferred Stock paid by Kelso was approximately $105.0 million of which
approximately $4.1 million was paid to KCI. The Company paid approximately $7.3
million of expenses in connection with the transaction.
As a result of the Recapitalization, KCI, through its direct majority interest
in KCLLC and its wholly owned interest in Keyhold, effectively holds all of the
membership interests in KCLLC. In addition all proceeds received by KCI from the
Recapitalization were contributed to KCLLC for additional membership interest.
6. Provision for Income Taxes
For the six and three months ended June 30, 2000, the Company's provision for
income taxes relates primarily to Guest, which was not converted to limited
liability company ("LLC") during 1999. For the three months ended June 30, 1999
the tax provision primarily relates to VFC's consolidated taxable income as a C
corporation. Through August 31, 1999, VFC (Note 2) and its subsidiaries were C
corporations and were responsible for paying taxes on their income. Effective
August 31, 1999, VFC was merged into KCLLC and most of VFC's subsidiaries, as
well as BWE, Hudson and ESP, were converted to LLCs. Upon the subsidiaries'
conversion to LLCs, the members of KCLLC became responsible for the taxes on the
income of the Company, other than income of the subsidiaries that remained C
corporations. Through May 22, 2000, KCI, the majority member of KCLLC, was an S
corporation and the shareholders of KCI were personally responsible for the
income taxes on the income of KCLLC that is allocated to KCI. Upon the
consummation of the Recapitalization (Note 5), KCI automatically converted to C
corporation status. Beginning May 23, 2000, the Company is responsible for taxes
on the income of KCI and the Company.
7. Subsequent Event
On May 26, 2000, the Company entered into a definitive agreement to acquire all
the outstanding common stock of Acme Electric Corporation ("ACME"), a public
company and leader in the design and manufacture of power conversion equipment,
for $9 per share in cash. The transaction is valued at approximately $56.7
million in total before expenses, including the assumption of $11.0 million of
debt. Founded in 1917, ACME designs and manufactures power conversion equipment
for electronic and electrical systems for industrial, commercial, residential,
and military and aerospace applications. The Company plans to finance the
transaction with existing cash balances and bank financing.
As a result of this acquisition, the Company is currently negotiating a new
credit facility, which would be comprised of $100.0 million of term debt and a
$40.0 million revolving credit facility. The Company anticipates closing the
transaction during the second half of 2000.
<PAGE>
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. The Company operates in
two business segments, the manufacture of mechanical engineered components which
produces flexible shaft products, specialty lock products and related
accessories and turbo charger actuators and related componentry. The electrical
components business produces an array of electrical componentry items for
recreational and industrial applications and switches for utility companies,
which are utilized in industrial markets.
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Net Sales: Net sales increased by approximately $10.1 million, or 14.5%, from
approximately $69.8 million for the six months ended June 30,1999 to
approximately $79.9 million for the six months ended June 30, 2000. Net sales of
the mechanical engineered components business increased by approximately $4.3
million, or 10.5%, from approximately $40.9 million for the six months ended
June 30, 1999 to approximately $45.2 million for the six months ended June 30,
2000. Net sales of the electrical components business increased by approximately
$5.8 million, or 20.1%, from approximately $29.0 million for the six months
ended June 30, 1999 to approximately $34.8 million for the six months ended June
30, 2000.
The increase in net sales in the mechanical components business is primarily
related to the Company's actuator product line, which was acquired as part of
the VFC acquisition. The six months ended June 30, 2000 reflect the results of
operations for the full period whereas the six months ended June 30, 1999 only
reflects the results of operations from January 19, 1999. In addition, the
increase in net sales of the mechanical components business was due to growth in
the business' core markets as well as the integration of the G&H flexible shaft
product line, which was acquired during February 1999.
The growth in sales of the electrical components business, which the Company
entered into as a result of the VFC acquisition, is largely due to the inclusion
of the results of operations of this business for the full six months in 2000
versus the six months ended June 30, 1999, which only reflect the results of
operations from January 19, 1999. In addition, the electrical components
business continues to experience growth in product sales designed for industrial
markets.
Gross Profit: Gross profit increased by approximately $5.4 million, or 19.4%,
from approximately $28.1 million for the six months ended June 30, 1999 to
approximately $33.5 million for the six months ended June 30, 2000. Gross profit
for the mechanical engineered components business increased by approximately
$2.3 million or 14.7% from approximately $16.0 million for the six months ended
June 30, 1999 to approximately $18.3 million for the six months ended June 30,
2000. Gross profit for the electrical components business increased by
approximately $3.1 million or 26.2% from approximately $12.0 million for the six
months ended June 30, 1999 to approximately $15.2 million for the six months
ended June 30, 2000.
Gross profit, as a percentage of net sales, increased 1.7% from 40.2% for the
six months ended June 30, 1999 to 41.9% for the six months ended June 30, 2000.
Gross profit, as a percentage of net sales, for the mechanical engineered
components business increased 1.4% from 39.1% for the six months ended June 30,
1999 to 40.5% for the six months ended June 30, 2000. Gross profit, as a
percentage of net sales, for the electrical components business increased 2.1%
from 41.6% for the six months ended June 30, 1999 to 43.7% for the six months
ended June 30, 2000.
<PAGE>
The increase in the gross profit and gross profit percentage for the mechanical
components business are related to the inclusion of the actuator product line
for the full quarter in 2000 versus 1999 which only reflects the results from
January 19, 1999 as well as product mix across all of its product lines.
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. The increase in gross
profit dollars is primarily related to the inclusion of the results of
operations of the electrical components business for the full six months in 2000
versus 1999, which only reflects the results from January 19, 1999. The increase
in gross profit percentage in the electrical components business is primarily
related to product mix.
Selling, General and Administrative Expenses: SG&A expenses increased by
approximately $857,000 or 5.5%, from approximately $15.6 million for the six
months ended June 30, 1999 to approximately $16.4 million for the six months
ended June 30, 2000. SG&A expenses for the mechanical components business
remained at approximately $5.7 million for the six months ended June 30, 2000
and 1999. SG&A expenses for the electrical components business increased by
approximately $745,000 or 9.6%, from approximately $7.8 million for the six
months ended June 30, 1999 to approximately $8.5 million for the six months
ended June 30, 2000.
SG&A, as a percentage of net sales, decreased by 1.7% from 22.3% for the six
months ended June 30, 1999, to 20.6% for the six months ended June 30, 2000.
SG&A, as a percentage of net sales, for the mechanical engineered components
business decreased 1.5% from 14.2% for the six months ended June 30, 1999 to
12.7% for the six months ended June 30, 2000. SG&A, as a percentage of net
sales, for the electrical components business decreased by 2.3% from 26.8% for
the six months ended June 30, 1999, to 24.5% for the six months ended June 30,
2000. The mechanical and electrical components business' decline in SG&A as a
percentage of net sales is primarily related to the business' ability to support
top line growth on its established infrastructure. In addition, the electrical
components business benefited from the formulation of its specialty electrical
components product line through the integration of Marinco, Guest and certain
product lines of Glendinning. The SG&A expenses, as a percentage of sales, of
the electrical components business is generally higher than those of the
mechanical components business as a result of the electrical components business
maintaining higher levels of sales and marketing expenses due to the businesses
to which it targets its products.
SAR Valuation Compensation and other: For the six months ended June 30, 2000,
the Company recorded a charge of approximately $1.6 million related to
outstanding stock appreciation rights. The stock appreciation rights ("SARs")
were issued in conjunction with the. VFC acquisition in lieu of cash
consideration for the purchase of equity held by VFC line management who
continued with the Company. The Company is required to report any change in the
valuation of the SARs as a charge against earnings. In connection with the
Recapitalization (see Liquidity and Capital Resources), the SARs were exercised
and the holders of the SARs purchased KCI Common Stock with a substantial
portion of the after-tax proceeds of such exercise.
Income from Operations: Income from operations increased by approximately $2.7
million, or 21.4% from approximately $12.4 million for the six months ended June
30, 1999 to approximately $15.1 million for the six months ended June 30, 2000.
This increase is the sum of the increase in gross profit of approximately $5.4
million less the increase in SG&A expenses and the SAR and non recurring
expenses of approximately $2.8 million due to the factors discussed above.
Recapitalization fees: In connection with the Recapitalization (see Liquidity
and Capital Resources), the Company incurred approximately $7.3 million of
transaction fees.
Interest Expense: Interest expense decreased by approximately $427,000, or 5.9%,
from approximately $7.3 million for the six months ended June 30, 1999 to
approximately $6.8 million for the six months ended June 30, 2000. This decrease
is due to lower levels of outstanding borrowings during the six months ended
June 30, 2000 versus the six months ended June 30, 1999, as a result of the
Company not
<PAGE>
having any borrowings outstanding under its revolving credit facility during the
six months ended June 30, 2000. In addition, through June 30, 2000, the Company
had repaid $8.0 million of principal of the Company's $60 million term loan.
During January 1999, the Company amended its then current borrowing facilities
(see Liquidity and Capital Resources below) in order to finance a large portion
of the VFC acquisition as well as the G&H acquisition.
Provision for Income Taxes: The provision for income taxes decreased by
approximately $785,000, or 43.3% from approximately $1.8 million for the six
months ended June 30, 1999 to approximately $1.0 million for the six months
ended June 30, 2000. This decrease is primarily related to the conversion of
most of the subsidiaries acquired as part of the. VFC acquisition to LLC status
effective August 31, 1999. Upon the subsidiaries' conversion to LLCs, the
members of KCLLC became responsible for the taxes due on the income of the
Company, other than income from the subsidiaries that remained C corporations.
Through August 31, 1999 VFC and its subsidiaries were C corporations for tax
purposes. As of June 30, 2000, the Company's continuing operations only include
a provision for taxes on the income of one C corporation. The effective tax rate
for the six months ended June 30, 2000 is approximately 74.7%, which is
primarily attributable to the non-deductibility of the Recapitalization
expenses. Such expenses are an adjustment to the KCI shareholder basis for tax
purposes.
Through May 22, 2000, KCI, the majority member of KCLLC, was an S corporation
and the shareholders of KCI were personally responsible for the income taxes on
the income of KCLLC that is allocated to KCI. Upon the consummation of the
Recapitalization (see Liquidity and Capital Resources), KCI automatically
converted to C corporation status. Beginning May 23, 2000 the Company is
responsible for taxes on the income of KCI and the Company.
Income from continuing operations: Income from continuing operations decreased
by approximately $3.2 million, or 91.9%, from approximately $3.5 million for the
six months ended June 30, 1999 to approximately $348,000 for the six months
ended June 30, 2000. The decrease is primarily the result of increases in income
from operations of approximately $2.7 million and other income of approximately
$235,000 and decreases in interest expense and the provision for taxes of
approximately $427,000 and 785,000, respectively, offset by the Recapitalization
expenses of approximately $7.3 million, due to the factors discussed above.
Loss from discontinued operations: Loss from discontinued operations increased
by approximately $3.9 million for the six months ended June 30, 2000. In April
2000, the Company consummated the sale of Heart and Cruising. The Company
received approximately $9.0 million in proceeds before any transaction related
expenses. Of the $9.0 million of proceeds, $600,000 was placed in escrow in
accordance with the agreement. The Company recorded a loss on the disposal of
Heart and Cruising of approximately $3.3 million. To the extent that cash is
released from escrow, such funds will be recorded as a gain at that time.
Net (loss) income: Net loss increased by approximately $7.2 million, or 182.9%,
from net income of approximately $3.9 million for the six months ended June 30,
1999 to a net loss of approximately $3.2 million for the six months ended June
30, 2000. The increase is the result of the sum of a decrease in income from
continuing operations of approximately $3.2 million and an increase in loss from
discontinued operations of approximately $3.9 million, due to the factors
discussed above.
Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999
Net Sales: Net sales increased by approximately $1.4 million, or 3.6%, from
approximately $39.0 million for the three months ended June 30, 1999 to
approximately $40.4 million for the three months ended June 30, 2000. Net sales
of the mechanical engineered components business increased by approximately $1.3
million, or 5.9%, from approximately $21.2 million for the three months ended
June 30, 1999 to approximately $22.4 million for the three months ended June 30,
2000. Net sales of the electrical components business increased by approximately
$157,000, or 0.9%, from approximately $17.8
<PAGE>
million for the three months ended June 30, 1999 to approximately $18.0 million
for the three months ended June 30, 2000.
The increase in net sales in the mechanical components business is primarily
related to growth in the business' core markets as well as the integration of
the G&H acquisition.
While the growth in sales of the electrical components business, which the
Company entered into as a result of the VFC acquisition is 0.9% for the three
months ended June 30, 1999, the prior period includes the revenues of
Glendinning Marine Products, Inc. ("Glendinning") which was divested in November
1999. After removing the revenues for Glendinning for the prior quarter, the
adjusted growth rate for the three months ended would have been 9.9%. This
growth is related to the growth in the core markets of the electrical components
business.
Gross Profit: Gross profit increased by approximately $1.1 million , or 7.1%,
from approximately $15.9 million for the three months ended June 30, 1999 to
approximately $17.1 million for the three months ended June 30, 2000. Gross
profit for the mechanical engineered components business increased by
approximately $820,000, or 9.7%, from approximately $8.4 million for the three
months ended June 30, 1999 to approximately $9.2 million for the three months
ended June 30, 2000. Gross profit for the electrical components business
increased by approximately $310,000, or 4.1%, from approximately $7.5 million
for the three months ended June 30, 1999 to approximately $7.8 million for the
three months ended June 30, 2000.
Gross profit, as a percentage of net sales, increased 1.4% from 40.9% for the
three months ended June 30, 1999 to 42.3% for the three months ended June 30,
2000. Gross profit, as a percentage of net sales, for the mechanical engineered
components business increased 1.4% from 39.8% for the three months ended June
30, 1999 to 41.2% for the three months ended June 30, 2000. Gross profit, as a
percentage of net sales, for the electrical component business increased 1.4%
from 42.2% for the three months ended June 30, 1999 to 43.6% for the three
months ended June 30, 2000.
The increase in the gross profit is related to the sales growth of the
mechanical components business as well as its growth in gross profit percentage.
The growth in gross profit percentage for the mechanical components business is
related to product mix across each of the product lines of the 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. The increase in gross
profit is primarily related to the growth in gross profit percentage. The
increase in gross profit percentage in the electrical components business is
primarily related to product mix.
Selling, General and Administrative Expenses: SG&A expenses decreased by
approximately $362,000 or 4.1%, from approximately $8.7 million for the
three months ended June 30, 1999 to approximately $8.4 million for the three
months ended June 30, 2000. SG&A expenses for the mechanical components business
decreased by approximately $228,000, or 7.4%, from approximately $3.1 million
for the three months ended June 30, 1999 to approximately $2.9 million for the
three months ended June 30, 2000. SG&A expenses for the electrical components
business decreased by approximately $416,000, or 8.8%, from approximately $4.7
million for the three months ended June 30, 1999 to approximately $4.3 million
for the three months ended June 30, 2000.
SG&A, as a percentage of net sales, decreased by 1.7% from 22.4% for the three
months ended June 30, 1999 to 20.7% for the three months ended June 30, 2000.
SG&A, as a percentage of net sales, for the mechanical engineered components
business decreased approximately 1.8% from 14.5% for the three months ended June
30, 1999 to 12.7% for the three months ended June 30, 2000. SG&A, as a
percentage of net sales, for the electrical components business decreased by
2.6% from 26.6% for the three months ended June 30, 1999 to 24.0% for the three
months ended June 30, 2000. The decrease in the SG&A dollars and percentage is
the result of continued cost containment and the final rationalization of the
Valley Forge Corporation acquisition, which has resulted in lower corporate
overhead as well as lower
<PAGE>
SG&A expenses for the electrical components business resulting from the
formulation of its specialty electrical components product line through the
integration of Marinco, Guest and certain product lines of Glendinning. The SG&A
expenses, as a percentage of sales, of the electrical components business is
generally higher than those of the mechanical components business as a result of
the electrical components business maintaining higher levels of sales and
marketing expenses due to the businesses to which it targets its products.
SAR Valuation Compensation and other: For the three months ended June 30, 2000,
the Company recorded a charge of approximately $1.6 million related to
outstanding SARs. The SARs were issued in conjunction with the VFC acquisition
in lieu of cash consideration for the purchase of equity held by VFC line
management who continued with the Company. The Company is required to report any
change in the valuation of the SARs as a charge against earnings. In connection
with the Recapitalization (see Liquidity and Capital Resources), the SARs were
exercised and the holders of the SARs purchased KCI Common Stock with a
substantial portion of the after-tax proceeds of such exercise.
Income from Operations: Income from operations decreased by approximately
$443,000, or 6.2%, from approximately $7.2 million for the three months ended
June 30, 1999 to approximately $6.7 million for the three months ended June 30,
2000. This decrease is the sum of the increase in gross profit of approximately
$1.1 million plus the decrease in SG&A expenses of approximately $362,000 offset
by the increase on stock appreciation compensation and other of approximately
$1.9 million.
Recapitalization Transaction fees: In connection with the Recapitalization (see
Liquidity and Capital Resources), the Company incurred approximately $7.3
million of transaction fees.
Interest Expense: Interest expense decreased by approximately $352,000, or 9.3%,
from approximately $3.8 million for the three months ended June 30, 1999 to
approximately $3.4 million for the three months ended June 30, 2000. This
decrease is due to lower levels of outstanding borrowing during the three months
ended June 30, 2000 versus the three months ended June 30, 1999, as a result of
the Company not having any borrowing outstanding under its revolving credit
facility during the current quarter. In addition, through June 30, 2000, the
Company had repaid $8.0 million of principal of the Company's $60 million term
loan. During January 1999, the Company amended its then current borrowing
facilities (see Liquidity and Capital Resources below) in order to finance a
large portion of the VFC acquisition as well as the G&H acquisition.
Provision for Income Taxes: The provision for income taxes decreased by
approximately $359,000, or 33.2%, from approximately $1.1 million for the three
months ended June 30, 1999 to approximately $723,000 for the three months ended
June 30, 2000. This decrease is primarily related to the conversion of most of
the subsidiaries acquired as part of the VFC acquisition to LLC status effective
August 31, 1999. Upon the subsidiaries' conversion to LLC's, the members of
KCLLC became responsible for the taxes due on the income of the Company, other
than the income from the subsidiaries that remained C corporations. Through
August 31, 1999, VFC and its subsidiaries were C corporations for tax purposes.
As of June 30, 2000, the Company's continuing operations only include a
provision for taxes on the income of one C corporation. The effective tax rate
for the three months ended June 30, 2000 is significantly higher than the
statutory rate of 34%. This is primarily attributable to the non-deductibility
of the Recapitalization expenses. Such expenses are an adjustment to shareholder
basis for tax purposes.
Through May 22, 2000, KCI, the majority member of KCLLC, was an S corporation
and the shareholders of KCI were personally responsible for the income taxes on
the income of KCLLC that is allocated to KCI. Upon the consummation of the
Recapitalization (see Liquidity and Capital Resources), KCI automatically
converted to C corporation status. Beginning May 23, 2000, the Company is
responsible for taxes on the income of KCI and the Company.
(Loss) income from continuing operations: Loss from continuing operations
increased by approximately $6.9 million, or 292.1%, from income from continuing
operations of approximately $2.4 million for the
<PAGE>
three months ended June 30, 1999 to a loss from continuing operations of
approximately $4.5 million for the three months ended June 30, 2000. The
increase is primarily the result of a decrease in income from operations of
approximately $443,000, the Recapitalization expenses of approximately $7.3
million offset by an increase in other income of approximately $139,000 and
decreases in interest expense and the provision for taxes of approximately
$352,000 and $359,000, respectively, due to the factors discussed above.
Loss from discontinued operations: Loss from discontinued operations increased
by approximately $560,000 for the three months ended June 30, 2000. In April
2000, the Company consummated the sale of Heart and Cruising. The Company
received approximately $9.0 million in proceeds before any transaction related
expenses. Of the $9.0 million of proceeds, $600,000 was placed in escrow in
accordance with the agreement. The Company recorded a loss on disposal of Heart
and Cruising of approximately $3.3 million. To the extent that cash is released
from escrow, such funds will be recorded as a gain at that time.
Net (loss) income: Net loss increased by approximately $7.5 million, or 301.4%,
from net income of approximately $2.5 million for the three months ended June
30, 1999 to a net loss of approximately $5.0 million for the three months ended
June 30, 2000. The increase is the result of the sum of an increase in loss from
continuing operations of approximately $6.9 million and an increase in loss from
discontinued operations of approximately $560,000, 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 materially fluctuated from
quarter to quarter. The Company's other main source of liquidity was
historically derived from the Company's term loan and revolving credit facility.
In January 1999, the Company amended its former acquisition and revolving loans
to provide for a $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, 2000 included $4.5
million related to the term loan. The revolving credit facility commitment (of
which there were no borrowings outstanding at June 30, 2000) is for six years.
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 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 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, usually within 90 days.
As the underlying contract comes up for renewal, the interest associated with
the contract becomes due. As of June 30, 2000, the Company had no outstanding
commitments for capital expenditures and anticipates further capital
expenditures of approximately $2.8 million for the remainder of fiscal 2000. The
expenditures are needed 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.
In connection with the Company's desire to continue to grow through acquisition
and be a leading supplier of essential componentry, KCI and its shareholders
consummated a Recapitalization of KCI with affiliates of Kelso & Company
("Kelso") pursuant to which, among other things:
<PAGE>
o KCI was recapitalized with Common Stock and Preferred Stock;
o KCI shareholders exchanged approximately 862,000 shares of their Common
Stock for Preferred Stock and KCI optionholders exercised options to
purchase 20,533 shares of Common Stock, all of which were then exchanged
for shares of Preferred Stock. All such Preferred Stock was immediately
sold to Kelso for cash at approximately $117 per share;
o SGC Partners II LLC ("SG"), which owned all of the stock of Keyhold,
Inc. ("Keyhold"), which owned approximately 11.1% of the membership
interests of KCLLC prior to the Recapitalization, exchanged all of its
Keyhold stock for shares of Preferred Stock which were immediately sold to
Kelso for cash at approximately $117 per share, terminating Keyhold's
right to require KCLLC to repurchase Keyhold's outstanding investment in
KCLLC at the then current market value thereof;
o Holders of KCI stock appreciation rights ("SARs") exercised their SARs
and with a substantial portion of their after-tax proceeds from the
exercise, purchased Common Stock;
o Kelso purchased an aggregate of approximately 35,000 shares of Preferred
Stock from KCI at approximately $117 per share.
At the closing of the Recapitalization, KCI, Kelso and certain shareholders of
KCI entered into a Shareholders Agreement and a Registration Rights Agreement
and KCI and Kelso entered into an Advisory Agreement.
Effective upon the consummation of the Recapitalization, Kelso owns all of the
Preferred Stock. The Preferred Stock is not entitled to vote for the election of
directors but is entitled to designate two members of KCI's seven member Board
of Directors. In addition, the Preferred Stock has certain approval rights and
is convertible into Common Stock at the holder's option (upon conversion would
constitute approximately 67.2% of the total outstanding common equity of KCI on
a fully diluted basis). The Preferred Stock has a liquidation preference equal
to its purchase price plus accrued dividends, bears a 1% dividend payable in
kind and is redeemable at the option of the holder after June 2, 2009. All of
the outstanding Common Stock and options to purchase Common Stock of KCI
continue to be held by parties that held such securities prior to the
Recapitalization and by the parties who purchased KCI Common Stock with the
after-tax proceeds from the exercise of their SARs. The aggregate purchase price
of the Preferred Stock paid by Kelso was approximately $105.0 million of which
approximately $4.1 million was paid to KCI. The Company paid approximately $7.3
million of expenses in connection with the transaction.
As a result of the Recapitalization, KCI, through its direct majority interest
in KCLLC and its wholly owned interest in Keyhold, effectively holds all of the
membership interests in KCLLC. In addition all proceeds received by KCI from the
Recapitalization were contributed to KCLLC for additional membership interest.
Cash flows provided by operating activities were approximately $7.3 million and
$8.3 million for the six months ended June 30, 2000 and 1999, respectively. The
net decrease of $1.0 million over the prior period is the sum of a decrease in
cash provided by continuing operations of approximately $593,000 and a decrease
in cash provided by discontinued operations of approximately $420,000. The
decrease in cash provided by continuing operations is primarily related to a
decrease in net income plus non-cash charges of approximately $1.5 million plus
a net increase in inventories of approximately $1.8 million offset by a net
decrease in prepaid and other current assets of approximately $1.9 million and a
net increase of accounts payable and accrued expenses of approximately $826,000.
The decrease in net income plus non-cash charges is primarily related to the
decrease in income from continuing operations, which
<PAGE>
decreased approximately $1.5 million (net after the addback of the SAR
compensation charge of approximately $1.6 million). The net increases of
inventory and accounts payable and accrued expenses were primarily related to
the Company's growth over 1999.
Cash flows from investing activities provided net cash of approximately $6.7
million during the six months ended June 30, 2000 and used net cash of
approximately $82.7 million for the six months ended June 30, 1999. The primary
reason for the decrease in investing activities was the acquisitions of VFC and
G&H, completed during the three months ended June 30, 1999. The Company also
sold Force 10 during that same period, which it had acquired as part of VFC, for
$1.7 million in cash. During the six months ended June 30, 2000 the Company sold
most of its inverter operations for net proceeds of approximately $8.4 million.
Capital expenditures for the six months ended June 30, 2000 and 1999 were
approximately $1.7 million and $1.4 million, respectively.
Cash flows from financing activities used net cash of approximately $6.3 million
during the six months ended June 30, 2000 and provided net cash of $67.9 million
for the six months ended June 30, 1999. The $74.1 million net decrease is
primarily attributable to proceeds received under the Company's new term loan
and revolving credit facility during the six months ended June 30, 1999. This
was offset by the repayment of approximately $15.1 million of 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, made in conjunction with its
acquisition. In connection with the new debt facilities, the Company incurred
approximately $2.1 million of deferred financing costs during the six months
ended June 30, 1999. During the six months ended June 30, 2000, the Company paid
approximately $3.1 million of long term debt, primarily related to payment on
its outstanding term loan. The Company also realized proceeds from capital
contributions of approximately $7.1 million and $3.3 million during the six
months ended June 30, 2000 and 1999, respectively. The capital contributions
received during the six months ended June 30, 2000 were received in connection
with the Recapitalization. During the six months ended June 30, 2000 and 1999
the Company paid capital withdrawals of approximately $2.4 million and $703,000,
respectively, which were primarily related to member tax distributions. In
connection with the divestitures of Glendinning and the Inverter business, the
Company paid, during the six months ended June 30, 2000, approximately $420,000
related to outstanding vested SARs with certain members of operating management
of these divestitures. In connection with the Recapitalization, the Company paid
approximately $7.1 million to the holders of the Company's SARs, who had
exercised all their outstanding SARs and purchased Common Stock with a
substantial portion of their after-tax proceeds from the exercise.
On May 26, 2000, the Company entered into a definitive agreement to acquire all
the outstanding common stock of Acme Electric Corporation ("ACME"), a public
company and a leader in the design and manufacture of power conversion
equipment, for $9 per share in cash. The transaction is valued at approximately
$56.7 million before expenses, including the assumption of $11 million of debt.
Founded in 1917, ACME designs and manufactures power conversion equipment for
electronic and electrical systems for industrial, commercial, residential, and
military and aerospace applications. The Company plans to finance the
transaction with existing excess cash balances and bank financing.
As a result of this acquisition, the Company is currently negotiating a new
credit facility, which would be comprised of $100.0 million of term debt and a
$40.0 million revolving credit facility. The Company anticipates closing the
transaction during the second half of 2000.
Management believes that the Company's cash flow from operations, together with
its borrowing availability under its existing credit facilities and its
relationship with Kelso, will be adequate to meet its anticipated capital
requirements for the foreseeable future.
<PAGE>
New Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has issued FASB Interpretation
No. 44, Accounting for Certain Transactions involving Stock Compensation, an
interpretation of Accounting Principles Board Opinion No. 25. This
interpretation clarifies the application of APB No. 25 for certain issues. While
the Company accounts for its stock compensation transactions with its employees
under APB No. 25, this statement is not expected to have a material impact on
the Company's consolidated financial statements. This interpretation is
effective July 1, 2000.
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, 2000 was approximately $29
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.
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 Company's outstanding 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 plus an applicable margin, or LIBOR plus an applicable margin specified in
the agreement. All of the borrowings under the term loan, which had $52.0
million outstanding as of June 30, 2000, are locked in at approximately 9.3%
until August 27, 2000, when the underlying LIBOR contracts are up for renewal.
The Company had no borrowings outstanding under its revolving credit facility
during the three months ended June 30, 2000.
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.
<PAGE>
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS, LLC
Date: August 11, 2000 By: /s/ CLAY B. LIFFLANDER
-----------------------
Clay B. Lifflander
Chief Executive Officer
Date: August 11, 2000 By: /s/ ROBERT B. KAY
-------------------
Robert B. Kay
President
Date: August 11, 2000 By: /s/ KEITH A. MCGOWAN
----------------------
Keith A. McGowan
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 11, 2000 By: /s/ CLAY B. LIFFLANDER
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Clay B. Lifflander
Chief Executive Officer
Date: August 11, 2000 By: /s/ ROBERT B. KAY
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Robert B. Kay
President
Date: August 11, 2000 By: /s/ KEITH A. MCGOWAN
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Keith A. McGowan
Chief Financial Officer
