Item 1. Business
KCLLC, a Delaware limited liability corporation organized on May 15, 1998, maintains its principal office at 200 White Plains Road, Tarrytown, New York 10591 and its telephone number is (914) 332-8088.
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 KCI 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 conducts its operations through its two business segments, mechanical engineered components ("MEC") and electrical components ("EC"). MEC's product offerings consist primarily of medium security lock products and accessories, flexible shaft and remote valve control components and turbo-charger components which are manufactured by its subsidiaries Hudson Lock, LLC ("Hudson"), ESP Lock Products, LLC ("ESP"), B.W. Elliott Manufacturing Co., LLC ("BWE") and Gits Manufacturing, LLC ("Gits"). EC's products include power conversion products, specialty electrical wiring devices and connectors and high-voltage utility switches which are manufactured by its subsidiaries Acme Electric Corporation ("Acme"), Marine Industries, LLC ("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner Electric, LLC ("Turner"). No one customer accounted for more than ten percent of the sales of the Company or of the MEC or EC business for the three years ended December 31, 2000. For the year ended December 31, 2000, four customers who are subsidiaries of one company accounted for approximately 12% of the MEC business.
Acquisition History
In 1992, the Company's management began an acquisition program to acquire small to medium size manufacturers of essential niche components for use in various OEM customer products. The 1992 acquisition of BWE from certain individual shareholders, including the current President of BWE, George M. Scherer, marked the first of such acquisitions. In 1993, the Company acquired the flexible shaft division of Stow Manufacturing Company, Inc., as a consolidation opportunity for BWE. On May 15, 1997, the Company acquired all of the issued and outstanding capital stock of Hudson from Jordan Industries, Inc. The acquisition of Hudson marked the Company's entrance into the medium-security lock business. On December 10, 1997, the Company acquired all of the issued and outstanding capital stock of ESP as a consolidation opportunity for Hudson. Effective January 19, 1999, KCLLC, acquired all of the issued and outstanding securities
of Valley Forge Corporation ("VFC") for approximately $84.0 million. The acquisition of VFC enabled the Company to complement its MEC business and enter into the manufacture and sale of EC. The Company expanded its EC business with the acquisition of Acme for approximately $47.3 million in November 2000. Acme designs and manufactures power conversion equipment for electronic and electrical systems for industrial, commercial, residential, and military and aerospace applications. (See note 2 to the consolidated financial statements contained elsewhere in this Form 10-K)
The Company has historically acquired complementary or related manufacturing businesses and sought to integrate them into existing operations. Following an acquisition, management seeks to rationalize operations, reduce overhead costs, develop additional cross-selling opportunities and establish new customer relationships. As a result of its integration efforts and internal growth, the Company's consolidated net sales have increased from approximately $9.1 million in fiscal year 1992 to approximately $159.4 million for fiscal year 2000.
The Company continues to seek to make selective acquisitions of light industrial manufacturing companies, but there are no agreements regarding any such acquisitions existing as of the date hereof.
Mechanical Engineered Components
The MEC business features three major product lines: (i) flexible shafts for the transmission of rotary power, (ii) turbocharger components, including wastegate actuators, and (iii) medium-security locks and locking systems.
Flexible Shafts
The Company is the leading domestic designer and manufacturer of flexible shaft products and assemblies. Flexible shafting is constructed utilizing unique wire winding technology. Flexible shaft assemblies are custom designed for the transmission of rotary power at low torque levels (less than ten horsepower), and can be incorporated into almost any machine, product, or device replacing conventional power transmission components such as rigid shafts, gearboxes, universal joints, and couplings. Flexible shafts are integrally designed into the OEM's final product to offer benefits, such as less weight, fewer component parts, less assembly time, and greater freedom in design, resulting in a lower cost to manufacture the OEM's final product. The flexible shaft assemblies are critical components utilized in weed trimmers, concrete vibrators, lawn tractors, aircraft engines and wings, plant processing equipment, large vessels such as Navy ships, nuclear power plants, and many other applications in a variety of industries. The potential applications for flexible shafting are limited only by the Company's ability to develop new solutions to integrate flexible shafts into new OEM designs or to displace conventional power transmission products in existing applications.
The Company's flexible shaft products serve multiple markets including the lawn and garden market where the Company produces products for weed trimmers, lawn tractors, and turf and ground equipment for John Deere, Wacker, and Poulan Weed Eater, among others, the aerospace industry where the products and assemblies are utilized in flap drive systems for regional jets and commuter aircraft, thrust reverser and sync-lock systems for large commercial aircraft, and other applications. Additional applications for the Company's products include concrete vibrators and other end uses for the construction industry. Customers are primarily OEM's and include Wacker, L.B. Equipment and Racine. In the
maritime industry, the Company's products are used in valve control and flexible shaft systems for major shipyards in the construction and upgrading of U.S. Navy and Coast Guard ships. Shipyard customers include Bath Iron Works, United Defense and Newport News Shipyard, among others.
Turbocharger components and actuation
The Company is a primary outsource supplier of actuation devices and related componentry to the domestic market for turbocharged diesel engines. Wastegate actuators are an essential component of a diesel engine turbocharger system which, through the use of flow valve controls, increases engine power, efficiency, and economy while reducing emissions. As the primary supplier to nearly every major OEM turbocharger manufacturer, including Honeywell, Cummins Engine, and Borg Warner, the Company's products can be found on a variety of truck, pick-up, and heavy-duty diesel-operated platforms. End-use customers for the Company's products include blue-chip truck and vehicle manufacturers such as Ford, DaimlerChrysler, Mack, Nissan, and Caterpillar. The Company holds multiple patents and is very active in the development of new products to expand the Company's product line, including related emission control products.
Medium-Security Locks and Locking Systems
The Company competes in the medium-security segment for cylindrical lock applications. Medium-security locks are used in applications that involve non-life-threatening situations or when articles of low to moderate financial value are being secured. The Company produces highly engineered, custom, and specialty medium-security locks and locking systems to meet OEM customers' specifications for use in office furniture, point of sale terminals, bank bags, post office boxes, storage lockers, and other applications. The Company's lock products are typically small and low-cost but are precision-engineered and custom-designed critical components of a larger, more expensive end product. The Company also produces locking systems, which provide a safety feature used to prevent multiple drawers from being opened simultaneously in filing cabinets and desks. The Company is a sole or primary source for locks to leading OEMs including Herman Miller, Knoll, Hon, Block, IBM, NCR and others.
Electrical Components
The Company's EC business features three major product lines: (i) power conversion products, (ii) specialty electrical components ("SPEC") and (iii) electric utility components.
Power Conversion Products
The Company's acquisition of Acme enabled the Company's EC business to enter into the production of power conversion products. Acme's primary products are transformers that range in size from 1/4 KVA (1,000 volts x Amps) to 1,000 KVA. A transformer is an electrical device designed to convert alternating current from one voltage to another. It can be designed to manipulate voltages. A transformer has no moving parts and is a completely static solid state device, which insures, under normal operating conditions, a long and trouble-free life. It consists, in its simplest form, of two or more wires or foils wound on a laminated steel core. The Company has 1,400 active transformer models with the focus on the higher margin, smaller units for the wholesale distributor markets, and custom product offerings with lower margins, but anticipated higher volume based orders, for OEMs, which the Company believes will drive the transformer
product line's revenue growth. Transformer designs rarely change and most transformers have a long useful life.
Acme operates in a segment of the transformer market estimated by National Electrical Manufacturers Association to be approximately $350 million for the year 2000. This segment is defined as dry type transformers, less than 600 volt, 1/4 to 1,000 KVA. The competition is segmented into two tiers, between the large switch gear manufacturers selling transformers as part of a package of products, such as General Electric, Electrical Distribution Products, a division of Schneider Electric ("Square D"), Hammond Manufacturing Inc., Eaton Corporation and Siemens, and transformer specialists, such as Acme, Sola/Heavy-Duty, Jefferson Electric, Inc. Federal Pacific and others. Acme supplies approximately 15% of the total market, or approximately half that of General Electric and Square D but twice that of any other competitor.
Specialty Electrical
The Company supplies the recreational and industrial markets with products for both OEM customers and the after-market retail customers. The Company's core markets for SPEC products are in the recreation industry where the Company commands a strong market position. SPEC products include; (i) weather- and corrosion-resistant wiring devices, such as ship-to-shore electrical connectors for marine and vehicle-to-outlet connectors for recreational vehicle applications; (ii) onboard "potted" (i.e., completely insulated) battery chargers for outdoor applications including bass boat and other marine applications; and (iii) various accessory products such as plugs, receptacles, electrical switches, solar ventilation products, and boat accessories such as horns, windshield wiper systems, lighting products, and teak accessories. The SPEC product line enjoys a dominant market position in its core market where the Company's brands are highly regarded by both OEM and aftermarket customers. The Company's wiring devices and components are designed to withstand hostile weather and corrosive environments, while remaining easy to install in less than ideal conditions.
The Company's SPEC product line, which was acquired during 1999 as part of the acquisition of VFC, continues to experience strong growth in industrial markets since these products were targeted to the industrial marketplace approximately six years ago. The primary product offerings include; (i) onboard "potted" battery chargers for industrial and healthcare applications such as fork and "scissor" lifts, personal mobility carts, and electric wheelchairs; and (ii) specialty wiring devices designed for industrial applications where protection from water, chemicals, dust, or other elements is required. Growth in this market has resulted from the development of customized products for applications such as outdoor power generators, movie and theatrical production, and semiconductor equipment manufacturing.
Within the SPEC market, the Company's core market niches are the recreational and industrial markets, where the Company sells to both OEM customers and after-market retail customers under internationally recognized brand names such as Marinco, Guest, AFI, Nicro, Park Power, and various private labels. In the recreational marine market, where the Company sells the entire range of its product offerings, the Company specifically targets the blue water/leisure boating and inland fishing/bass boat market segments. Customers include OEMs, such as Bayliner, and Sea Ray, and after-market distributors, such as West Marine, Boat America, Bass Pro and Boater's World. Customers in the industrial market include Pride Healthcare, Devilbiss, Coleman and LAM Research. The Company has distinguished itself by providing complete and readily accessible customer service and by its ability to customize products for new applications in existing markets.
Electric Utility Components
The Company dominates the design and manufacture of high-voltage switchgear for electric utilities in the power transmission segment of the electric utility industry. The smaller size of this segment, relative to the distribution and substation segments, has enabled the Company to secure its position over time through superior quality and service while creating high barriers to entry through specialization, reputation, and investments in machinery and equipment. Significant customers include TVA, Ameren, Illinova, Alabama Power, and Pacific Gas and Electric. The EC business switchgear products consist primarily of air break switches, load break interrupters, and accessory equipment. Air break switches are used for sectionalizing and routing power from one point to another. Load break interrupters allow the sectionalizing and routing of power under full load conditions. Accessory equipment enables the utility operator to program parameters and related functions that will automatically sectionalize and switch power flow in the event of a fault. Once switched, the faulted line can be repaired, re-energized, and returned to service with minimal downtime or loss of service revenue. Consistent with the Company's systems approach, electric utility components and accessories are sold together in all-in-one packages.
Sales and Marketing
The Company employs both salaried and commission-based sales personnel, as well as independent sales representatives and distributors to facilitate the marketing and sales of its products. The Company's sales and marketing teams have adopted an integrated approach to product development, marketing and sales. They seek to work closely with the Company's engineers to address customer specific design requirements and the hurdles associated therewith, as well as potential product profitability. In addition, the sales team is responsible for keeping the Company's engineering, manufacturing and management personnel advised of possible future trends and requirements of customers. The Company's sales and marketing personnel also focus on bringing customers a level of personal service the Company believes to be superior to its competitors.
Raw Materials and Suppliers
The primary raw materials used by the Company are copper, brass, zinc, stainless steel, steel wire and rubber, all of which are commodity items, readily available from a wide range of sources. The Company has enjoyed and continues to enjoy good relations with its suppliers and has not suffered any material
interruptions in the delivery of its required materials. Additionally, the Company is not dependent on any single supplier. In the event a supply arrangement is terminated, the Company would be forced to look elsewhere for its raw materials. Management believes these can be obtained with minimal, if any, business interruption. However, the prices for such materials can fluctuate, and such fluctuations can be material. A significant increase in raw material prices could adversely affect the results of operations of the Company.
Competition
While the Company faces competition in each of its business segments, management believes that its products are able to achieve a significant share of their related market niches due to a variety of factors. The Company's strategy attempts to differentiate its products from its competitors by providing high product quality, customer service, superior design capabilities and proprietary, vertically integrated manufacturing processes. The Company's strategy of providing custom engineered solutions and a high level of service to its customer base has protected and strengthened its market share in the markets that it serves. Although it is possible other competitors may seek to serve these markets, the Company believes significant barriers to entry exist, including the unwillingness of OEMs to expand their vendor relationships for the same products purchased, the availability of customized processes which the Company possesses and enables the Company to service its customers needs on an efficient basis and the capital investment required to purchase the equipment needed to manufacture products of similar quality.
Environmental and Safety Regulations
The Company's operations are subject to federal, state and local environmental laws and regulations, which impose limitations on the discharge of pollutants into the air and water and establish standards for treatment, storage and disposal of solid and hazardous wastes. The Company believes that it is in substantial compliance with applicable environmental laws and regulations.
Employees
As of December 31, 2000, the Company employed 1,936 persons on a full-time basis. Of these employees, 889 are employed in the MEC business 756 is employed in the EC business. The Company's corporate office had 5 employees as of December 31, 2000. Acme's corporate office employed 17 persons at December 31, 2000. At December 31, 2000, the divisions of Acme that were held for sale employed 269 persons. One of the Company's subsidiaries has a collective bargaining agreement, which covered 82 employees as of December 31, 2000. At December 31, 2000, one of the divisions of Acme that is held for sale had a collective bargaining agreement covering 122 employees. Neither the Company nor any of its subsidiaries has ever had a work stoppage and each of KCLLC and its subsidiaries considers its relationship with its employees to be satisfactory.
Item 2.
Item 2. Properties
At December 31, 2000 the Company's principal properties consisted of:
(1) Does not include facilities for the two businesses of Acme that are held for sale (See note 2 of the consolidated financial statements).
Item 3.
Item 3. Legal Proceedings
There are no pending material legal proceedings to which the Company or its properties is subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the year ended December 31, 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
KCLLC's membership interests are not publicly traded (see Certain Relationships and Related Transactions).
Item 6.
Item 6. Selected Financial Data
The following selected financial data has been derived from the consolidated financial statements of the Company included elsewhere in this Form 10-K. For year ended December 31, 1996, the financial data set forth represents the results and the balance sheet data of BWE (predecessor to the Company). For the year ended December 31, 1997, the financial data set forth represents BWE and from their respective dates of acquisition, Hudson and ESP. The financial data set forth includes the results of operations of the Company's remaining subsidiaries from their respective acquisition dates. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the Company's consolidated financial statements and notes thereto.
(a) Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated as a subchapter S corporation, which caused the shareholders of their then parent company, KCI, to be personally liable for the taxes due on the income of the Company. Through August 31, 1999, VFC was a C corporation and was responsible for paying taxes on its 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 limited liability company ("LLC") status. Corporations which elect subchapter S corporation or LLC status are no longer liable for the majority of taxes due on their income since the shareholders then become personally liable for most taxes on the income of the Company. Accordingly, subsequent to May 31, 1997 through December 31, 1998, the provision for income taxes includes only those taxes applicable to certain states.
For the year ended December 31, 1999, the Company's provision for income taxes relates primarily to VFC's consolidated taxable income (as a C corporation) and the taxable income of the subsidiaries not converted to LLC status. On May 22, 2000, KCI's S election terminated and KCI became responsible for taxes on the income of the Company (See notes 1 and 9(a) to the consolidated financial statements).
(b) Net (loss) income for the years ended December 31, 2000 and 1998 reflects an extraordinary loss on early extinguishment of debt of approximately $1.2 million and $4.6 million, respectively.
(c) Net (loss) income for the years ended December 31, 2000 and 1999 reflects loss from discontinued operations of approximately $4.0 million and $28,000 respectively.
(d) Does not include approximately $5.9 million related to accrued stock appreciation rights as of December 31, 1999.
(e) Includes approximately $13.1 million of redeemable member's equity at December 31, 1999.
Item 7
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
KCLLC was formed on April 1, 1998 to facilitate an offering of senior notes. Upon its formation, KCLLC became the parent holding company of the wholly-owned subsidiaries of KCI, and KCI became the sole member of KCLLC. The consolidated financial statements included elsewhere in this Form 10-K are prepared as though KCLLC was formed on January 1, 1998. KCI's results of operations from January 1, 1998 to April 1, 1998 are included in KCLLC's financial statements. KCI holds no other assets other than its investment in KCLLC and has no operations. Through its operating subsidiaries, the Company is a leading manufacturer of custom-engineered essential componentry for application in a diverse array of end-use products. The Company targets original equipment manufacturer ("OEM") markets where the Company believes its value-added engineering and manufacturing capabilities, along with its timely delivery, reliability and customer service, enable it to differentiate the Company from its competitors and enhance profitability. Through 1998, the Company operated in two business segments, both of which were involved in the manufacture of mechanical engineered components. These businesses were comprised of the manufacturing of specialty locks and related accessories and of flexible shaft products.
The Company has two operating business segments, the mechanical engineered components business ("MEC") and electrical components ("EC") business. The acquisition of VFC enabled the Company to complement its MEC business and enter into the manufacture and sale of EC. The Company expanded its EC business product offerings with the acquisition of Acme in November 2000. Acme designs and manufactures power conversion equipment for electronic and electrical systems for industrial, commercial, residential, and military and aerospace applications. (See note 2 to the consolidated financial statements contained elsewhere in this Form 10-K)
Results of Operations
The following table sets forth, for the periods indicated, consolidated statement of operations data for the Company expressed in dollar amounts (in thousands) and as a percentage of net sales. The financial data set forth includes the result of operations of its wholly owned subsidiaries from their respective dates of acquisition (see Note 2 to the consolidated financial statements). The data set forth below should be read in conjunction with the Company's consolidated financial statements and notes thereto contained elsewhere in this Form 10-K.
Consolidated Statement of Operations Data:
Year ended December 31, 2000 compared to the year ended December 31, 1999
Net Sales: Net sales increased by approximately $15.3 million, or 10.6%, from approximately $144.1 million for the year ended December 31, 1999 to approximately $159.4 million for the year ended December 31, 2000. Net sales of the MEC business increased by approximately $6.6 million, or 8.1%, from approximately $81.7 million for the year ended December 31, 1999 to approximately $88.3 million for the year ended December 31, 2000. Net sales of the EC business increased by approximately $8.7 million, or 13.9%, from approximately $62.4 million for the year ended December 31, 1999 to approximately $71.1 million for the year ended December 31, 2000.
The increase in net sales in the MEC business is related to growth in the core markets of the MEC business. The growth in sales of the EC business, which the Company entered into as a result of the VFC acquisition, was fueled by growth in the core markets of the business as well as continued new product development, which enabled the Company to expand its market share in the industrial markets that it serves. In addition, the results of the EC business include the results of the power conversion product line for the month of December 2000, due to the acquisition of Acme as well as the inclusion of the results of operations of the remaining product lines of this business for the full year in 2000, whereas the year ended December 31, 1999 only reflects the results of operations from January 19, 1999, as a result of the VFC acquisition.
Gross Profit: Gross profit increased by approximately $6.4 million, or 10.8%, from approximately $59.0 million for the year ended December 31, 1999 to approximately $65.4 million for the year ended December 31, 2000. Gross profit for the MEC business increased by approximately $3.3 million, or 10.2%, from approximately $32.1 million for the year ended December 31, 1999 to approximately $35.4 million for the year ended December 31, 2000. Gross profit for the EC business increased by approximately $3.0 million, or 11.4%, from approximately $27.0 million for the year ended December 31, 1999 to approximately $30.0 million for the year ended December 31, 2000.
Gross profit, as a percentage of net sales, for the years ended December 31, 2000 and 1999 was approximately 41.0%. Gross profit, as a percentage of net sales, for the MEC business increased 0.8% from 39.3% for the year ended December 31, 1999, to 40.1% for the year ended December 31, 2000. Gross profit, as a percentage of net sales, for the EC business decreased 1.0% from 43.2% for the year ended December 31, 1999, to 42.2% for the year ended December 31, 2000.
The increase in the gross profit for the MEC business is related to growth in the business' core markets. The growth in gross profit, as a percentage net sales, for the MEC business is related to product mix across all of its product lines.
The margins for the EC business are generally higher as a result of the nature of the customer base to which the EC 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 EC business for the full year in 2000 versus 1999, which only reflects the results from January 19, 1999. The decrease in gross profit percentage in the EC business is primarily related to product mix.
Selling, General and Administrative Expenses: Selling, general and administrative ("SG&A") expenses decreased by approximately $454,000, or 1.4%, from approximately $33.1 million for the year ended December 31, 1999 to approximately $32.6 million for the year ended December 31, 2000. SG&A expenses for the MEC business decreased by approximately $427,000, or 3.7%, from approximately $11.6 million for the year ended December 31, 1999 to
approximately $11.2 million for the year ended December 31, 2000. SG&A expenses for the EC business for the year ended December 31, 2000 and 1999 was approximately $17.1 million.
SG&A, as a percentage of net sales, decreased by 2.4% from 22.9% for the year ended December 31, 1999, to 20.5% for the year ended December 31, 2000. SG&A, as a percentage of net sales, for the MEC business decreased 1.6% from 14.2% for the year ended December 31, 1999 to 12.6% for the year ended December 31, 2000. SG&A, as a percentage of net sales, for the EC business decreased by 3.3% from 27.3% for the year ended December 31, 1999, to 24.0% for the year ended December 31, 2000. The MEC and EC 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 final rationalization of the VFC acquisition resulted in lower corporate overhead and lower SG&A expenses for the EC business as a result of the formulation of its specialty EC 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 EC business are generally higher than those of the MEC business as a result of the EC business maintaining higher levels of sales and marketing expenses due to the businesses to which it targets its products.
Stock appreciation rights compensation and other nonrecurring expenses: For the year ended December 31, 2000 and 1999, the Company recorded charges of approximately $1.6 million and $4.2 million, respectively, related to outstanding stock appreciation rights ("SARs"). The SARs were issued in conjunction with the VFC acquisition in lieu of cash consideration for the purchase of equity held by operating management of former VFC subsidiaries who continued with the Company. The Company was 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), all of 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 $9.0 million, or 41.9%, from approximately $21.5 million for the year ended December 31, 1999 to approximately $30.5 million for the year ended December 31, 2000. This increase is the sum of the increase in gross profit of approximately $6.4 million plus the decrease in SG&A expenses of approximately $454,000 and the decrease in stock appreciation rights compensation and other non-recurring expenses of approximately $2.2 million due to the factors discussed above.
Recapitalization fees: In connection with the Recapitalization (see Liquidity and Capital Resources), the Company incurred approximately $7.9 million of transaction fees.
Interest Expense: Interest expense decreased by approximately $399,000, or 2.7%, from approximately $14.5 million for the year ended December 31, 1999 to approximately $14.1 million for the year ended December 31, 2000. This decrease is due to lower levels of outstanding borrowings throughout most of 2000 versus the year ended December 31, 1999, as a result of the Company not having any borrowings outstanding under its revolving credit facility during the year ended December 31, 2000 as well as lower debt outstanding under the term loan for most of 2000. In September 2000, the Company entered into a new credit agreement (see Liquidity and Capital Resources) in order to finance a large portion of the acquisition of Acme.
Provision for Income Taxes: The provision for income taxes increased by approximately $2.6 million, or 102.7% from approximately $2.6 million for the year ended December 31, 1999 to approximately $5.2 million for the year ended December 31, 2000. The Company's effective tax rates for the year ended December 31, 2000 and 1999 were approximately 57.0% and 34.5%, respectively. Through May
22, 2000, KCI, the majority member of KCLLC, was an S corporation and shareholders of KCI were personally responsible for the income taxes on the income of KCLLC that was allocated to KCI. Upon the consummation of the Recapitalization (see Liquidity and Capital Resources), KCI automatically converted to C corporation status. In addition, as part of the Recapitalization, KCI acquired Keyhold, Inc. ("Keyhold"), which owned the minority interest in KCLLC and was a C corporation for tax purposes. On December 31, 2000, Keyhold merged into KCI. Beginning May 23, 2000, the financial statements of the Company reflects its tax provision as if it were a C corporation, the tax status of its member. The tax provision for the year ended December 31, 2000 is primarily related to the taxable income of the Company from May 23, 2000 through December 31, 2000. In addition, the Company's high effective tax rate for the year ended December 31, 2000 is primarily a result of the loss allocated to the S corporation period and the impact of the non-deductibility of amortization of certain intangible assets.
The tax provision for the year ended December 31, 1999 is primarily related to the taxable income of VFC and its former subsidiaries through August 31, 1999. Through August 31, 1999 VFC and its subsidiaries were C corporations for tax purposes.
Income from continuing operations: Income from continuing operations decreased by approximately $944,000, or 19.5%, from approximately $4.8 million for the year ended December 31, 1999 to approximately $3.9 million for the year ended December 31, 2000. The decrease is primarily the result of the sum of increases in income from operations of approximately $9.0 million and other income of approximately $227,000 and a decrease in interest expense of approximately $399,000 offset by an increase in the provision for taxes of approximately $2.6 million and the Recapitalization expenses of approximately $7.9 million, due to the factors discussed above.
Loss from discontinued operations: Loss from discontinued operations increased by approximately $4.0 million for the year ended December 31, 2000. In April 2000, the Company consummated the sale of Heart Interface Corporation ("Heart") and Cruising Equipment Company ("Crusing"), which were acquired as part of VFC (see note 2 to the consolidated financial statements). 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, which the Company has recorded in its other assets. 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, which terminates in April 2002, such funds will be recorded as a gain at that time. To date, the Company has not received any claims against the escrow.
On December 29, 2000, the Company sold its interests in Mastervolt B.V. and subsidiaries ("Mastervolt"), which had been acquired as part of VFC (see note 2 to the consolidated financial statements). The Company received approximately $2.3 million in proceeds and recorded a loss on disposal of approximately $525,000.
Extraordinary Item: In November 2000, the Company closed on its new credit facility (see Liquidity and Capital Resources). As a result, the Company wrote off the unamortized balance of the deferred financing costs relating to the prior credit facility of approximately $2.1 million. Such writeoff is reflected, net of a tax benefit of approximately $828,000, as an extraordinary charge related to the early retirement of debt.
Net (loss) income: Net loss increased by approximately $6.1 million, or 127.3%, from net income of approximately $4.8 million for the year ended December 31, 1999 to a net loss of approximately $1.3 million for the year ended December 31, 2000. The increase in loss is the result of the sum of a decrease in income from continuing operations of approximately $944,000, which was primarily driven by the Recapitalization expenses, an increase in loss from discontinued operations of approximately $4.0 million and the extraordinary charge of approximately $1.2 million, due to the factors discussed above.
Year ended December 31, 1999 compared to the year ended December 31, 1998
Net Sales: Net sales were approximately $144.1 million for the year ended December 31, 1999, an increase of approximately $82.2 million, or 133.0%, from approximately $61.9 million for the year ended December 31, 1998. Net sales of the MEC business were approximately $81.7 million for the year ended December 31, 1999, an increase of approximately $19.8 million or 32.0%, from approximately $61.9 million for the year ended December 31, 1998. Net sales of the EC business, which was acquired in the first quarter of fiscal 1999, were approximately $62.4 million for the year ended December 31, 1999. The increases in the total and segment net sales are primarily attributable to the acquisitions of VFC and G&H.
Gross Profit: Gross profit was approximately $59.0 million for the year ended December 31, 1999, an increase of approximately $36.3 million, or 159.7%, from approximately $22.7 million for the year ended December 31, 1998. Gross profit for the MEC business was approximately $31.1 million for the year ended December 31, 1999, an increase of approximately $8.4 million, or 37.0% from approximately $22.7 million for the year ended December 31, 1998. Gross profit for the EC business was approximately $27.9 million for the year ended December 31, 1999.
Gross profit, as a percentage of net sales, was 41.0% and 36.7% for the years ended December 31, 1999 and 1998, respectively. Gross profit, as a percentage of net sales, for the MEC business were 38.1% and 36.7% for the year ended December 31, 1999 and 1998, respectively. Gross profit, as a percentage of net sales, for the electrical component business was 44.7% for the year ended December 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 EC business, which historically experiences higher gross margins than in the MEC business. The margins for the EC business are generally higher as a result of the nature of the target markets to which these businesses sell their products.
Selling, General and Administrative Expenses: SG&A expenses were approximately $33.1 million for the year ended December 31, 1999, an increase of approximately $22.3 million, or 206.8%, from approximately $10.8 million for the year ended December 31, 1998. Depreciation and amortization expense increased by approximately $2.1 million for the year ended December 31, 1999. The increase in depreciation and amortization is primarily related to the acquisition of VFC. Corporate expenses also increased for the year ended December 31, 1999 by approximately $2.2 million. The increase in corporate expenses is primarily related to the redundant costs of the VFC corporate office and the training and travel costs associated with closing that office. The corporate office of VFC closed on September 30, 1999. In addition, the Company experienced unusual increases in professional fees, primarily as a result of the subsidiaries' reorganization to LLC status and the additional tax planning and reporting requirements, which resulted from the VFC acquisition. The Company's continuing acquisition activities were also a factor in professional fees increasing
approximately $1.1 million for the year ended December 31, 1999. The remainder of the increase in SG&A expenses is predominantly attributable to the acquisition of VFC, which added approximately $20.1 million (or 88.9% of the total increase in SG&A expenses) to SG&A for the year ended December 31, 1999. SG&A expenses for the MEC business were approximately $12.0 million for the year ended December 31, 1999, an increase of approximately $3.0 million, or 33.0%, from approximately $9.0 million for the year ended December 31, 1998. This increase was partially related to the integration of G&H but was predominantly related to the expansion of the MEC business as a result of the VFC acquisition. The EC business had SG&A expenses of approximately $20.9 million for the year ended December 31, 1999.
SG&A, as a percentage of net sales, was 23.1% for the year ended December 31, 1999, an increase of 5.7% from 17.4% for the year ended December 31, 1998. SG&A, as a percentage of net sales, for the MEC business was 14.7% and 14.5% for the years ended December 31, 1999 and 1998, respectively. SG&A, as a percentage of net sales, for the EC business was 33.5% for the year ended December 31, 1999. The overall increase in the percentage of SG&A is directly related to the EC business, which maintains higher levels of sales and marketing expenses due to the nature of the target markets to which these businesses sell their products.
Stock appreciation rights compensation and other nonrecurring expenses: For the year ended December 31, 1999, based on an independent appraisal of KCI stock, the Company recorded a non-cash charge of approximately $4.2 million related to the 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. In connection with the Recapitalization (see Liquidity and Capital Resources), all of 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 was approximately $21.5 million for the year ended December 31, 1999, an increase of approximately $9.5 million, or 79.6%, from approximately $12.0 million for the year ended December 31, 1998. This increase is related primarily to the acquisition of VFC.
Interest Expense: Interest expense was approximately $14.5 million for the year ended December 31, 1999, an increase of approximately $6.9 million, or 90.3%, from approximately $7.6 million for the year ended December 31, 1998. This increase is due to a full year of interest expense in 1999 related to the issuance of $80.0 million of 10 1/2% senior notes in May 1998 as well as the interest expense recorded in 1999 related to the issuance of debt outstanding under the Company's new credit facilities.
Provision for Income Taxes: The provision for income taxes was approximately $2.6 million for the year ended December 31, 1999, an increase of approximately $2.5 million, from approximately $97,000 for the year ended December 31, 1998. Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated as a subchapter S corporation, which caused the stockholders of their then parent company, KCI, to be personally liable for the taxes due on the income of the Company. Through August 31, 1999, VFC was a C corporation and was responsible for paying taxes on its 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 limited liability company ("LLC") status. These conversions were accomplished by merging each of the existing subsidiaries into a newly organized Delaware LLC. Upon election of LLC status by the subsidiaries, two members of KCLLC, Keyhold, Inc. ("Keyhold"), a New York C Corporation, and KCI became
responsible for the taxes due on the income of the Company, apart from the subsidiaries that remained C corporations. Since KCI was an S corporation during 1999 and 1998, the shareholders of KCI are personally responsible for income taxes on the income of KCLLC that is allocated to KCI.
For the year ended December 31, 1999, the Company's provision for income taxes relates primarily to VFC's consolidated taxable income (as a C corporation) and the taxable income of the subsidiaries not converted to LLC status.
Income from continuing operations: Income from continuing operations was approximately $4.8 million for the year ended December 31, 1999, an increase of approximately $224,000 from income from operations of approximately $4.6 million for the year ended December 31, 1998. This increase is the result of an increase in income from operations of approximately $9.5 million, which was offset by increases in interest expense of approximately $6.9 million and the provision for income taxes of $2.5 million, all due to the factors discussed above.
Loss from discontinued operations: In 1999, the Company decided to dispose of its inverter business and recorded the net assets of Heart, Cruising and Mastervolt as net assets of discontinued operations and reported the after tax results of operations as loss from discontinued operations (see note 2 to the consolidated financial statements). The net loss from discontinued operations was approximately $28,000 for the year ended December 31, 1999. The Company had made no accrual of costs of disposal related to the sale of their interests since it was management's estimate that the Company would record gains from the sales at that time.
Net Income: Net income was approximately $4.8 million for the year ended December 31, 1999, an increase of approximately $4.8 million from approximately $3,000 for the year ended December 31, 1998. This increase is the result of an increase in income from continued operations of approximately $224,000 and the loss from discontinued operations of approximately $28,000. Additionally, the results of operations for the year ended December 31, 1998 were negatively impacted by an extraordinary charge of approximately $4.6 million resulting from the early repayment of debt in connection with the Company's senior notes, which were issued in May 1998.
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 sources of liquidity historically have been the Company's $80 million of unsecured 10 1/2% senior notes due 2008 and it's outstanding credit facilities. In November 2000, the Company closed on a new credit facility, which replaced the Company's previous credit facility. The new credit facility provides for a six-year $40 million revolving credit facility and a six-year $100 million term loan facility. The new credit agreement, guaranteed by the Company's subsidiaries, is collateralized by all of the capital stock of the subsidiaries, receivables, inventories, equipment and certain intangible property. There was $3.7 million outstanding under the revolving credit facility at December 31, 2000. The term loan is payable in quarterly installments through September 2006. Both the term loan and revolving credit facility bear interest at fluctuating interest rates determined by reference to a base rate plus an applicable margin which will vary from 1.00% to 2.75% and require the payment of a commitment fee of 0.5% on the unused portion of the facility as well as quarterly commitment fees. The credit facility also
allows for up to $5.0 million of outstanding letters of credit. In addition, the new credit agreement contains certain covenants and restrictions which require the maintenance of financial ratios, and restrict or limit dividends and other shareholder distributions, transactions with affiliates, capital expenditures, rental obligations and the incurrence of indebtedness. The Company used the proceeds from the new credit facility to repay the previous borrowing facility as well as finance the acquisition of Acme.
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 senior notes require semiannual interest payments on the outstanding principal. The term loan requires quarterly principal payments. Principal payments for 2001 are approximately $8.1 million. Under the revolving credit facility and term loan, 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 180 days. As the underlying contract comes up for renewal, the interest associated with the contract becomes due. As of December 31, 2000, the Company had no outstanding commitments for capital expenditures and anticipates capital expenditures of approximately $6.6 million for fiscal 2001. 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:
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, 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 SARs exercised their SARs and, with a substantial portion of their after-tax proceeds from the exercise, purchased Common Stock of KCI;
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. As part of advisory agreement, KCI is required to pay a $325,000 annual management fee to Kelso. Kelso agreed that amounts paid by Millbrook to Kelso out of management fees received by Millbrook from KCI or KCLLC would offset KCI's obligation to Kelso under the advisory agreement between Kelso and KCI.
Effective upon the consummation of the Recapitalization, KCI has 1,100,000 and 10,000,000, respectively, of authorized shares of Preferred and Common Stock. Kelso became the owner of all the outstanding shares of 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 of the Preferred Stock it would constitute approximately 62.0% of the total outstanding Common Stock 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, for cash, 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 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 $7.9 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, 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. On December 31, 2000, Keyhold was merged into KCI.
Cash flows provided by operating activities were approximately $7.7 million, $20.5 million and $8.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. The net decrease of approximately $12.8 million for the year ended December 31, 2000 from the year ended December 31, 1999 resulted primarily from the decrease in net income, primarily driven by the Recapitalization expenses during the year ended December 31, 2000 and increases of operating assets during the year ended December 31, 2000. The net increase of approximately $11.8 million for the year ended December 31, 1999 over the year ended December 31, 1998 is primarily the result of an increase in net income plus non-cash charges of approximately $7.7 million for the year ended December 31, 1999 as compared to the year ended December 31, 1998. The net increase in accounts receivable was primarily driven by the growth of the Company as well as higher sales in November and December 2000 as compared to the prior year. The increase in the inventory for the year ended December 31, 2000 was related primarily to the Company's growth over the fiscal year 1999, a build up of inventory to counter the increased lead times resulting from an increased overseas vendor base as well as expansion of its Thailand facility. The increase in the prepaid expenses for the year ended December 31, 2000 is primarily driven by prepaid income taxes. The increases in the non-cash charges for the year ended December 31, 1999 primarily relate to increased
depreciation and amortization as well as the $4.2 million charge recorded in connection with the SARs discussed above. The total increase in non-cash charges for the year ended December 31, 1999 were partially offset, as compared to the year ended December 31, 1998, by the $4.6 million extraordinary charge taken in connection with the early retirement of debt. Depreciation and amortization expense increased for the year ended December 31, 1999 over December 31, 1998 primarily as a result of the VFC acquisition.
During the year ended December 31, 1999, the Company's accrued expenses primarily accounted for the remainder of the increase of cash flows from operations over the year ended December 31, 1998. The increase in accrued expenses is related to increased accrued interest related to the Company's new term loan and revolving credit facilities as well as increased accrued professional fees primarily related to tax compliance in connection with the subsidiaries' reorganization to LLC status (See Note 1 to the consolidated financial statements elsewhere in this Form 10-K). Further, the Company had increased compensation accruals as a result of the additional employee hires as well as increased incentive compensation related to the Company's growth.
Cash flows from operations of discontinued operations generated approximately $1.4 million for the year ended December 31, 1999.
Cash flows used in investing activities were approximately $38.7 million, $82.9 million and $2.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. The decrease for the year ended December 31, 2000 of approximately $44.2 million from the year ended December 31, 1999 and the increase for the year ended December 31, 1999 from the year ended December 31, 1998 of approximately $80.1 million are primarily related to the size of the acquisitions accomplished in those years. On November 21, 2000, the Company acquired all of the outstanding shares of Acme for a purchase price of approximately $47.3 million and assumed liabilities of approximately $28.0 million. On January 19, 1999, the Company acquired all of the outstanding shares of VFC for a purchase price of approximately $84.0 million and assumed liabilities of approximately $21.7 million (see note 2 to the consolidated financial statements). The Company realized $10.7 million of proceeds from the sale of Heart, Cruising and Mastervolt (See note 2 to the consolidated financial statements) during the year ended December 31, 2000. During the year ended December 31, 1999, the Company divested Force 10 Marine, Inc., Multiplex Technology Inc. and Glendinning Marine Products, Inc ("Glendinning"), which it had acquired as part of VFC, for a total of approximately $7.4 million. Capital expenditures for the years ended December 31, 2000, 1999 and 1998 were approximately $3.1 million, $2.7 million and $2.2 million, respectively.
Cash flows from financing activities provided net cash of approximately $30.6 million, $53.4 million and $5.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. The net decrease for the year ended December 31, 2000 of approximately $22.8 million from the year ended December 31, 1999 and the net increase for the year ended December 31, 1999 of approximately $47.7 million from the year ended December 31, 1998 were both primarily due to the changes made in the Company debt facilities. Proceeds under the Company's new credit facility for the year ended December 31, 2000 totaled $103.7 million. The Company used such proceeds to repay its prior credit facility, finance the acquisition of Acme, which included repaying approximately $10.4 million of debt assumed in the Acme acquistion, and working capital purposes. For the year ended December
31, 1999, the Company received an aggregate of approximately $82.6 million from its term loan and credit facility. The repayment of approximately $37.1 million of long-term debt and other long-term obligations offset this, the most significant portions being the repayment of approximately $8.9 million of VFC's long-term debt, which was made in conjunction with the VFC acquisition and the subsequent repayments of all amounts outstanding under the then existing revolving credit facility throughout the course of 1999. For the years ended December 31, 2000, 1999 and 1998, the Company paid deferred financing costs of approximately $3.8 million, $2.2 million and $4.9 million, respectively, related to the Company's new and previous credit facilities.
For the years ended December 31, 2000, 1999 and 1998 the Company was the recipient of approximately $7.1 million, $12.3 million and $500,000 in capital contributions. The capital contributions received during the year ended December 31, 2000, were contributed by KCI in connection with Recapitalization described above. Approximately $7.5 million was used to repay the outstanding SAR's, including, approximately $420,000 related to outstanding vested SARs with certain members of operating management of Glendinning and the inverter business, which were divested in fiscal years 1999 and 2000, respectively. The remaining holders who are current members of operating management purchased Common Stock as part of the Recapitalization with a substantial portion of their after-tax proceeds from the exercise of their SARs. Simultaneous with the closing of the VFC acquisition, the Company was the recipient of approximately $3.3 million in capital from KCI. This capital was raised by KCI through the sale of new stock in KCI. In September 1999, SG and Keyhold purchased their interests in KCLLC and the Company received net proceeds of approximately $9.0 million related to the capital contribution by SG and Keyhold. The proceeds of the SG and Keyhold contribution, divestitures of subsidiaries and cash from operations enabled the Company to repay all amounts outstanding under the revolving credit facility in 1999. In addition, the Company prepaid its $1.5 million term loan installment, due in January 2000, during December 1999. For the years ended December 31, 1999 and 1998, the Company paid capital withdrawals of approximately $2.3 million and $1.7 million, primarily to cover estimated tax payments of the members. During the year ended December 31, 2000, KCLLC paid approximately $1.4 million of capital withdrawals. KCI used approximately $1.1 million of the funds to repurchase outstanding shares of its common stock from four former shareholders. The remaining withdrawals in 2000 of approximately $300,000 were for tax distributions to the members.
In December 1999, the Company consummated the acquisition of the outstanding minority interest in Guest, which was one of the subsidiaries acquired as part of the VFC acquisition. The minority shareholders agreed to sell their 7% share of Guest to the Company for a combination of cash and KCI stock. KCI received additional membership interests as consideration for the stock distributed to the minority shareholders.
Management believes that the Company's cash flow from operations, together with its borrowing availability under its existing credit facilities, will be adequate to meet its anticipated capital requirements for the foreseeable future.
Inflation
Inflation has not been material to the Company's operations for the periods presented.
Backlog
The Company's backlog of orders as of December 31, 2000, was approximately $30.8 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. In addition, purchase orders can generally be cancelled at any time without penalty.
New Accounting Pronouncements
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 did have a material impact on the Company's consolidated financial statements. This interpretation became effective July 1, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 is not a rule or interpretation of the SEC, however, it represents interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws. The interpretations outlined in SAB 101 did not have a material impact on the Company's revenue recognition policies.
Other Matters
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 7A.
Item 7A. 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 $98.2 million outstanding under its term loan and with any amounts outstanding under its $40-million revolving credit facility. Under both the term loan and the revolving credit facility, the Company has the option to lock in a certain interest rate based on either the base rate, which is equivalent to prime, or LIBOR plus an applicable margin specified in the agreement. Principally all of the borrowings under the term loan are locked in at approximately 9.4% until March 2001, when the underlying LIBOR contract is up for renewal. Subsequent to December 31, 2000, the Company repaid all outstanding borrowings under the revolving line of credit. A 1% change in the interest rate for the Company's credit facilities in place in 2000 would have resulted in interest of approximately $578,000. The senior notes bear a fixed rate of interest and therefore are not subject to market risk. The Company does not hold derivative financial instruments or believe that material imbedded derivatives exist within its contracts.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements for the three years ended December 31, 2000, together with the report of PricewaterhouseCoopers LLP dated March 2, 2001, are included elsewhere herein. See Item 14 for a list of the consolidated financial statements and consolidated financial statement schedule.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None
PART III
Item 10.
Item 10. Directors, Executive Officers and Key Employees of the Company
The following table sets forth information with respect to the directors, executive officers and other key employees of the Company as of December 31, 2000. All directors and officers of the Company hold office until the annual meeting of stockholders next following their election, or until their successors are elected and qualified.
John S. Dyson has been Chairman of the Board of Directors of the KCI, KCLLC and Finance Corp. since their inception. Since 1996, Mr. Dyson has been Chairman of the Board of Directors of Millbrook Capital Management ("Millbrook"), a management company providing executive level services to the Company under the Management Agreement, and he currently serves as Chairman of the Mayor of the City of New York's Council of Economic Advisors. From 1994 to 1996, Mr. Dyson served as Deputy Mayor for Finance and Economic Development for the City of New York. From 1982 to 1993 Mr. Dyson was the Chairman of Dyson-Sinclair Associates, a management company and the predecessor of Millbrook. From 1976 to 1979, he served as Commissioner of the New York State Department of Commerce. Mr. Dyson
was Vice Chairman of Dyson-Kissner-Moran Corporation from 1970 to 1975, at which time he was appointed to the position of Commissioner of the New York State Department of Agriculture.
Clay B. Lifflander has served as a director of KCI and KCLLC since their inception. Mr. Lifflander was elected Chief Executive Officer in November 1999. Before November 1997, Mr. Lifflander has been President of KCI since its inception. Mr. Lifflander has been President of Millbrook since 1995, and from 1994 to 1995, Mr. Lifflander was President of the New York City Economic Development Corporation. Previously, Mr. Lifflander was Managing Director in the Mergers and Acquisitions Group at Smith Barney Inc., where he worked from 1984 to 1994.
Robert B. Kay was elected President of KCLLC in November 1999. Prior to his election he served as the Chief Financial Officer of KCLLC from February 1999 to November 1999. Mr. Kay became a director of KCI and KCLLC in March 1999. From August 1998 through December 1998, Mr. Kay was the Senior Vice-President and Chief Financial Officer, as well as a director, of Tiffen Manufacturing Corp., a manufacturer and distributor of photographic and imaging products. From January 1994 through August 1998, Mr. Kay was a Senior Vice-President and Chief Financial Officer of Oxford Resources Corp. (renamed NationsBank Auto Leasing, Inc.), a publicly traded consumer finance company.
Alan L. Rivera has been the Vice President, Secretary and a Director of KCI, KCLLC and Finance Corp. since their inception. Since September 1996, Mr. Rivera has been employed by Millbrook, where he serves as Chief Financial Officer and General Counsel. From 1994 to 1996, Mr. Rivera served as Executive Vice President of Finance and Administration and General Counsel of the New York City Economic Development Corporation. From 1990 to 1994, Mr. Rivera was an associate with the New York City law firm of Townley & Updike, specializing in corporate finance matters, and from 1987 to 1990, Mr. Rivera was an associate with Mudge, Rose, Guthrie, Alexander and Ferdon, specializing in public finance matters.
George M. Scherer has been the Vice President-Manufacturing and a Director of KCI and KCLLC since their inception. Mr. Scherer has been with BWE since 1978 when he began as Engineering Manager. He has served as the President and a Director of BWE since 1982. Prior to joining BWE, Mr. Scherer was a product application engineer for Stow Manufacturing Company, Inc. in Binghamton, N.Y. from 1975 to 1978. Prior to his position at Stow Manufacturing Company, Inc., Mr. Scherer was a plant engineer at GAF Corporation in Binghamton, N.Y. from 1973 to 1975.
Philip E. Berney has served as a director since May 2000, and is a board designee of the Kelso Funds. Mr. Berney joined Kelso & Company, a private investment firm in 1999 as one of its Managing Directors. Previously, Mr. Berney previously worked at Bear, Stearns & Co. Inc. where he was a Senior Managing Director. He also serves as a director of CDT Acquisition Corp. Mr. Berney received a Bachelor of Science degree in Business Administration from the University of North Carolina in Chapel Hill.
Thomas R. Wall, IV has served as a director since May 2000, and is a board designee of the Kelso Funds. Mr. Wall has held various positions of increasing responsibility with Kelso & Company, a private investment firm, since 1983, and currently serves as one of its Managing Directors. Mr. Wall also serves as a director of AMF Bowling, Inc., Citation Corporation, Consolidated Vision Group, Inc., Cygnus Publishing, Inc., IXL Enterprises Inc., Mitchell Supreme Fuel
Company, Mosler, Inc., Peebles Inc., and 21st Century Newspapers, Inc. Mr. Wall received a Bachelor of Science degree in Business Administration from Washington & Lee University.
Keith A. McGowan was elected as the Chief Financial Officer of KCLLC in November 1999. Prior to this promotion, he had served as KCLLC's Principal Accounting Officer since April 1999. From April 1998 to March 1999, Mr. McGowan was a self-employed consultant. From July 1997 to April 1998, he served as the Vice President of Finance of Digitec 2000, Inc., a distributor of prepaid phone products. From November 1985 to June 1997, Mr. McGowan was employed by BDO Seidman, LLP, an accounting and consulting firm, where he was promoted to Partner in July 1995.
Michael L. Colecchi has been with Hudson since 1970, when he began as a tool and die maker. He subsequently assumed various positions of responsibility in Hudson's manufacturing department until 1980, when he was appointed Plant Manager. In 1984, Mr. Colecchi was promoted to Vice President of Manufacturing. In 1989, Mr. Colecchi was promoted to Vice President and General Manager. Mr. Colecchi has served as President of Hudson since 1996.
J. Marty O'Donohue has been President of Marinco since 1991. Mr. O'Donohue managed his own marketing consulting firm, O'Donohue and Associates, from 1988 to 1991.
Daryl Lilly has been the President of Gits since June of 2000. Previously, he served as Executive Vice President, Vice President of Product Development and Engineering Manager for Gits. In addition to his experience with the Company, Mr. Lilly has 15 years of experience in various automotive component manufacturing industries.
A. Jack Hoppenjans has been President of Turner since 1982. He joined Turner in 1960 as a mechanical designer and has held various positions with the Turner during his 40 year tenure.
Item 11.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The summary table sets forth information with respect to the compensation of each of the named executive officers and key employees for services provided in all capacities to the Company for the three years in the period ended December 31, 2000.
(1) The salaries of Clay B. Lifflander and Alan L. Rivera are paid by Millbrook Capital Management, Inc. ("Millbrook") pursuant to the terms of a Management Agreement. See "Certain Relationships and Related Transactions--Management Agreement." (2) The 2000 bonuses for Robert B. Kay, George Scherer and Keith McGowan have yet to be determined. The bonuses of these individuals are at the discretion of the Board of Directors of KCLLC. (3) The Company is a party to employment agreements with certain of its key employees. (4) Long terms awards related to options granted to purchase KCI common stock.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the options that were granted to named executive officers of the Company in the fiscal year ended December 31, 2000.
(1) Market value was determined by the Board of Directors to equal the exercise price at date of grant.
Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the term of the options. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date and are not intended to forecast possible future appreciation, if any, in the price of the KCI common stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares. The actual gains, if any, on the stock option exercises will depend on the future performance of the KCI common stock, the holder's continued employment through applicable vesting periods and the date on which the options are exercised. The potential realizable value of the foregoing options is calculated by assuming that the fair market value of the KCI common stock on the date of grant of such options equaled the exercise price of such options.
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 2000 AND YEAR END OPTION/SAR VALUES
The following table provides information related to the number and value of options held by the named executive officers at December 31, 2000.
(1) Assumes a fair market value of $117.35 per share of common stock at December 31, 2000.
Employment and Related Agreements
The employment agreement with Robert B. Kay, President of the Company, is dated March 1, 1999, terminates March 1, 2004 and provides for, among other things, a base salary of $295,000 per annum with yearly increases based on the CPI, an annual incentive bonus in the event Mr. Kay and the Company reach certain performance goals, a car allowance, and vacation and benefits commensurate with the plans and programs generally offered by the Company to employees of the same level and responsibility of Mr. Kay. The agreement also provides that Mr. Kay will not compete with the Company for two years after termination of his agreement and contains certain confidentiality provisions.
The employment agreement with George M. Scherer, President of Elliott, is dated January 16, 1996 and terminated on January 16, 2001. The agreement provided Mr. Scherer with a base salary of $225,000 per year, as well as an annual cash bonus in the event BWE reaches certain targeted levels of earnings. This agreement also provides that Mr. Scherer (i) will not compete with Elliott for three years after termination of his agreement, (ii) will keep all proprietary information confidential and (iii) will assign to Elliott all innovations that may be developed by Mr. Scherer during his employment. The Company is currently negotiating a new contract with Mr. Scherer, the terms of which the Company expects to be similar to the previous agreement.
1998 Long-Term Incentive Plan
KCI's 1998 Incentive Compensation Plan (the "1998 Plan") was adopted to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants of KCI, KCLLC and its subsidiaries and to promote the success of the Company's business. Options granted under the 1998 Plan may be either incentive stock options, as defined in Section 422A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options. In addition, stock appreciation rights, and restricted stock awards and other stock-based awards may be granted under the 1998 Plan. No further grants will be made under the 1998 Plan. As of December 31, 2000, options to purchase an aggregate of 53,025 shares were outstanding under the 1998 Plan at a weighted average exercise price of $42 per share, of which options to purchase 30,815 shares are currently exercisable.
The 1998 Plan is administered by the Board of Directors of KCI, which has the power to determine the terms of any options or awards granted thereunder, including the exercise price, the number of shares subject to the option or award, and the exercisability thereof. Options and awards granted under the 1998 Plan are generally not transferable, and each option or award is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all incentive stock options granted under the 1998 Plan must be at least equal to the fair market value of the shares of Common Stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of KCI, the exercise price of any stock option granted must be equal to at least 110% of the fair market value on the grant date and the maximum term of the option must not exceed five years. The term of all other options or awards under the 1998 Plan may not exceed ten years. The specific terms of each option grant or award are approved by KCI's Board of Directors and are reflected in a written stock option or award agreement.
Key Components Stock Incentive Plan
In May 2000, the Company adopted the Key Components, Inc. Stock Incentive Plan (the "KCI Plan"). Approximately 205,000 shares of KCI's Common Stock have been reserved for options issued under the KCI Plan. Options granted under the 1998 Plan may be either incentive stock options, as defined in Section 422A of the Internal Revenue Code of 1986, as amended, or non-qualified stock options. In September 2000, the Company issued options for approximately 119,000 shares of common stock at an exercise price of approximately $117 per share. Options for approximately 39,000 shares vest over the next three years. The options for the approximately 80,000 remaining shares vest only after a change in control of the Company and if the Company's Preferred Shareholders obtain a targeted return on their investment. The Company would take a charge to earnings for the accretion in value upon the date that the Company is reasonably assured that such criteria would be satisfied. At December 31, 2000, no options issued under the KCI Plan were vested.
The KCI Plan is administered by a committee as determined by the Board of Directors of KCI and in accordance with the Shareholders Agreement. Any options granted under the KCI Plan must be assigned an exercise price equal to the market value of KCI Common Stock on the date of the grant of the option. Options and awards granted under the KCI Plan are generally not transferable, and each option or award is exercisable during the lifetime of the optionee only by such optionee. The term of the options under the KCI Plan may not exceed ten years. The specific terms of each option grant or award are approved by KCI's Board of Directors and are reflected in a written stock option or award agreement.
Stock Appreciation Rights
In connection with the VFC acquisition, KCI issued SARs to certain members of operating subsidiary management. The SARs, which were fully vested, entitle the holder to receive, in cash, the difference between the exercise price and market
value of KCI stock as of the date of exercise. The Company was required to record as compensation expense any net accretion in the value of the SARs based on current market value of KCI stock. For the years ended December 31, 2000 and 1999, the Company included in continuing operations approximately $1.6 million and $4.2 million in compensation expense related to the SARs. All of the SARs were exercised in connection with the Recapitalization, with the holders of the SARs using a substantial portion of their after-tax proceeds to purchase shares of KCI common stock.
KCLLC 401(k) Plan
Effective January 1, 2001, the Company merged the 401(k) plans covering substantially all the employees of the Company, other than those of Acme into one newly formed KCLLC 401(k) plan (the "KCLLC Plan"). The KCLLC plan covers all the employees of the Company, other than those of Acme and those covered by the Gits defined benefit plan. The KCLLC Plan provides for a match of 4% of employee's compensation up to 2% maximum employer match. The Company has the ability to make additional discretionary contributions. The benefits of the KCLLC Plan vest over five years.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company is comprised of KCLLC, a Delaware corporation which is a parent holding company for its wholly owned subsidiaries, including Key Components Finance Corp. KCI holds all of the member interests in KCLLC. KCI has no material assets other than its interest in KCLLC and has no operations. The following table sets forth information concerning the beneficial ownership of KCLLC membership interests, as of March 12, 2001 of (i) each person known to own beneficially more than 5% of KCLLC membership interest and KCI's outstanding Common Stock, (ii) by each director, executive officer and key employee of the Company and/or any of its subsidiaries and (iii) all such directors, executive officers, and key employees as a group. All shares are owned with sole voting and investment power, unless otherwise indicated.
(1) Unless otherwise indicated, the Company believes that the beneficial owners of the securities have sole investment and voting power with respect to such securities, subject to community property laws where applicable. Shares represent fully diluted share ownership of KCI.
(2) Percentages are based on effective membership percentages including dilutive effect of outstanding vested stock options exercisable within 60 days.
(3) Includes an aggregate of 113,279 shares of KCI Common Stock owned of record by the Charles H. Dyson Trust #1 F/B/O John Dyson U/A DTD 8/2/68, Charles H. Dyson Trust #1 F/B/O John Dyson U/A DTD 4/6/76 and the Margaret M. Dyson Trust #1 F/B/O John Dyson U/A DTD 3/26/68 (the "Dyson Trusts"), of which Mr. Dyson is a beneficiary and trustee.
(4) Includes of 464 shares of KCI Common Stock owned of record by trusts for the benefit of Mr. Lifflander's minor children, or which Mr. Lifflander is a trustee and 113,279 shares of KCI Common Stock owned of record by the Dyson Trusts, of which Mr. Lifflander is a trustee.
(5) Represents vested options to purchase 15,714 shares of KCI Common Stock. See "Executive Compensation."
(6) Includes 918,065 shares of KCI Preferred Stock owned by Kelso and its affiliates, which are convertible at the option of the holder into 918,065 shares of KCI Common Stock.
(7) Represents vested options to purchase 1,215 shares of KCI Common Stock. See "Executive Compensation"
(8) Includes 113,279 shares of KCI Common Stock owned of record by the Dyson Trusts and 464 shares of KCI common stock owned of record by trusts for the benefit of Mr. Lifflander's minor children, of which Mr. Lifflander is a trustee and 918,065 shares of KCI Preferred Stock owned by Kelso and its affiliates.
Item 13.
Item 13. Certain Relationships and Related Transactions
ESP Lease
The Company rents its Leominster, Massachusetts manufacturing facility under an
operating lease agreement entered into with a company that is co-owned by the former President of ESP and a shareholder of KCI. The lease, which expires on May 31, 2003, provides for annual rent increases based on the CPI. Rental payments amounted to $208,000, $203,000 and $208,000 for the three years ended December 31, 2000, 1999 and 1998, respectively.
BWE Lease
The Company rents one of its manufacturing facilities under an operating lease agreement entered into with a company which is co-owned by George Scherer who is a member of the Board of Directors of KCI and KCLLC, a shareholder of KCI and the President of BWE. The terms of the lease, which expires December 31, 2008, provide for annual rent increases of 5%. Rental payments amounted to $151,000, $144,000 and $137,000 in 2000, 1999 and 1998, respectively.
Management Agreement
KCLLC pays management fees to Millbrook, a party related to John S. Dyson, Chairman of the Boards of KCI and KCLLC and a shareholder of the KCI. The Company recorded management fees related to Millbrook of $900,000, $800,000, and $800,000 for the years ended December 31 2000, 1999 and 1998, respectively. Pursuant to the terms of a Management Agreement, dated as of May 28, 1998, Millbrook provides the Company with executive level services, for an annual base management fee equal to $500,000 (the "Base Fee") payable in quarterly installments, plus an additional fee of $400,000 per year (the "Additional Fee") in 2000, and $300,000 for the year ended December 31, 1999 and 1998, payable following completion of the Company's audited financial statements for such year. No portion of the Base Fee or the Additional Fee may be paid at the time that any Event of Default (as defined therein) exists under the Company's Indenture, dated as of May 28, 1998 (the "Indenture"). In addition, the Additional Fee may only be paid to the extent that, after giving effect thereto, the Company's Consolidated Coverage Ratio (as defined in the Indenture) exceeds 2.0:1, for the fiscal years ending on or prior to December 31, 1999, and 2.25:1 for the fiscal years ending after December 31, 1999. The Additional Fee (as defined is $300,000) may be increased, beginning with the fiscal year ending December 31, 2000, by an amount up to 15% of the aggregate amount of the Base Fee and the then current amount of the Additional Fee; provided, however, that the percentage increase shall not exceed the percentage increase in pro forma EBITDA (as defined in the Indenture) for such fiscal year as compared to the prior fiscal year. For the year ended December 31, 2000 the additional fee was increased by $100,000 as a result of the pro forma growth over the year ended December 31, 1999. Notwithstanding the foregoing, total management fees payable under the Management Agreement may not exceed $1.2 million in any fiscal year. Any management fee, which are not permitted to be paid at the time due will be deferred (without interest) and will be paid as soon as permitted. Millbrook will also be entitled to be reimbursed for its out of pocket expenses. As part of the Recapitalization, Millbrook agreed with Kelso to a reduced management fee, commencing in 2002, of $175,000 plus amounts paid to Kelso. Kelso agreed that amounts paid by Millbrook to Kelso out of management fees received by Millbrook from KCI or KCLLC would offset KCI's obligation to Kelso under the Advisory Agreement between Kelso and KCI.
During 2000, KCLLC paid $825,000 and $400,000, respectively, for investment
banking fees to Millbrook in connection with the acquisition of Acme and the sale of the inverter business. During 1999, KCLLC also paid Millbrook $500,000 and $350,000, respectively, for investment advisory services related to the sale of the Keyhold membership interest and the sale of Multiplex. The Company paid Millbrook an investment banking fee equal to $900,000 upon consummation of the offering of the Company's Senior Secured Notes in May 1998 for financial advisory and other services.
Recapitalization
In May 2000, KCI and its shareholders consummated the Recapitalization with affiliates of 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 SG, which owned all of the stock of 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 exercised their SARs and, with a substantial portion of their after-tax proceeds from the exercise, purchased Common Stock from KCI;
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. As part of Advisory Agreement, KCI is required to pay a $325,000 annual management fee to Kelso. Kelso agreed that amounts paid by Millbrook to Kelso out of management fees received by Millbrook from KCI or KCLLC would offset KCI's obligation to Kelso under the Advisory Agreement between Kelso and KCI.
Effective upon the consummation of the Recapitalization, Kelso became the owner of 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 of the Preferred Stock would constitute approximately 62.0% of the total outstanding Common Stock 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 for
cash 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 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 $7.8 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.
Investment by Keyhold, Inc.
On August 12, 1999, KCLLC entered into the SG Agreements with Keyhold, a wholly owned subsidiary of SG, and SG to sell up to $20.0 million of membership equity interests in KCLLC. On September 1, 1999, SG (through Keyhold) made a capital contribution to KCLLC of $10.0 million, before expenses of approximately $997,000. Keyhold received approximately an 11% membership equity interest in KCLLC. Keyhold was acquired as part of the Recapitalization with Kelso.
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(1) Previously filed with the Company's Schedule 14D-1, filed on December 9,1998 (Commission File No.5-13949). (2) Previously filed with the Company's registration statement on Form S-4 (File No. 333- 59675), which was declared effective on November 9, 1998.
(3) Previously filed with the Company's Current Report on Form 8-K (File No. 333-58675-01), filed February 3, 1999. (4) Previously filed with the Company's Form 10-K for the year ended December 31, 1998. (5) Previously filed with the Company's Form 10-Q for the three months ended December 31, 1999. (6) Previously filed with the Company's Form 10-K for the year ended December 31, 1999. (7) Previously filed with the Company's Form 8-K filed on December 6, 2000. (8) Previously filed with the Company's Form 8-K filed on April 19, 2000. (9) Previously filed with the Company's Form 10-Q for the three months ended June 30, 2000. (10) Previously filed with the Company's Form 10-Q for the three months ended September 30, 2000. (11) Previously filed with Schedule 14A of Acme, filed October 12, 2000 (Commission File No. 001-08277). (12) Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEY COMPONENTS, LLC
Dated: March 12, 2001 By: /s/ Clay B. Lifflander ----------------------
Clay B. Lifflander Chief Executive Officer
Dated: March 12, 2001 By: /s/ Robert B. Kay -----------------
Robert B. Kay President
Dated: March 12, 2001 By: /s/ Keith A. McGowan --------------------
Keith A. McGowan Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 12, 2001 By: /s/ John S. Dyson -----------------
John S. Dyson Director
Dated: March 12, 2001 By: /s/ Clay B. Lifflander ----------------------
Clay B. Lifflander Director
Dated: March 12, 2001 By: /s/ Alan L. Rivera ------------------
Alan L. Rivera Director
Dated: March 12, 2001 By: /s/ Robert B. Kay -----------------
Robert B. Kay Director
Dated: March 12, 2001 By: /s/ George M. Scherer ---------------------
George M. Scherer Director
Dated: March 12, 2001 By: /s/ Philip E. Berney --------------------
Philip E. Berney Director
Dated: March 12, 2001 By: /s/ Thomas R. Wall, IV ----------------------
Thomas R. Wall, IV Director
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report to be signed on its behalf by the undersigned thereunto duly authorized.
KEY COMPONENTS FINANCE CORP.
Dated: March 12, 2001 By: /s/ Clay B. Lifflander ----------------------
Clay B. Lifflander Chief Executive Officer
Dated: March 12, 2001 By: /s/ Robert B. Kay -----------------
Robert B. Kay President
Dated: March 12, 2001 By: /s/ Keith A. McGowan --------------------
Keith A. McGowan Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: March 12, 2001 By: /s/ John S. Dyson -----------------
John S. Dyson Director
Dated: March 12, 2001 By: /s/ Clay B. Lifflander ----------------------
Clay B. Lifflander Director
Dated: March 12, 2001 By: /s/ Alan L. Rivera ------------------
Alan L. Rivera Director
Dated: March 12, 2001 By: /s/ Robert B. Kay -----------------
Robert B. Kay Director
Dated: March 12, 2001 By: /s/ George M. Scherer ---------------------
George M. Scherer Director
Dated: March 12, 2001 By: /s/ Philip E. Berney --------------------
Philip E. Berney Director
Dated: March 12, 2001 By: /s/ Thomas R. Wall, IV ----------------------
Thomas R. Wall, IV Director
Report of Independent Accountants
To the Board of Directors and Member of Key Components, LLC:
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 35 present fairly, in all material respects, the financial position of Key Components, LLC and its subsidiaries at December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 35 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, CT March 2, 2001
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
1. Organization and Basis of Presentation and Nature of Significant Accounting Operations Policies
The consolidated financial statements as of and for the three years ended December 31, 2000 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, 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, whose product offerings include power conversion products, specialty electrical components and high-voltage utility switches which are manufactured by its subsidiaries Acme Electric Corporation ("Acme"), Marine Industries, LLC ("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner Electric, LLC ("Turner").
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
KCLLC was formed on April 1, 1998 to facilitate an offering of senior notes. Upon its formation, KCLLC became the parent holding company of the wholly-owned subsidiaries of Key Components, Inc. ("KCI"), a New York corporation. The consolidated financial statements are prepared as though KCLLC was formed on January 1, 1998. At December 31, 2000, KCI owns all of the membership interests in KCLLC. KCI holds no other assets other than its investments in KCLLC. KCI has no operations.
From August 31, 1999 to December 31, 2000, Keyhold, Inc. ("Keyhold"), a Delaware corporation (Note 9(b)) held a minority membership in KCLLC. In connection with the Recapitalization (Note 9(a)) Keyhold was acquired by KCI in May 2000. On December 31, 2000, Keyhold was merged into KCI. From its date of acquisition by KCI to December 31, 2000, all transactions of or obligations related to Keyhold are reflected in the consolidated financial statements of KCLLC. KCLLC's assets are limited to the Company's corporate office and its investments in its subsidiaries. KCLLC's financial statements include the related expenses of operating the Company's corporate office.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market, on a first-in, first-out basis.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over useful lives of the assets as follows:
Income Taxes
Effective May 31, 1997, each of the subsidiaries of KCI, as of that date, elected to be treated as a subchapter S corporation, which caused the stockholders of their then parent company, KCI, to be personally liable for the taxes due on the income of the Company. Through August 31, 1999, Valley Forge Corporation ("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 limited liability company ("LLC") status. These conversions were accomplished by merging each of the existing subsidiaries into a newly organized Delaware LLC. Upon conversion to LLC status of the subsidiaries, the two members of KCLLC at that time, KCI and Keyhold, became responsible for the taxes due on the income of the Company, apart from the subsidiaries that remained C corporations. KCLLC distributes to its members the estimated amount of taxes owed on income of the Company. Upon the consummation of the Recapitalization (Note 9(a)), KCI automatically converted to a C corporation for tax purposes. At the same time, KCI acquired Keyhold, which was a C corporation for tax purposes. Beginning May 23, 2000, the Company reflects in its tax provision as if it were a C corporation, the status of its member. Keyhold was merged into KCI effective December 31, 2000.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
From January 1, 1998 through the date of acquisition of VFC, no provision for income taxes was recognized in the financial statements except for certain franchise and income taxes which certain states impose on S corporations. For the year ended December 31, 1999, the Company's provision for income taxes relates primarily to VFC's consolidated taxable income (as a C corporation) and the taxable income of one subsidiary not converted to LLC status. For the year ended December 31, 2000, the Company's provision primarily relates to the C corporation taxes that the Company is responsible for on the taxable income of the Company from May 23, 2000 to December 31, 2000. Deferred income taxes have been recorded to reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end. Valuation allowances are recorded when necessary to reduce deferred tax assets to the amounts expected to be realized.
Intangibles
Intangibles at December 31, 2000 primarily consist of costs associated with a licensing agreement and covenants not to compete arising from business acquisitions. These assets are being amortized on a straight-line basis over the lives of the related agreements which range from five to seven years. Amortization of intangibles charged to continuing operations amounted to approximately $506,000, $681,000 and $809,000 for 2000, 1999 and 1998, respectively. Accumulated amortization at December 31, 2000 and 1999 was approximately $3,134,000 and $2,490,000, respectively.
Long-lived Assets
Whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company evaluates the basis of its long-lived assets based on expectations of undiscounted cash flows related to those assets. Based on its most recent analysis, the Company believes that no impairment of its long-lived assets exists at December 31, 2000.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Goodwill
Goodwill represents the excess of the cost of acquired businesses over the fair market value of their net tangible assets. Goodwill is being amortized on the straight-line method over thirty-five to forty years. Amortization charged to continuing operations amounted to approximately $2,626,000, $2,464,000 and $1,140,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Accumulated amortization at December 31, 2000 and 1999 was approximately $6,726,000 and $4,102,000, respectively.
Deferred Financing Costs
Debt issuance costs have been deferred and are being amortized on a straight-line basis over the lives of the financings. Amortization charged to continuing operations amounted to approximately $926,000, $875,000 and $290,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Accumulated amortization at December 31, 2000 and 1999 was approximately $1,238,000 and $1,172,000, respectively.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers, when title passes and all risk and rewards of ownership have been transferred.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company's customer base includes customers in a multitude of industries. Some of its larger customers are focused in the marine, turbocharger, aerospace, lawn and garden and office furniture industries. Due to the distribution of its customer base amongst a large array of end user markets, management does not believe that a significant concentration of credit risk exists at December 31, 2000.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash, accounts receivable, accounts payable and accrued expenses, management believes that the carrying amounts approximate fair value due to their short maturities. The estimated fair value of the Company's long-term debt is based on the current rates offered to the Company for debt of similar maturities and approximates carrying value at December 31, 2000.
New Accounting Pronouncements
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 ("APB") No. 25, "Accounting for Stock Issued to Employees." 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 did not have a material impact on the Company's consolidated financial statements. This interpretation became effective July 1, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 is not a rule or interpretation of the SEC, however, it represents interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws. The interpretations outlined in SAB 101 did not have a material impact on the Company's revenue recognition policies.
Reclassifications
Certain reclassifications were made to conform the prior periods to the current year presentation.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
2. Acquisitions and During the three years ended December 31, Dispositions 2000, the Company acquired the entities described below, which were accounted for by the purchase method of accounting, and the results of operations have been included in the consolidated financial statements since the date of acquisition.
(a) Acme Electric Corporation
On November 21, 2000, the Company acquired all of the outstanding shares of Acme for a purchase price of approximately $47,300,000 and assumed liabilities of approximately $28,019,000. In conjunction with the acquisition, the Company repaid approximately $10,400,000 of Acme's outstanding long-term debt out of the approximately $28,019,000 of liabilities assumed as part of the acquisition. The Company recorded the excess purchase price over net assets acquired of approximately $28,910,000 as goodwill. The Company ascribed a thirty-five year useful life to goodwill.
At the time of the acquisition, the Company decided to sell the Acme Aerospace ("Aerospace") and the Acme Electronics ("Electronics") divisions. In accordance with Emerging Issues Task Force ("EITF") Bulletin 87-11, "Allocation of Purchase Price to Assets to be Sold," the Company recorded the anticipated net proceeds from the sale of these subsidiaries adjusted for the anticipated net cash inflows 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 are excluded from the operations of the Company, in accordance with EITF 87-11. Such results and estimated sale proceeds plus the estimated net cash inflows during the holding periods have been included in goodwill. Any difference between the estimated and actual cash flows will also be included in goodwill. The Company is currently in the sales process for both Aerospace and Electronics. Aerospace manufactures lightweight high power battery chargers and related power systems for aerospace applications. Electronics is a contract electronics manufacturer for data storage, telecommunications and medical electronic applications.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
In recording the purchase of Acme, the Company has recorded assets held for sale of approximately $9,800,000, which has been derived from the projected cash flows of the divisions held for sale during their holding period based on management's experience. The Company estimates that Aerospace and Electronics will be sold between June and October 2001.
As part of the Company's plan of integrating the Acme acquisition, the Company accrued approximately $2,050,000 of severance costs and $290,000 of lease exit costs related to exiting Acme's corporate office. At December 31, 2000, no expenditures had been made related to these accruals. The Company estimates that Acme's corporate office will be closed in July 2001. The amount of assets held for sale and the accrued costs represent significant estimates and are subject to change based on actual results.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
(b) Valley Forge Corporation
On January 19, 1999, the Company acquired all of the outstanding shares of VFC for a purchase price of approximately $84,000,000 (including the issuance of stock appreciation rights of approximately $1,400,000) and assumed liabilities of approximately $21,700,000. In conjunction with the acquisition, the Company repaid approximately $8,900,000 of VFC's outstanding long-term debt out of the approximately $21,700,000 of liabilities assumed as part of the acquisition. VFC manufactures electrical and mechanical engineered components sold to original equipment manufacturers ("OEM"), dealers, and distributors. The Company recorded the excess purchase price over net assets acquired of approximately $52,500,000 as goodwill. The Company ascribed a thirty-five year useful life to 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 EITF 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 $1,700,000 in cash. Multiplex was sold on May 28, 1999 for proceeds before taxes of approximately $4,300,000. The tax liability for the sales of Force 10 and Multiplex was approximately $144,000.
On November 30, 1999, the Company sold the stock of Glendinning Marine Products, Inc. ("Glendinning"), a former subsidiary of VFC, for approximately $3,000,000. The Company received approximately $2,100,000 in cash and the new owners assumed the outstanding mortgage of the Glendinning facility.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
In November 1999, management of the Company decided to withdraw from the business of the manufacture and sale of 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. At December 31, 1999, the Company had made no accrual of costs of disposal related to the sale of their interests since it had been management's estimate that the Company would record gains from the sales at that time.
In April 2000, the Company consummated the sale of Heart and Cruising. The Company received approximately $9,000,000 in proceeds before any transaction related expenses. Of the $9,000,000 of proceeds, $600,000 was placed in escrow in accordance with the agreement. At December 31, 2000, the Company had approximately $622,000 of restricted cash related to the escrow included in other assets. The Company recorded a loss on disposal of Heart and Cruising of approximately $3,317,000. To the extent that cash is released from escrow, such funds will be recorded as a gain at that time. The escrow terminates in April 2002. To date the Company has received no claims against the escrowed funds.
On December 29, 2000, the Company sold its interests in Mastervolt to the minority shareholders of Mastervolt. The Company received approximately $2,321,000 before related expenses and recorded a loss on disposal of approximately $525,000.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
The following table summarizes the net assets of the power inverter business as of December 31, 1999:
December 31, 1999 ------------------------------------------------------------- (in thousands)
Accounts receivable $ 4,005 Inventory 4,014 Other current assets and prepaid expenses 165 Plant and equipment, net 985 Goodwill, net 4,768 Other intangibles, net 148 Other assets 4 Deferred tax assets 666 Bank overdraft (218) Accounts payable (1,358) Accrued wages and related (476) Accrued expenses (994) ------------------------------------------------------------- Net assets of Heart and Cruising 11,709 Investment in and notes receivable from Mastervolt 2,901 ------------------------------------------------------------- Total $14,610 =============================================================
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
The summary of the operations of the power inverter business for the years ended December 31, 2000 and 1999 are as follows:
December 31, 2000 1999 -------------------------------------------------------------- (in thousands)
Net sales $ 6,573 $ 23,956 -------- --------
Net loss from operations of the inverter business (net of income taxes (benefit) of ($111) and $149, respectively) $ (146) $ (28) Loss on disposal of the inverter business (net of income taxes of $0) (3,842) -- -------------------------------------------------------------- Net loss of discontinued operations (net of income taxes (benefit) of ($111) and $149, respectively) $ (3,988) $ (28) ==============================================================
On December 1, 1999, KCI, KCLLC and the minority shareholders of Atlantic Guest, Inc. ("Guest"), a subsidiary acquired as part of the VFC acquisition, consummated the sale of the 7% minority interest of Guest to the Company for a combination of cash and KCI stock. KCI received as consideration for the stock issued to the shareholders an equal interest in KCLLC.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
(c) G & H Technology
On February 5, 1999, the Company acquired the flexible shaft product line of G&H Technology, Inc. ("G&H") for approximately $4,000,000 in cash. The acquired product lines are compatible with the Company's mechanical engineered components business and the assets and product lines of G&H were integrated into the Company's flexible shaft manufacturing facility in Binghamton, New York. The Company recorded goodwill of approximately $3,000,000 in connection with the acquisition.
On an unaudited pro forma basis, assuming that the Acme acquisition, the Recapitalization transaction (Note 9(a)) and the termination of KCI's S election (Note 1) for tax purposes, and for the 1999 presentation that the VFC acquisition (Note 2(b)), the sale of Glendinning and decision to dispose of the inverter business had occurred on January 1, 1999, the consolidated results of operations of the Company would have been as follows for the year ended December 31, 2000:
Year ended December 31, 2000 1999 --------------------------------------------------- (Unaudited)
Pro forma net sales $210,975 $195,415 Pro forma income from continuing operations $ 12,509 $ 4,992 Pro forma net income $ 7,294 $ 5,003 ===================================================
The unaudited pro forma financial information presented above is not necessarily indicative of the results that would have actually occurred had the companies been combined for the period presented.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
3. Inventories Inventories consist of the following:
December 31, 2000 1999 ------------------------------------------ (in thousands)
Raw materials $17,070 $10,774 Work-in-process 7,857 6,401 Finished goods 10,410 5,197 ------------------------------------------ Total inventory $35,337 $22,372 ==========================================
4. Property, Plant and Property, plant and equipment consists of Equipment the following:
Depreciation expense amounted to approximately $3,776,000, $3,607,000 and $1,796,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
5. 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 the manufacture of flexible shaft products. Concurrent with the VFC acquisition in January 1999, the Company reorganized its operating segments into the mechanical engineered components business and the electrical components business. The VFC acquisition resulted in the Company expanding its mechanical engineered components 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 Company expanded its electrical components business with the acquisition of Acme in November 2000. The electrical components business product offerings include power conversion products, specialty electrical components and high-voltage utility switches.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
The Company evaluates performance and allocates resources based on profit or loss from operations before interest, taxes, depreciation and amortization ("EBITDA"). In its calculation of EBITDA certain charges that management determines as non-recurring are excluded. Segment information is as follows:
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Reconciliation of Selected Segment Information to the Company's Consolidated Totals
No one customer accounted for more the ten percent of the sales of the Company or of the mechanical engineered components or electrical components business for the three years ended December 31, 2000. For the year ended December 31, 2000, four customers who are subsidiaries of one Company accounted for approximately 12% of the mechanical engineered components business.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
6. Long-Term Debt Long-term debt consists of the following:
(a) Senior Notes
On May 28, 1998, the Company issued $80,000,000 of 10.50% Senior Notes due June 1, 2008, with interest payable semi-annually. The net proceeds from the sale were used to repay debt, repurchase outstanding warrants and for general corporate purposes. In connection with this repayment, the Company recorded an extraordinary loss of $4,616,000 in 1998. The extraordinary loss represents the payment of redemption premiums and the write-off of deferred finance costs. At December 31, 2000 and 1999, the Company has accrued interest on these notes in the amount of $700,000.
The notes are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by the subsidiaries of the Company (the "Subsidiary Guarantors"). At December 31, 2000, KCLLC has de minimus assets other than its investments in the Subsidiary Guarantors and cash and no operations other than those of the Company's corporate office. Accordingly, the consolidated financial statements present the combined assets and operations of the Subsidiary Guarantors.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
(b) Term Loan and Revolving Credit Facility
On September 29, 2000 and in connection with the acquisition of Acme, the Company entered into a new credit facility, which replaced the Company's existing credit facility. The new credit facility provides for a six-year $40,000,000 revolving credit facility and a six-year $100,000,000 term loan facility. The new credit agreement is guaranteed by KCI and the Company's subsidiaries, and is collateralized by all of the capital stock of the subsidiaries, receivables, inventories, equipment and certain intangible property. The Company closed on the new credit agreement in November 2000. The term loan is payable in quarterly installments through September 2006 and the Company may prepay the quarterly installments. Both the term loan and revolving credit facility bear interest at fluctuating interest rates determined by reference to a base rate or LIBOR plus an applicable margin which will vary from 1.00% to 2.75%. Base rate and LIBOR were 9.50% and 6.69%, respectively, at December 31, 2000. The revolving credit facility also calls for a commitment fee of 0.50% on the unused portion of the facility as well as quarterly facility commitment fees. The facility also allows for up to $5,000,000 of outstanding letters of credit. At December 31, 2000 the Company had one outstanding letter of credit for approximately $443,000. In addition, the new credit agreement contains certain covenants and restrictions which require the maintenance of financial ratios, and restrict or limit dividends and other shareholder distributions, transactions with affiliates, capital expenditures, rental obligations and the incurrence of indebtedness. At December 31, 2000, the Company was in compliance with these covenants and restrictions. As of December 31, 2000, the Company had $3,700,000 outstanding under the revolving credit facility and had $98,125,000 outstanding under the term loan. Accrued interest payable at December 31, 2000 was approximately $204,000.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
As of December 31, 1999, the Company had no borrowings outstanding under the prior revolving credit facility and had $55,000,000 outstanding under the prior term loan. Accrued interest and commitment fees payable at December 31, 1999 was $959,000.
(c) Mortgage
The Company has a mortgage collateralized by one of the Company's manufacturing facilities. The mortgage requires monthly payments of approximately $5,000 of principal and interest at approximately 7.7% per annum with the balance of the principal of approximately $657,000 due May 1, 2008.
At December 31, 2000, aggregate principal payments required on all amounts due after one year are as follows:
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
7. Federal and State Income tax expense (benefit) consists of Income Taxes the following:
A reconciliation between income taxes computed at the statutory federal rate and income tax expense is as follows:
Due to the change in tax status as described in Note 1, the 2000 deferred tax provision includes a charge of $181,000 to record the net deferred tax liabilities.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
The Company's net deferred assets and liabilities were as follows:
At December 31, 2000, the Company also had a $1,972,000 deferred tax asset with a 100% valuation allowance relating primarily to capital losses generated from the sales of the inverter business. The Company recorded a 100% allowance since the Company does not believe that it can derive a benefit from this asset at this time.
Included in prepaid taxes are approximately $1.2 million of tax distributions made to KCI that KCLLC anticipates being returned upon the filing of the 2000 tax returns of KCI's shareholders.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
8. Lease Commitments The Company rents several manufacturing and warehouse facilities under operating lease agreements, two of which are with related parties (Note 11). Rent expense under all lease agreements amounted to $1,321,000, $1,077,000 and $499,000 in 2000, 1999, and 1998, respectively.
The Company also leases certain machinery and equipment with a bargain purchase option. These leases are classified as capital leases and expire at various dates through 2005.
At December 31, 2000 and 1999, approximately $585,000 and $658,000, respectively, was recorded as accrued lease costs related to leased facilities no longer in use by one of the Company's subsidiaries (Note 11). The accrual represents the discounted future rental payments, net of estimated sublease income. At December 31, 2000 and 1999, approximately $32,000 and $72,000, respectively, were included in current maturities of long-term debt and accrued lease costs.
The following is a schedule of the future minimum lease payments (net of sublease income) required under operating leases which run through 2010.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
9. Member's Equity (a) 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 option holders 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, 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 from KCI;
o Kelso purchased an aggregate of approximately 35,000 shares of Preferred Stock from KCI at approximately $117 per share.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
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. As part of Advisory Agreement, KCI is required to pay a $325,000 annual management fee to Kelso. Kelso agreed that amounts paid by Millbrook to Kelso out of management fees received by Millbrook from KCI or KCLLC would offset KCI's obligation to Kelso under the Advisory Agreement between Kelso and KCI.
Effective upon the consummation of the Recapitalization, KCI has 1,100,000 and 10,000,000, respectively, of authorized shares of Preferred and Common Stock. Kelso became the owner of all of the outstanding shares of 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, the Preferred Stock would constitute approximately 62.0% of the total outstanding Common Stock 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 for cash 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 the parties who purchased Common Stock with the after-tax proceeds from the exercise of their SARs, which are primarily top management and employees of the Company. The aggregate purchase price of the Preferred Stock paid by Kelso was approximately $105,000,000 of which approximately $4,100,000 was paid to KCI. The Company paid approximately $7,900,000 of expenses in connection with the transaction.
As a result of the Recapitalization, KCI, through its direct majority interest in KCLLC, held directly and indirectly all of the membership interests in KCLLC. As a result of the merger of Keyhold into KCI (See Note 1), KCI now 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.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
(b) Keyhold Membership Interest
On August 12, 1999, KCLLC entered into agreements (the "SG Agreements") with Keyhold and SG, to sell up to $20,000,000 of membership equity interests in KCLLC. On September 1, 1999, SG (through Keyhold) made a capital contribution to KCLLC of $10,000,000, before expenses of approximately $997,000. Keyhold received approximately an 11% membership equity interest in KCLLC. In connection with the Recapitalization (note 9 (a)), SG was paid approximately $16,187,000 for their interest in Keyhold and Keyhold became a wholly owned subsidiary of KCI. On December 31, 2000, Keyhold was merged into KCI. Keyhold's investment had been classified as redeemable member's equity and has been adjusted to estimated fair value, through the date of sale of Keyhold to KCI. The accretion in value had been recorded as a reduction in member's equity.
(c) Stock Incentive Plans of KCI
In 1998, KCI adopted a Long-Term Incentive Plan (the "1998 Plan") to attract, retain and provide additional incentive to employees. In 2000, the Company adopted the Key Components, Inc. Stock Incentive Plan (the "KCI Plan"). Awards under the either plan may take the form of incentive stock options of KCI or non-qualified stock options of KCI. Upon the adoption of the KCI Plan, no further grants will be made under the 1998 Plan. During 2000, the Company issued options for 118,985 shares of common stock. Options for approximately 39,000 shares vest over the next three years. The options for the approximately 80,000 remaining shares vest only after a change in control of the Company and if KCI's preferred shareholders obtain a targeted return on their investment. The vesting event would allow the holder to be compensated for the net accretive value of the underlying shares. The Company would take a charge to earnings for the accretion in value upon the date that the Company is reasonably assured that such criteria would be satisfied. The holders of vested options under the KCI Plan can, under certain circumstances, require KCI to repurchase those options at fair market value, as defined in the Shareholders Agreement.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Information regarding outstanding stock options is as follows:
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
A summary of stock options at December 31, 2000 is as follows:
The Company applies APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, as the exercise price of options was at or above the market value estimated by management at date of grant, no compensation cost has been recognized.
Pro forma information regarding net income is required by SFAS No. 123, "Accounting for Stock-Based Compensation", and has been determined as if the Company had accounted for its employee stock options under the minimum value method with the following assumptions:
Had compensation cost for the stock options been determined based on the fair values at the grant dates, the Company's net income would have been reduced to the pro forma amounts indicated below:
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
(d) Accrued Compensation Rights
In connection with the VFC acquisition, KCI issued SARs to certain members of operating subsidiary management. The Company is required to record as compensation expense any change in the value of the SARs based on current market value of KCI stock. For the years ended December 31, 2000 and 1999, the Company included in continuing operations approximately $1,556,000 and $4,211,000, respectively, in compensation expense related to the SARs. The SARs were exercised in connection with the Recapitalization (Note 9(a)).
(e) KCI Obligations
As KCI has no operations, it is dependent on KCLLC for financial resources in the form of capital distributions to meet its obligations. KCI obligations include the $105 million of its preferred stock (Note 9(a)), which are redeemable for cash at the option of the holder after June 2, 2009 and the requirement to purchase shares from its common shareholders under certain circumstances. Such repurchases are to be made at fair market value as defined in KCI's shareholder agreement. At December 31, 2000 approximately 392,000 KCI common shares plus potentially 31,000 shares covered by stock options were subject to repurchase by KCI. The ability of KCLLC to make such capital distributions will be limited by its available resources and is limited by restrictions of debt and other agreements.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
10. Retirement Plans The Company sponsors a profit sharing plan for all non-union employees at two subsidiaries acquired as part of the VFC acquisition. Under this plan, contributions are discretionary and limited to a percentage of eligible employees' compensation. There was no profit sharing expense for this plan for 2000 and 1999. At December 31, 2000 the Company had decided to terminate the plan. The Plan is fully funded and no liabilities are anticipated to be generated from the termination.
The Company has a non-contributory defined benefit pension plan covering substantially all the employees of Acme (the "Acme Pension Plan"). The formula covering the employees of Acme provides pension benefits based upon the employee's individual yearly compensation. The Acme Pension Plan assets are managed and invested by a financial institution. It is the Company's intent to replace the benefits of the Acme Pension Plan with the Company's 401(k) Plan. At December 31, 2000, the Company had included in other long-term liabilities $879,000 related to the anticipated excise tax liability that would be due upon termination of the Acme Pension Plan. The Company also reduced the prepaid pension asset of Acme related to the Company's anticipated use of approximately $1,390,000 of the over funding in the Acme Pension Plan to fund future employer 401(k) contributions related to the employees in the Acme Pension Plan. In addition Gits has a noncontributory defined benefit pension plan (the "Gits Plan") covering its union employees retiring after August 1, 1993. Pension benefits are based on a multiple of a fixed amount per month and years of service, as defined in the union agreement. Benefits of the Gits Plan generally vest over a seven-year period. The assets of the Gits Plan are managed and invested by an insurance company.
It is the Company's funding policy for the Gits Plan and the Acme Pension Plan to fund at least an amount necessary to satisfy the minimum requirements of the Employee Retirement Income Security Act of 1974. The amount to be funded is subject to annual review by management and its consulting actuary. In recent years, funding contributions have been restricted due to application of Internal Revenue Code full-funding limitations.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
At December 31, 2000, approximately 1.6% of the plans' assets are invested in cash and equivalents, 69.4% are invested in equities and 29.0% is invested in fixed income securities and annuities.
The Company also has a non-qualified Supplemental Executive Retirement Plan ("SERP") and a non-qualified post-retirement benefits plan for certain officers and former officers of Acme. The SERP provides benefits based upon an executive's compensation in the last year of service and is reduced by benefits received from the salaried plan. The nonqualified benefits plan provides post retirement health care. Six participants of this plan are retired and receiving payments under the plan. At December 31, 2000, the Company had included in other long-term liabilities approximately $2,883,000 related to these plans.
At December 31, 2000, the Company had five 401(k) plans in effect. One covered all employees at domestic locations of all the subsidiaries acquired as part of the VFC acquisition ("VFC Plan"). Employee contributions under the VFC Plan of up to 3% of each covered employee's compensation are matched 100% by the Company. The employees of BWE, Hudson, ESP and Acme are covered by 401(k) plans for each subsidiary. Employer contributions to these plans are discretionary. Employer contributions in the aggregate were approximately $404,000, $496,000 and $90,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Effective January 1, 2001, the Company merged the VFC plan and the plans covering the employees of BWE, Hudson and ESP into one newly formed KCLLC 401(k) plan (the "KCLLC Plan"). The KCLLC plan covers all the employees of the Company, other than those of Acme and those covered by the Gits defined benefit plan. The KCLLC Plan provides for a match of 4% of employee's compensation up to 2% maximum employer match. The Company has the ability to make additional discretionary contributions. The benefits of the KCLLC Plan vest over five years. It is the Company's intent to merge the Acme 401(k) plan into the KCLLC Plan.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Summarized information of the Plans, which are reflected from the dates of acquisition (January 1999 for the Gits Plan and November 2000 for the Acme plans) to December 31, 2000 are shown below (in thousands):
Change in Benefit Obligation:
Pension Benefits Other Year ended December 31, 2000 1999 2000 - -------------------------------------------------------------------------------- (In thousands) Benefit obligation at beginning of year $ 1,033 $ -- $ -- Benefit obligations acquired 16,692 1,366 2,875 Service cost 95 43 9 Interest cost 148 60 17 Actuarial gain (35) (382) -- Benefits paid (128) (54) (18) Other 62 -- - -------------------------------------------------------------------------------- Benefit obligation at end of year $ 17,867 $ 1,033 $ 2,883 ================================================================================
Change in Plan Assets:
Pension Benefits Other - -------------------------------------------------------------------------------- Year ended December 31, 2000 1999 2000 - -------------------------------------------------------------------------------- (In thousands) Fair value of plan assets at beginning of year $ 1,343 $ -- $ -- Plan assets acquired 22,253 1,366 -- Actual return on plan assets 119 31 -- Contributions -- -- 18 Benefits paid (128) (54) (18) Other (4) -- -- - -------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 23,583 $ 1,343 $ -- ================================================================================
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
Reconciliation of Funded Status
Pension Benefits Other
Year ended December 31, 2000 1999 2000 - -------------------------------------------------------------------------------- (In thousands) Over (under) funded status $ 5,716 $ 310 $(2,883) Unrecognized net actuarial gain (136) (310) -- - -------------------------------------------------------------------------------- Prepaid benefit 5,580 -- -- Recorded liability for future 401(k) contribution (1,390) -- -- - -------------------------------------------------------------------------------- Net Prepaid (accrued) asset/(obligation) $ 4,190 $ -- $(2,883) ================================================================================
Components of Net Periodic (Benefit) Cost
Pension Benefits Other
Year ended December 31, 2000 1999 2000 - -------------------------------------------------------------------------------- (In thousands)
Service cost $ 99 $ 43 $ 9 Interest cost 149 60 17 Expected return on plan assets (269) (116) -- Other (7) -- -- - -------------------------------------------------------------------------------- Net period benefit $ (28) $ (13) $ 26 ================================================================================
Assumption and Method Disclosures
Pension Benefits Other
Year ended December 31, 2000 1999 2000 - -------------------------------------------------------------------------------- (In thousands)
Discount rate 6.00 to 6.50% 7.25% 6.75% Expected long-term rate of return on assets 8.50% 8.50% 8.50% Amortization method Straight- Straight- line line N/A ================================================================================
For measurement purposes, a 5% annual trend rate of increase in the cost of covered health care benefits was assumed, with claims costs to increase from
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
5.0% to 6.0% per annum, based on age. The rate is assumed to remain the same over later years. A one percentage point change in assumed health care cost trend rates would have the following effects:
11. Related Party The Company rents one of its manufacturing Transactions facilities under an operating lease agreement entered into with a company that is co-owned by the President of BWE who also is a shareholder of KCI. The terms of the lease, which expires December 31, 2008, provide for annual rent increases of 5%. Rental payments amounted to $151,000, $144,000 and $137,000 in 2000, 1999 and 1998, respectively.
The Company rents its Leominster, Massachusetts manufacturing facility under an operating lease agreement entered into with a company that is co-owned by the former President of ESP who also is a shareholder of KCI. The lease, which expires on May 31, 2003, provides for annual rent increase based on the CPI. Rental payments amounted to $208,000, $203,000 and $208,000 for the three years ended December 31, 2000, 1999 and 1998, respectively.
Key Components, LLC and subsidiaries
Notes to Consolidated Financial Statements ================================================================================
The Company pays management fees to Millbrook Capital Management, Inc. ("Millbrook"), a party related to a Company shareholder. These management fees amounted to $900,000, $800,000 and $800,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As part of the Recapitalization, Millbrook agreed with Kelso to a reduced management fee, commencing in 2002, of $175,000 plus amounts paid to Kelso (Note 9(a)). Kelso agreed that amounts paid by Millbrook to Kelso out of management fees received by Millbrook from KCI or KCLLC would offset KCI's obligation to Kelso under the Advisory Agreement between Kelso and KCI.
During 2000, the Company paid Millbrook $400,000 and $825,000 related to the sale of the inverter business and the acquisition of Acme, respectively. During 1999, Millbrook received $500,000 and $350,000, respectively, for investment advisory services related to the sale of the Keyhold membership interest and the sale of Multiplex. The Company paid Millbrook $900,000 upon the consummation of the offering of the Company's senior secured notes in May 1998 for financial advisory and other services. Such costs are either recorded as part of the respective transactions or are included in deferred financing costs.
12. Statement of Cash Flows
Key Components, LLC and subsidiaries
Valuation and Qualifying Accounts ================================================================================
-------------- (1) Deductions primarily represent write-offs charged against the allowances listed.
(2) Represents allowance account balances of companies acquired at the date of acquisitions.