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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 333-58675
KEY COMPONENTS, LLC
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(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3425424
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown, New York 10591
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(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: 10 1/2% Senior
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Notes due 2008
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Commission File Number: 333-58675
KEY COMPONENTS FINANCE CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 14-180594
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: 10 1/2% Senior
--------------
Notes due 2008
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Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K. |_|
At March 12, 2001, the membership interests in Key Components, LLC were
owned by Key Components, Inc., a privately-held New York corporation. All of the
shares of common stock of Key Components Finance Corp. were owned by Key
Components, LLC.
Documents Incorporated by Reference: None
PART I
Key Components LLC ("KCLLC"), a Delaware limited liability corporation is a
parent holding company for its wholly owned subsidiaries, including Key
Components Finance Corp. ("Finance Corp."). KCLLC, together with such
subsidiaries, including Finance Corp., are collectively referred to herein as
the "Company." Key Components, Inc. ("KCI"), a New York corporation, is the sole
member of KCLLC. KCI has no other assets other than its interest in KCLLC and
has no operations. Accordingly, any transactions of KCI or obligations related
to KCI are reflected in the consolidated financials statements of the Company
and are reflected in the disclosures in this Form 10-K.
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
1
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
2
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
3
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.
4
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
5
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.
6
Item 2. Properties
At December 31, 2000 the Company's principal properties consisted of:
Manufacturing Use/ Square
Facility Corporate office Location Footage Owned/Leased
- ------------------------------- --------------------------- -------------------------- ------------ ------------------
KCLLC Corporate office Tarrytown, NY 3,000 Leased
Mechanical Engineered
Components:
BWE Flexible shaft products Binghamton, NY 250,000 Owned
Gits Turbocharger components Creston, Iowa 60,400 Owned
Gits Turbocharger components Chonburi, Thailand 17,200 Leased
Hudson Lock products Hudson, MA 218,000 Owned
ESP Lock products Leominster, MA 55,000 Leased
Electrical Engineered
Components:
Acme (1) Transformers Lumberton, NC 128,000 Owned
Acme (1) Transformers Monterrey, Mexico 47,000 Leased
Acme (1) Corporate office East Aurora 10,000 Leased
Marinco SPEC Napa, CA 77,000 Leased
Guest SPEC Meriden, CT 33,000 Owned
Turner Utility switchgear Fairview Heights, IL 52,000 Owned
Turner Utility switchgear Milstadt, IL 28,000 Leased
- ------------------------------- --------------------------- -------------------------- ------------ ------------------
(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. Legal Proceedings
There are no pending material legal proceedings to which the Company or its
properties is subject.
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. Market for Registrant's Common Equity and Related Stockholder
Matters
KCLLC's membership interests are not publicly traded (see Certain Relationships
and Related Transactions).
7
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.
Year ended December 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands)
Revenue $159,417 $144,125 $61,862 $27,318 $13,449
Income from operations 30,459 21,471 11,953 5,115 447
Income from continuing operations 3,899 4,843 4,619 1,250 490
Net (loss) income (a) (b) (c) (1,316) 4,815 3 1,250 490
Total assets 246,550 181,256 93,144 79,757 11,454
Long term debt (including current
maturities) (d) (e) 182,711 149,149 81,278 66,856 3,428
(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.
8
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)
9
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:
Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- -------------------------- ----------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
------------- ------------- ------------- -------------- ------------- -------------
Net Sales $159,417 100.0% $144,125 100.0% $61,862 100.0%
Cost of Goods Sold 94,013 59.0 85,079 59.0 39,130 63.3
------------- ------------- ------------- -------------- ------------- -------------
Gross Profit 65,404 41.0 59,046 41.0 22,732 36.7
Selling, general and
administrative expenses 32,611 20.5 33,065 22.9 10,779 17.4
Stock appreciation rights
compensation and other
nonrecurring expenses 2,334 1.5 4,510 3.2 -- --
------------- ------------- ------------- -------------- ------------- -------------
Income from operations 30,459 19.1 21,471 14.9 11,953 19.3
Other income 692 0.4 465 0.3 404 0.7
Reorganization expenses (7,937) (4.9) -- -- -- --
Interest expense (14,143) (8.9) (14,542) (10.1) (7,641) (12.4)
------------- ------------- ------------- -------------- ------------- -------------
Income before provision for
taxes 9,071 5.7 7,394 5.1 4,716 7.6
Provision for income taxes 5,172 3.3 2,551 1.7 97 0.1
------------- ------------- ------------- -------------- ------------- -------------
Income from continuing
operations 3,899 2.4 4,843 3.4 4,619 7.5
Loss from discontinued
operations (3,988) (2.5) (28) (0.0) -- --
Extraordinary loss on early
extinguishment of debt (1,227) (0.7) -- -- (4,616) (7.5)
------------- ------------- ------------- -------------- ------------- -------------
Net (loss) income $(1,316) (0.8)% $4,815 3.3% $ 3 0.0%
============= ============= ============= ============== ============= =============
10
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
11
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
12
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.
13
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
14
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
15
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
16
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;
17
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
18
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
19
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.
20
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.
21
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. 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. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
22
PART III
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.
Name Age Position
- ---- --- --------
John S. Dyson 58 Chairman of the Board of Directors of KCI and KCLLC
Clay B. Lifflander 38 Director of KCI and KCLLC. Chief Executive Officer of KCLLC.
Robert B. Kay 38 Director of KCI and KCLLC. President of KCLLC.
Alan L. Rivera 38 Director of KCI and KCLLC, Vice President and Secretary of KCI and KCLLC
George M. Scherer 47 Director of KCI and KCLLC, Vice President of KCI and President of BWE
Philip E. Berney 37 Director of KCI and KCLLC
Tom R. Wall, IV 41 Director of KCI and KCLLC
Keith A. McGowan 38 Chief Financial Officer and Vice President of KCLLC
J. Marty O'Donohue 50 President of Marinco
Daryl A. Lilly 40 President of Gits
Michael L. Colecchi 51 President of Hudson
A. Jack Hoppenjans 64 President of Turner
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
23
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
24
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.
25
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.
Annual Compensation Long Term
Compensation
Awards
---------------------------------------------- --------------------
Other Annual
Name and Principal Position Year Salary ($) Bonus Compensation Securities
($) Underlying Options
- ---------------------------- ---------- ------------- -------------- ----------------- --------------------
Clay B. Lifflander (1), 2000 -- -- -- 30,000(4)
Chief Executive 1999 -- -- -- --
Officer 1998 -- -- -- --
$ --
Robert B. Kay (3), 2000 $266,178 $ -- (2) $100,000 30,000(4)
President 1999 $250,000 $125,000 30,000(4)
Alan L. Rivera (1), 2000 -- -- -- 7,500(4)
Secretary 1999 -- -- -- --
1998 -- -- -- --
Keith A. McGowan,
Chief Financial Officer 2000 $143,584 -- (2) $60,000 5,250(4)
1999 $90,000 $40,000 -- 5,000(4)
George M. Scherer (3),
President of BWE
2000 $ 225,000 -- (2) 4,000(4)
1999 $ 225,000 $23,000 -- --
1998 $ 302,994 $43,028 -- --
(1) The salaries of Clay B. Lifflander and Alan L. Rivera are paid by
Millbrook Capital Management, Inc. ("Millbrook") pursuant to the terms
of a Management Agreement. See "Certain Relationships and Related
Transactions--Management Agreement."
(2) The 2000 bonuses for Robert B. Kay, George Scherer and Keith McGowan
have yet to be determined. The bonuses of these individuals are at the
discretion of the Board of Directors of KCLLC.
(3) The Company is a party to employment agreements with certain of its key
employees.
(4) Long terms awards related to options granted to purchase KCI common
stock.
26
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table summarizes the options that were granted to named executive
officers of the Company in the fiscal year ended December 31, 2000.
- ------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at Assumed
Individual Grants Annual Rates for Option Term (1)
- ------------------------------------------------------------------------ -------------------------------------
Percent of
Total
Number of Options/
Securities SARS Granted
Underlying to Employees
Options/SARS in Fiscal Exercise Expiration
Name Granted (#) Year Price ($/sh) Date 5% 10%
- -------------- -------------- -------------- ------------- ------------ ---------------- -------------------
Clay B.
Lifflander 30,000 24.2% $117.35 9/20/10 $2,286,000 $5,839,000
Robert B. Kay 30,000 24.2% $117.35 9/20/10 $2,286,000 $5,839,000
George M.
Scherer 4,000 4.0% $117.35 9/20/10 $305,000 $779,000
Alan L.
Rivera 7,500 6.0% $117.35 9/20/10 $571,000 $1,460,000
Keith A.
McGowan 250 0.2% $95.00 1/02/10 $17,000 $44,000
Keith A.
McGowan 5,000 4.0% $117.35 9/20/10 $381,000 $973,000
(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.
27
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.
Number of Securities underlying Unexercised Value of Unexercised In-the-Money Options
Options at Year End (1) at Year End (1)
-----------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Clay B. Lifflander 0 30,000 $ 0 $ 0
Robert B. Kay 15,714 34,286 $1,294,048 $352,952
George M. Scherer 0 4,000 $ 0 $ 0
Alan L. Rivera 0 7,500 $ 0 $ 0
Keith A. McGowan 1,215 6,835 $ 61,443 $107,725
(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,
28
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
29
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. 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.
Beneficial Owner Address Common Stock Beneficially Owned
Shares (1) % (2)
John S. Dyson Key Components, LLC 223,932(3) 16.7%
200 White Plains Road
Tarrytown, NY 10591
Clay B. Lifflander Key Components, LLC 173,446(3)(4) 12.9%
200 White Plains Road
Tarrytown, NY 10591
Robert B. Kay Key Components, LLC 15,714(5) 1.2%
200 White Plains Road
Tarrytown, NY 10591
Alan L. Rivera Key Components, LLC 14,762 1.1%
200 White Plains Road
Tarrytown, NY 10591
George M. Scherer Key Components, LLC 52,857 3.9%
200 White Plains Road
Tarrytown, NY 10591
30
Beneficial Owner Address Common Stock Beneficially Owned
Shares (1) % (2)
Philip Berney Kelso & Co. 918,065(6) 68.4%
320 Park Avenue
New York, NY 10022
Thomas R. Wall, IV Kelso & Co. 918,065(6) 68.4%
320 Park Avenue
New York, NY 10022
Kelso & Co. Kelso & Co. 918,065(6) 68.4%
320 Park Avenue
New York, NY 10022
Keith A. McGowan Key Components, LLC 1,215(7) 0.1%
200 White Plains Road
Tarrytown, NY 10591
All Officers and Directors (8 Key Components, LLC 1,248,620(8) 93.1%
persons) 200 White Plains Road
Tarrytown, NY 10591
(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. Certain Relationships and Related Transactions
ESP Lease
The Company rents its Leominster, Massachusetts manufacturing facility under an
31
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
32
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
33
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. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Form 10-K
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Page
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(a) Documents filed as part of the Form 10-K
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(1) Financial Statements:
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Report of Independent Accountants 43
Consolidated Balance Sheet at December 31, 2000 and 1999 44
Consolidated Statement of Income for the three years ended December 31, 2000 45
Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2000 46
Consolidated Statement of Cash Flows for the three years ended December 31, 2000 47
Notes to Consolidated Financial Statements 48-82
(2) Financial Statement Schedules:
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Valuation and Qualifying Accounts and Reserves (Schedule II) 83
(b) Reports on Form 8-K
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Reports on Form 8-K were as follows:
(a) April 19, 2000 reporting the sale of Heart and Cruising -
(b) May 23, 2000 reporting the consummation of the Recapitalization -
(c) December 6, 2000 reporting the acquisition of Acme