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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, 2001
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
- ------------------------------- ------------------------------------
(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: None
Commission File Number: 333-58675
KEY COMPONENTS FINANCE CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 14-180594
- ------------------------------- ------------------------------------
(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: None
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 February 22, 2002, 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 the
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 the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company conducts its
operations through its two businesses, its electrical components ("EC") business
and its mechanical engineered components ("MEC") business. The EC business
product offerings 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").
MEC's product offerings consist primarily of flexible shaft and remote valve
control components, turbo-charger components and medium security lock products
and accessories, 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"). No one customer accounted for more
than ten percent of sales of the Company for any of the three years ended
December 31, 2001. For the years ended December 31, 2001 and 2000, four
customers, who are subsidiaries of one company accounted for approximately 13%
and 12%, respectively, of the MEC business.
Acquisition History
The 1992 acquisition of BWE began the acquisition program of the Company to
acquire small to medium size manufacturers of essential niche components for use
in various OEM customer products. In 1993, the Company acquired the flexible
shaft division of Stow Manufacturing Company, Inc., as a consolidation
opportunity for BWE. During 1997 and 1998, the Company added to the MEC's
product offerings with the acquisitions of Hudson and ESP. During 1999, the
Company complemented its MEC product offerings and formed its EC business
through its acquisition of Valley Forge Corporation ("VFC"). The Company
expanded its EC business with the acquisition of Acme for approximately $47.3
million in November 2000 (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 $193.8 million for fiscal year 2001.
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.
1
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. A transformer has no moving parts and is a
completely static solid-state device, which insures a long and maintenance-free
life under normal operating conditions. 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, which are sold through two primary sales
channels, its wholesale distribution network and by direct sales to OEM's. Sales
through the wholesale distribution markets are generally of smaller sized
transformer models. Due to the small size of the average order through the
wholesale distribution network, the margins achieved are generally higher than
those achieved selling to OEM's. In the OEM sales channel, customers are offered
custom built products, which generally achieve lower margins as products are
price-reduced in anticipation of a higher volume of orders. The Company believes
the OEM sales channel will drive the transformer product line's revenue growth.
Transformer designs rarely change and most transformers have a long useful life.
Acme operates in a segment of the transformer market estimated by National
Electrical Manufacturers Association to be approximately $300 million for the
year 2001. This segment is defined as being comprised of dry type transformers
which are less than 600 volts and range from 1/4 to 1,000 KVA. The competition
in this segment is divided into two tiers: the large switch gear manufacturers
who sell 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.
and Federal Pacific. Acme supplies products which comprise approximately 15% of
the total market, which is approximately one half that of General Electric and
Square D's market share but twice that of any other competitor.
In June 2001, the Company determined to retain the aerospace division of Acme as
part of the power conversion product line (see Note 2 to the consolidated
financial statements elsewhere in this Form 10-K). This expanded the power
conversion product line to include battery charger systems and the manufacturing
of fibrous nickel cadmium batteries for use in such battery systems, power
control systems, power supplies and converters used primarily in aerospace
applications. Major customers of this product line include governmental defense
manufacturers and OEM aerospace manufacturers. The aerospace aftermarket is an
increasing share of the product line's revenues as the quantity of batteries and
systems sold by the Company that were designed into OEM applications has grown
over the last five years.
2
Specialty Electrical
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 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 and has a strong market presence. Customers
include OEMs and major after-market distributors. 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.
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 SPEC product line also has products
targeted for industrial applications. The SPEC's market share from sales of
these products has grown dramatically 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.
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. While the Company competes in the distribution and substation segments
of the electric utility marketplace as well, it is in the transmission segment
that 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 large utilities. 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.
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 lighter weight, fewer
component parts, less assembly time, and greater freedom in design, resulting in
a lower manufacturing cost for 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.
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 of wastegate
actuators to nearly every major OEM turbocharger manufacturer, 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
high-end truck and vehicle manufacturers such as Ford. 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.
3
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 furniture
OEMs.
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 significant
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. The
Company also maintains environmental insurance at certain of its locations.
4
Employees
As of December 31, 2001, the Company employed 1,558 persons on a full-time
basis. Of these employees, 769 were employed in the EC business, 652 were
employed in the MEC business, the Company's corporate office had 8 employees and
the division of Acme that was held for sale employed 129 persons as of December
31, 2001. Two of the Company's subsidiaries have collective bargaining
agreements, one of which covered 70 employees and the other which covered 71
employees. Neither the Company nor any of its subsidiaries has ever had a work
stoppage and each of KCLLC and its subsidiaries considers its relationship with
its employees to be satisfactory.
Item 2. Properties
At December 31, 2001 the Company's principal properties consisted of:
Manufacturing Use/ Corporate Square
Facility office Location Footage Owned/Leased
- ------------------------------- ------------------------------- ---------------------- ------------ ------------------
KCLLC Corporate office Tarrytown, NY 3,000 Leased
Electrical Engineered
Components:
Acme (1) Power conversion Lumberton, NC 128,000 Owned
Acme (1) Power conversion Monterrey, Mexico 45,000 Leased
Acme (1) Power conversion Tempe, AZ 35,000 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
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
(1) Does not include facilities for the business of Acme that was sold in
February 2002 (See Note 2 of the consolidated financial statements
elsewhere in this Form 10-K).
Item 3. Legal Proceedings
None.
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, 2001.
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).
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. The
financial data set forth includes the results of operations of its wholly owned
subsidiaries from their respective dates of acquisition. 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.
5
Year ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net Sales $193,817 $160,465 $144,400 $61,862 $27,318
Income from operations 26,486 31,368 22,346 11,953 5,115
Income from continuing operations 4,731 3,899 4,843 4,619 1,250
Net income (loss) (a)(b)(c) 4,731 (1,316) 4,815 3 1,250
Total assets 225,719 245,671 181,256 93,144 79,757
Long term debt (including current
maturities)(d)(e) 165,837 182,711 149,149 81,278 66,856
(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 related 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, net of tax, 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, net of tax, 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.
6
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
KCLLC is the parent holding company of the wholly owned subsidiaries of the
Company. KCI, the sole member of KCLLC, holds no other assets other than its
investment in KCLLC and has no operations. The Company has two operating
business segments, its electrical components ("EC") business and mechanical
engineered components business ("MEC"). Through its two businesses, the Company
is a leading manufacturer of custom-engineered essential componentry for
application in a diverse array of end-use products. The Company targets original
equipment manufacturer ("OEM") markets where the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company's EC
business was formed through its acquisition of VFC in 1999. The Company expanded
the product offerings of its EC business with the power conversion product lines
it acquired through its acquisition of Acme in November 2000. (See Note 2 to the
consolidated financial statements contained elsewhere in this Form 10-K). The
Company's MEC business, which was comprised of its flexible shaft and lock
product lines prior to the VFC acquisition, was expanded with the addition of
the Company's turbocharger line, which it acquired in 1999 when the Company
completed its acquisition of VFC.
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 $193.8 million for fiscal year 2001.
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.
7
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 elsewhere in this Form 10-K). 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,
------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
- --------------------------------------------------------------------------------------------------------------------
Net Sales $193,817 100.0% $160,465 100.0% $144,400 100.0%
Cost of Goods Sold 122,975 63.4 93,847 58.5 85,079 58.9
------------- ------------- ------------- -------------- ------------- -------------
Gross Profit 70,842 36.6 66,618 41.5 59,321 41.1
Selling, general and
administrative expenses 41,208 21.3 30,290 18.9 30,001 20.8
Amortization of goodwill 3,558 1.8 2,626 1.6 2,464 1.7
Cumulative adjustment for
Aerospace (721) (0.4) - - - -
Stock appreciation rights
compensation and other
nonrecurring expenses 311 0.2 2,334 1.5 4,510 3.1
------------- ------------- ------------- -------------- ------------- -------------
Income from operations 26,486 13.7 31,368 19.5 22,346 15.5
Other income 376 0.2 799 0.5 465 0.3
Recapitialization expenses - - (7,937) (4.9) - -
Interest expense (16,573) (8.6) (15,159) (9.4) (15,417) (10.7)
------------- ------------- ------------- -------------- ------------- -------------
Income before provision for 10,289 5.3 9,071 5.7 7,394 5.1
taxes, discontinued
operations and
extraordinary item
Provision for income taxes 5,558 2.9 5,172 3.3 2,551 1.7
------------- ------------- ------------- -------------- ------------- -------------
Income from continuing 4,731 2.4 3,899 2.4 4,843 3.4
operations
Loss from discontinued
operations, net - - (3,988) (2.5) (28) (0.1)
Extraordinary loss on early
extinguishment of debt, net - - (1,227) (0.7) - -
------------- ------------- ------------- -------------- ------------- -------------
Net income (loss) $4,731 2.4% $(1,316) (0.8)% $4,815 3.3%
============= ============= ============= ============== ============= =============
8
A summary of the Company's segments is as follows:
Electrical Components Business Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2001 2000 1999
--------------------------- -------------------------- --------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
----------- --------------- ------------ ------------- -------------- -----------
Net Sales $120,401 100.0% $71,656 100.0% $62,543 100.0%
Cost of Sales 77,653 64.5 40,935 57.1 35,495 56.8
----------- --------------- ------------ ------------- -------------- -----------
Gross Margin 42,748 35.5 30,721 42.9 27,048 43.2
Selling, general and administrative
expenses 26,126 21.7 16,917 23.6 16,593 26.5
Amortization of goodwill 1,824 1.5 895 1.2 777 1.2
Cumulative adjustment for Aerospace (721) (0.6) - - - -
Stock appreciation rights compensation
and other nonrecurring expenses - - - - 3,945 6.3
----------- --------------- ------------ ------------- -------------- -----------
Income from operations $15,519 12.9% $12,909 18.0% $5,733 9.2%
=========== =============== ============ ============= ============== ===========
Mechanical Engineered Components Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- -------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
----------- --------------- ------------ -------------- ------------- -----------
Net Sales $73,416 100.0% $88,809 100.0% $81,857 100.0%
Cost of Sales 45,322 61.7 52,912 59.6 49,584 60.6
----------- --------------- ------------ -------------- ------------- -----------
Gross Margin 28,094 38.3 35,897 40.4 32,273 39.4
Selling, general and administrative
expenses 8,961 12.2 10,074 11.3 10,635 13.0
Amortization of goodwill 1,734 2.4 1,731 1.9 1,620 2.0
Non-recurring expenses 311 0.4 6 - 266 0.3
----------- --------------- ------------ -------------- ------------- -----------
Income from operations $17,088 23.3% $24,086 27.1% $19,752 24.1%
=========== =============== ============ ============== ============= ===========
Year ended December 31, 2001 compared to the year ended December 31, 2000
Net Sales: Net sales for the year ended December 31, 2001 ("Fiscal 2001")
increased by approximately $33.4 million, or 20.8% over net sales for the year
ended December 31, 2000 ("Fiscal 2000"). This increase was the result of the sum
of the $48.7 million, or 68.0%, increase in the net sales of the EC business
less the $15.4 million, or 17.3%, decrease in net sales of the MEC business.
The growth within the EC business was primarily due to the full year inclusion
of the results of operations of the transformer power conversion product line
for Fiscal 2001 as compared to the one-month inclusion of sales for December of
2000 in the results for Fiscal 2000. The transformer power conversion product
line contributed approximately $50.4 million in net sales for Fiscal 2001,
representing an increase of $45.1 million over Fiscal 2000. This product line
was acquired in November 2000 when the Company completed the acquisition of Acme
Electric Corporation ("Acme"). In addition, in June 2001, the Company decided to
retain rather than sell the aerospace product line ("Aerospace") of Acme.
Aerospace was merged into the power conversion product line of the Company. The
Company recorded a $721,000 cumulative adjustment (see Note 2 to the
consolidated financial statements elsewhere in this Form 10-K) representing the
net result of Aerospace's operations from date of acquisition to June 1, 2001.
Subsequent to June 1, 2001 the results of Aerospace's operations have been
included in the respective categories of operations. Included in net sales for
Fiscal 2001 is approximately $8.8 million of net sales from Aerospace for the
period June 1, 2001 to December 31, 2001.
9
Net sales in the MEC business decreased approximately $15.4 million to
approximately $73.4 million for Fiscal 2001. This decrease is primarily related
to the decline in sales of the Company's lock and turbocharger product lines,
which resulted from a downturn in the domestic economy and a reduction in
customer demand.
Gross Profit: Gross profit increased $4.2 million, or 6.3%, in Fiscal 2001 as a
result of an increase of approximately $12.0 million, or 39.1%, in the gross
profit of the EC business less the decline in gross profit of the MEC business
for Fiscal 2001 of approximately $7.8 million, or 21.7%.
The increase in the gross profit of the EC business is primarily related to the
inclusion of the results of operations of the transformer power conversion
product line for the full year in Fiscal 2001, as compared to Fiscal 2000, in
which only the results of operations of this product line for the month of
December 2000 were included due to the acquisition of this product line with
Acme at the end of November 2000. The transformer power conversion product line
contributed approximately $14.3 million in gross profit for Fiscal 2001,
representing an increase of approximately $12.7 million over Fiscal 2000. In
addition, the gross profit of the EC business for Fiscal 2001 increased
approximately $2.9 million as a result of the operations of Aerospace, which was
merged into the power conversion product line in June 2001 (see Note 2 to the
consolidated financial statements elsewhere in this Form 10-K). These increases
were slightly offset by a decline in gross profit of the specialty electrical
components product line, which was primarily driven by a decline in sales due to
the downturn in the domestic economy.
The approximately $7.8 million decline in gross profit of the MEC business for
Fiscal 2001 is primarily due to the decline in sales of the lock and
turbocharger product lines of MEC business for Fiscal 2001 that resulted from a
downturn in the domestic economy and a reduction in customer demand.
The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business declined approximately 7.4% for Fiscal 2001. For the MEC business the
GP percentage declined approximately 2.1% during Fiscal 2001.
The decline in the GP percentage of the EC business was primarily the result of
the inclusion of the results of the transformer power conversion product line
for the full year in Fiscal 2001 as compared to Fiscal 2000, in which only the
results of December 2000 were included. The gross margin profile of the
transformer product line is lower than the margins experienced in the remainder
of the product lines of the EC business. The decrease in GP percentage of the
MEC business is primarily related to a change in product mix and margin
compression due to lower sales levels.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses increased approximately $10.9 million, or
36.0%, in Fiscal 2001. As a percentage of net sales, SG&A increased 2.4% from
Fiscal 2000. SG&A of the EC business increased approximately $9.2 million, or
54.4%, for Fiscal 2001 and, as a percentage of net sales, declined 1.9% during
Fiscal 2001. SG&A of the MEC business, which declined approximately $1.1 million
during Fiscal 2001, increased as a percentage of net sales by approximately
0.9%.
The increase in SG&A expenses for Fiscal 2001 is primarily related to the
acquisition of Acme, which resulted in the Company integrating the transformer
and aerospace product lines of Acme into the EC business. The results of the
transformer power conversion product line were included for the full year in
Fiscal 2001 as compared to Fiscal 2000 where the results of this product line
were only included for the month of December 2000. SG&A of the transformer power
conversion product line for Fiscal 2001 was approximately $9.4 million,
representing an increase of approximately $8.4 million over SG&A of the Company
and the EC business for Fiscal 2001. Aerospace, which was merged into the power
conversion product line in June 2001 (see Note 2 to the consolidated financial
statements elsewhere in this Form 10-K), added approximately $1.6 million to
SG&A for Fiscal 2001. In addition, the corporate office of Acme, which was
closed in October 2001, added approximately $2.3 million of SG&A expenses for
Fiscal 2001, including approximately $425,000 of depreciation. This is an
increase over Fiscal 2000 of approximately $2.0 million. Upon the close of the
Acme corporate office, all remaining related expenses of that office terminated.
The decline in SG&A of the EC business as a percentage of net sales and in SG&A
of the MEC business was primarily related to the Company's cost reduction
initiatives in response to the slowing economy. The increase in SG&A as a
percentage of net sales of the MEC business primarily resulted from the impact
of the sharper decline in the net sales of the MEC business as compared to the
cost reductions made by the Company in SG&A. The Company's MEC business has a
lower overhead structure than its EC business due to lower sales and marketing
expenses of the MEC's business, which limits the ability of the Company to
reduce the expenses of the MEC business beyond a certain level.
10
On a pro forma comparative basis, assuming that the effects of the Acme
acquisition were reflected in Fiscal 2000 results, exclusive of the impact of
the additional corporate office expenses of Acme, all the product lines, except
for the Company's utility product line, which has experienced sales growth over
Fiscal 2000, have experienced a reduction in operating expense levels for Fiscal
2001, primarily driven by the Company's cost reduction initiatives.
Amortization of Goodwill: Goodwill amortization increased by approximately
$932,000 during Fiscal 2001, primarily related to the full year inclusion of
amortization of goodwill acquired in the Acme acquisition.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years
beginning after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the Company reclassify the carrying amount of
certain intangible assets into or out of goodwill.
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill.
In the first quarter of 2002, the Company will apply the new rules on accounting
for goodwill and other intangible assets and will make determinations as to what
amounts of goodwill, intangible assets and long term debt should be allocated to
its reporting units. In addition, the Company will perform the first of the
required impairment tests of goodwill. The Company has not yet determined what
the effect, if any, that these tests will have on the earnings and financial
position of the Company.
Cumulative Adjustment for Aerospace: Based on the strength of the operating
performance of Aerospace, which management believes is sustainable, on June 1,
2001, the Company decided to retain Aerospace, which had been previously
classified as held for sale. On that date and in accordance with Emerging Issue
Task Force ("EITF") 90-6, "Accounting for Certain Events Not Addressed in Issue
No. 87-11 Relating to an Acquired Operating Unit to be Sold," the Company
reallocated the purchase price paid for Acme as if Aerospace had never been held
for sale and recorded a cumulative adjustment for the results of operations of
Aerospace from the date of acquisition through May 31, 2001 of $721,000. This
amount previously had been excluded from the results of operations of the
Company and had been included in goodwill.
Stock appreciation rights compensation and other nonrecurring expenses: For the
year ended December 31, 2001, the Company's nonrecurring charges primarily
related to administrative expenses incurred in connection with the establishment
of a production facility in Mexico for the Company's lock products. At December
31, 2001, the Company had not begun production at its new Mexico facility. For
December 31, 2000 the nonrecurring charges primarily related to approximately
$1.6 million recorded in connection with 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: The decline in income from operations of approximately
$4.9 million, or 15.6%, resulted from the increase in gross profit of
approximately $4.2 million offset by the increase in SG&A expenses of
approximately $10.9 million and the increase in goodwill amortization of
approximately $932,000. The increase in operating expenses were reduced by the
$721,000 cumulative income adjustment for Aerospace and the decrease in stock
appreciation compensation and other non-recurring expenses of approximately $2.0
million due to the factors discussed above.
11
Recapitalization expenses: In connection with the Recapitalization (see
Liquidity and Capital Resources) completed during Fiscal 2000, the Company
incurred approximately $7.9 million of transaction fees.
Interest Expense: Interest expense increased by approximately $1.4 million, or
9.3%, during Fiscal 2001. This increase is primarily due to higher levels of
outstanding borrowings during Fiscal 2001 as compared to Fiscal 2000, primarily
due to the additional borrowings used to finance the acquisition of Acme in
November 2000 (see Liquidity and Capital Resources below). The impact of the
higher debt levels, however, was partially offset by the reduced rates of
interest charged on the outstanding principal on the variable rate term loan and
revolving credit facility due to declining interest rates of Fiscal 2001.
Provision for Income Taxes: The provision for income taxes increased
approximately $386,000, or 7.5%, from approximately $5.2 million in Fiscal 2000.
The Company's effective tax rate for Fiscal 2001 was approximately 54.0% on
income before taxes, which resulted primarily from the Company's additional
foreign tax liabilities as well as non-deductible expenses relating primarily to
goodwill amortization and non-deductible professional fees in connection with
the Acme acquisition. The effective rate for Fiscal 2000 was 57.0% which
resulted primarily due to the change in tax status of the Company during 2000 to
a C corporation as well as non-deductibility of expenses relating primarily to
the Reorganization expenses and goodwill amortization.
Income from Continuing Operations: Income from continuing operations increased
by approximately $832,000, or 21.3%, during Fiscal 2001. The increase resulted
from the decrease in income from operations of approximately $4.9 million, a
decrease in other income of approximately $423,000, an increase in interest
expense of approximately $1.4 million and a decrease in the Recapitalization
expenses of approximately $7.9 million, due to the factors discussed above.
Loss from Discontinued Operations, net: In Fiscal 2000, the Company incurred a
loss from discontinued operations of approximately $4.0 million. In April 2000,
the Company consummated the sale of Heart Interface Corporation ("Heart") and
Cruising Equipment Company ("Cruising"). The Company received approximately $9.0
million in proceeds before any transaction related expenses. Of the $9.0 million
of proceeds, $600,000 was placed in escrow in accordance with the agreement. The
Company recorded a loss on disposal of Heart and Cruising of approximately $3.3
million. To the extent that cash is released from the escrow, which is to
terminate in April 2002, such funds will be recorded as a gain at that time. In
July 2001, the Company received notice of a claim against the escrow. The
Company has responded to the claim and is awaiting further response from the new
owners of Heart and Cruising. The Company believes that the escrow will cover
any potential settlement of the claim.
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 elsewhere in this Form 10-K). The
Company received approximately $2.3 million in proceeds and recorded a loss on
disposal of approximately $525,000.
Extraordinary loss on early extinguishment of debt, net: In November 2000, the
Company closed on its new credit facility (see Liquidity and Capital Resources).
As a result, in Fiscal 2000, the Company wrote off the unamortized balance of
the deferred financing costs relating to the prior credit facility of
approximately $2.1 million. The expense is reflected, net of a tax benefit of
approximately $828,000, as an extraordinary item.
Net Income (Loss): Net income increased by approximately $6.0 million for Fiscal
2001. The increase in net income is the result of the sum of an increase in
income from continuing operations of approximately $832,000 and a decrease 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, 2000 compared to the year ended December 31, 1999
Net Sales: Net sales increased by approximately $16.1 million, or 11.1%, for
Fiscal 2000 as compared to the year ended December 31, 1999 ("Fiscal 1999"),
resulting from the increase in net sales of the EC business of approximately
$9.1 million, or 14.6%, and an increase in net sales of the MEC business of
approximately $7.0 million, or 8.5%.
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 transformer
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 the EC business for the full year in 2000, whereas
Fiscal 1999 only reflects the results of operations from January 19, 1999, as a
result of the VFC acquisition.
12
The increase in net sales in the MEC business is related to growth in the
business' core markets.
Gross Profit: Gross profit increased approximately $7.3 million, representing a
12.3% increase for Fiscal 2000 as compared to Fiscal 1999, as a result of the
approximately $3.7 million, or 13.5%, increase in the gross profit of the EC
business and the approximately $3.6 million, or 11.2%, increase in gross profit
of the MEC business for Fiscal 2000.
The increase in the gross profit of the EC business 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 as a
result of the VFC acquisition in January 1999.
The approximately $3.6 million increase in gross profit of the MEC business for
Fiscal 2000 is primarily due to growth in the business' core markets.
The GP percentage for the EC business declined approximately 0.3% for Fiscal
2000. For the MEC business the GP percentage increased approximately 1.0% during
Fiscal 2000. The changes in the GP percentages of the EC and MEC business for
Fiscal 2000 were primarily related to changes in product mix.
Selling, General and Administrative Expenses: SG&A expenses increased
approximately $289,000, or 1.0%, for Fiscal 2000 over Fiscal 1999. As a
percentage of net sales, SG&A declined 1.9%. SG&A of the EC business increased
approximately $324,000, or 2.0%, for Fiscal 2000 over Fiscal 1999 and as a
percentage of net sales, declined 2.9% during Fiscal 2000. SG&A of the MEC
business declined approximately $561,000 during Fiscal 2000, or as a percentage
of net sales, by approximately 1.7%.
The decline in SG&A for the EC and MEC businesses, 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 electrical
components product line through the integration of Marinco, Guest and certain
product lines of Glendinning Marine Products, Inc. ("Glendinning"). Glendinning
was sold in November 1999. 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.
Amortization of Goodwill: Goodwill amortization increased by approximately
$162,000 during Fiscal 2000, primarily related to the full year inclusion of
amortization of goodwill related to the VFC acquisition in that year. In
addition the Company recorded amortization expense in December 2000 related to
the goodwill acquired in connection with the acquisition of Acme.
Stock appreciation rights compensation and other nonrecurring expenses: For
Fiscal 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 40.4%, for Fiscal 2000. This increase results from the increase in
gross profit of approximately $7.3 million less the increase in SG&A expenses of
approximately $289,000 and the increase in goodwill amortization of
approximately $162,000 plus the decrease in stock appreciation rights
compensation and other non-recurring expenses of approximately $2.2 million due
to the factors discussed above.
Recapitalization expenses: 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 $258,000, or 1.7%,
during Fiscal 2000. This decrease is due to lower levels of outstanding
borrowings throughout most of 2000 versus Fiscal 1999, as a result of the
Company not having any borrowings outstanding under its revolving credit
facility during Fiscal 2000 as well as lower debt outstanding under the term
loan for most of Fiscal 2000. In September 2000, the Company entered into a new
credit agreement (see Liquidity and Capital Resources), which the Company closed
on, in November 2000, in order to finance a large portion of the acquisition of
Acme.
13
Provision for Income Taxes: The provision for income taxes increased by
approximately $2.6 million, or 102.7%, during Fiscal 2000. The Company's
effective tax rates for Fiscal 2000 and 1999 were approximately 57.0% and 34.5%,
respectively.
Through May 22, 2000, KCI, the majority member of KCLLC, was an S corporation
and shareholders of KCI were personally responsible for the income taxes on the
income of KCLLC that was allocated to KCI. Upon the consummation of the
Recapitalization (see Liquidity and Capital Resources), KCI automatically
converted to C corporation status. In addition, as part of the Recapitalization,
KCI acquired Keyhold, Inc. ("Keyhold"), which owned the minority interest in
KCLLC and was a C corporation for tax purposes. On December 31, 2000, Keyhold
merged into KCI. Beginning May 23, 2000, the Company's financial statements
reflect 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
goodwill and certain intangible assets.
The tax provision for Fiscal 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 declined by
approximately $944,000, or 19.5%, for Fiscal 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 $334,000 and a decrease in interest
expense of approximately $258,000 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, net: Loss from discontinued operations net
increased by approximately $4.0 million for Fiscal 2000. In April 2000, the
Company consummated the sale of Heart and Cruising, which were acquired as part
of VFC (see Note 2 to the consolidated financial statements elsewhere in this
Form 10-K). 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. In July 2001, the Company received notice of a
claim against the escrow. The Company has responded to the claim and is awaiting
further response from the new owners of Heart and Cruising. The Company believes
that the escrow will cover any potential settlement of the claim.
On December 29, 2000, the Company sold its interests in Mastervolt, which had
been acquired as part of VFC (see Note 2 to the consolidated financial
statements elsewhere in this Form 10-K). The Company received approximately $2.3
million in proceeds and recorded a loss on disposal of approximately $525,000
during Fiscal 2000.
Extraordinary loss on early extinguishment of debt, net: 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 expense is reflected, net of a tax benefit of approximately
$828,000, as an extraordinary item.
Net (Loss) Income: Net loss increased by approximately $6.1 million, or 127.3%
for Fiscal 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.
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 have historically been
the Company's $80 million of unsecured 10.5% senior notes due 2008 and its
outstanding credit facilities. In November 2000, the Company closed on a new
credit facility, which replaced the Company's previous credit facility. The
Company used the proceeds from the new credit agreement to repay the previous
borrowing facility and finance the acquisition of Acme. 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 and KCI, is collateralized by all of the capital stock of
the subsidiaries, receivables, inventories, equipment and certain intangible
property. There were no amounts outstanding under the revolving credit facility
at December 31, 2001. 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 or the
London interbank offered rate ("LIBOR") plus an applicable margin which will
vary from 1.0% to 2.75% and require the payment of a commitment fee of 0.50% on
the unused portion of the facility as well as quarterly commitment fees.
14
The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At December 31, 2001, the Company had one letter of credit outstanding
for approximately $443,000. The letter of credit primarily relates to a prior
year Acme self-insured liability related to outstanding workman's compensation
claims.
The new credit agreement contains certain covenants and restrictions which
require the maintenance of financial ratios and restrict or limit dividends and
other shareholder distributions, transactions with affiliates, capital
expenditures, rental obligations and the incurrence of indebtedness. At December
31, 2001, the Company was in compliance with the covenants of the credit
agreement.
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 required for the next 12 months will be
approximately $6.3 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, for different periods, which cannot exceed 180 days. As the
underlying contract comes up for renewal, the interest associated with the
contract becomes due. As of December 31, 2001, the Company had no outstanding
commitments for capital expenditures. The Company anticipates its capital
expenditures for the year ended December 2002 to be approximately $4.4 million.
The expenditures are primarily needed to maintain its facilities and expand its
production capacity for the Company's ongoing plan to expand operations in
Mexico and in order to take advantage of profitable market opportunities. 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, in May 2000, 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,
Inc. ("Keyhold"), which owned approximately 11.1% of the membership
interests of KCLLC prior to the Recapitalization, exchanged all of its
Keyhold stock for shares of Preferred Stock which were immediately sold
to Kelso for cash at approximately $117 per share, terminating
Keyhold's right to require KCLLC to repurchase Keyhold's outstanding
investment in KCLLC at the then current market value thereof;
o Holders of KCI SARs exercised their SARs and with a substantial portion
of their after-tax proceeds from the exercise, purchased Common Stock;
15
o Kelso purchased an aggregate of approximately 35,000 shares of
Preferred Stock from KCI at approximately $117 per share.
At the closing of the Recapitalization, KCI, Kelso and certain shareholders of
KCI entered into a Shareholders Agreement and a Registration Rights Agreement
and KCI and Kelso entered into an Advisory Agreement.
Effective upon the consummation of the Recapitalization, Kelso owns all of the
Preferred Stock. The Preferred Stock is not entitled to vote for the election of
directors but is entitled to designate two members of KCI's seven member Board
of Directors. In addition, the Preferred Stock has certain approval rights and
is convertible into Common Stock at the holder's option (upon conversion the
Preferred Stock would constitute over 60% of the total outstanding common equity
of KCI on a fully diluted basis). The Preferred Stock has a liquidation
preference equal to its purchase price plus accrued dividends, bears a 1%
cumulative annual dividend payable in kind and is redeemable at the option of
the holder after June 2, 2009. All of the outstanding Common Stock and options
to purchase Common Stock of KCI continue to be held by parties that held such
securities prior to the Recapitalization and by the parties who purchased 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
fees in connection with the Recapitalization of $7.9 million during Fiscal 2000.
All proceeds received by KCI from the Recapitalization were contributed to KCLLC
for additional membership interest.
KCI has no operations and is dependent on KCLLC for financial resources in the
form of capital distributions to meet its obligations. KCI obligations include
the $105.0 million of its preferred stock plus any dividends payable in arrears
(approximately $1.0 million in cumulative dividends in arrears, payable in kind,
at December 31, 2001), which are redeemable for cash at the option of the holder
after June 2, 2009, the requirement to purchase shares from its common
shareholders under certain circumstances and its tax obligations. Repurchases of
KCI Common Stock are made at fair market value as defined in KCI's shareholder
agreement. At December 31, 2001 approximately 1.3 million KCI common shares plus
potentially 182,000 shares covered by stock options were subject to repurchase
by KCI. The ability of KCLLC to make such capital distributions will be limited
by its available resources and is limited by restrictions of debt and other
agreements. KCLLC reflects in its tax provision the obligations of KCI.
Cash flows provided by operating activities were approximately $21.9 million,
$7.7 million, and $20.5 million for Fiscal 2001, 2000 and 1999, respectively.
The net increase of approximately $14.2 million for Fiscal 2001 resulted
primarily from the decrease in use of cash by the operating assets of the
business. During 2001 the Company, in response to the downturn in the economy,
initiated cost cutting programs and focused on the Company's working capital
accounts, specifically accounts receivable, inventory and accounts payable. In
addition, as business declined during Fiscal 2001 less cash was used in accounts
receivable and inventory. For Fiscal 2001, accounts receivable and inventory had
a net decline of approximately $11.8 million as compared to Fiscal 2000 when
accounts receivable and inventory resulted in a net increase of $6.6 million
over Fiscal 1999. Prepaid expenses and other current assets declined by
approximately $2.7 million, primarily driven by the Company's use of tax
overpayments in the prior year. Offsetting these increases in cash flows from
operations was a decrease in accounts payable and accrued expenses of
approximately $8.4 million, reflecting lower levels of spending due to the
current economic conditions.
The net decrease in cash provided by operating activities of approximately $12.8
million for Fiscal 2000 as compared to Fiscal 1999 resulted primarily from the
decrease in net income, primarily driven by the Recapitalization expenses during
Fiscal 2000 and increases of operating assets during Fiscal 2000. The net
increase in accounts receivable for Fiscal 2000 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 Fiscal 2000 was
related primarily to the Company's growth over the Fiscal 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 Fiscal 2000 is primarily driven by prepaid income
taxes.
Cash flows from operations of discontinued operations generated approximately
$1.4 million for Fiscal 1999.
Cash flows used in investing activities were approximately $3.5 million, $38.7
million and $82.9 million for Fiscal 2001, 2000 and 1999, respectively. The
decrease in cash used in investing activities for Fiscal 2001 as compared to
Fiscal 2000 of approximately $35.2 million and approximately $44.2 million for
Fiscal 2000 as compared to Fiscal 1999, are primarily related to the size of the
acquisitions accomplished in Fiscal 2000 and Fiscal 1999. 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 $28.8
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 elsewhere in this Form 10-K). The Company realized $10.7
million of proceeds from the sale of Heart, Cruising and Mastervolt (See Note 2
to the consolidated financial statements elsewhere in this Form 10-K) during
Fiscal 2000. During Fiscal 1999, the Company divested itself of Force 10 Marine,
Inc., Multiplex Technology Inc. and Glendinning, which it had acquired as part
of VFC, for a total of approximately $7.4 million. Capital expenditures for
Fiscal 2001, 2000 and 1999 were approximately $4.1 million, $3.1 million and
$2.7 million, respectively. The increase in capital expenditures over the three
year period is primarily due to the Company's growth through acquisitions.
16
Cash flows from financing activities used net cash of approximately $17.2
million during Fiscal 2001 and provided net cash of approximately $30.6 million
and $53.4 million for Fiscal 2000 and Fiscal 1999, respectively. The net cash
used in financing activities for Fiscal 2001 was primarily driven by the
Company's net repayment of approximately $16.2 million in debt under its
existing credit facilities. At December 31, 2001, the Company was two payments
ahead of schedule under its current term debt facility.
The net decrease in financing activities for Fiscal 2000 as compared to Fiscal
1999 of approximately $22.8 million was primarily due to the changes made in the
Company debt facilities. Proceeds received under the Company's existing credit
facility for Fiscal 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
acquisition, and working capital purposes. For Fiscal 1999, the Company received
an aggregate of approximately $82.6 million from its prior 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 Fiscal 2000 and 1999, the Company paid deferred financing costs of
approximately $3.8 million and $2.2 million, respectively, related to the
Company's existing and previous credit facilities.
During Fiscal 2000 and 1999 the Company was the recipient of approximately $7.1
million, and $12.3 million in capital contributions. The capital contributions
received during Fiscal 2000 were contributed by KCI in connection with
Recapitalization described above. Approximately $7.5 million was used to repay
the outstanding SARs, 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.
During Fiscal 2001 and 2000, the Company paid member withdrawals of
approximately $906,000 and $1.4 million, respectively. KCI used approximately
$906,000 and $1.1 million of the funds received during Fiscal 2001 and 2000,
respectively, to repurchase outstanding shares of its common stock from former
shareholders. The remaining withdrawals in 2000 of approximately $300,000 as
well as approximately $2.3 million paid during Fiscal 1999 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.
17
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.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the consolidated financial statements, included
elsewhere in this Form 10-K, includes a summary of the significant accounting
policies and methods used in the preparation of the Company's consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by the Company.
Revenue recognition: The Company recognizes revenue upon shipment of
products to customers, when title passes and all risks and rewards of
ownership have transferred. The Company considers revenue realized or
realizable and earned when the product has been shipped, the sales price
is fixed or determinable and collectibility is reasonably assured. The
Company reduces revenue for estimated customer returns.
Inventory: Inventories are stated at the lower of cost or market, on a
first-in, first-out basis. The Company purchases materials for the
manufacture of inventory for sale in its various markets. The decision to
purchase a set quantity of a particular inventory item is influenced by
several factors including current and projected cost, future estimated
availability and existing and projected sales to produce certain items.
The Company evaluates the net realizable value of its inventories and
establishes allowances to reduce the carrying amount of these inventories
as deemed necessary.
Goodwill and other intangible assets: At December 31, 2001, the Company
has recorded approximately $125.3 million in goodwill and other intangible
assets related to acquisitions made in 2000 and prior years. The
recoverability of these assets is subject to an impairment test based on
the estimated fair value of the underlying businesses. These estimated
fair values are based on estimates of the future cash flows of the
businesses. Factors affecting these future cash flows include: the
continued market acceptance of the products and services offered by the
businesses; the development of new products and services by the businesses
and the underlying cost of development; the future cost structure of the
businesses; and future technological changes.
Management's Estimates
The Company's discussion and analysis of its financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to product returns, bad debts,
inventories, intangible assets, pensions and post retirement benefits, warranty
obligations and contingencies and litigation. The Company bases its estimates on
historical experience, the use of external resources and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Significant estimates used by the Company that are subject to change include,
but are not limited to (i) the Company's allowance for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments for their open accounts receivable with the Company. If the financial
condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances could be
required, (ii) allowances established against its inventory carrying value to
record its inventories at net realizable value. If actual market conditions are
less favorable than those projected by management, additional inventory
allowances may be required, (iii) the Company records as necessary, valuation
allowances against its deferred tax assets. Were the Company to determine that
it would not be able to realize its deferred tax assets in the future,
additional valuation allowances could be required, (iv) the Company evaluates
the carrying amounts of its long lived assets for recoverability. If the Company
were to determine that the value ascribed to any of its long-lived assets was
not recoverable an allowance could be required, (v) the Company records the
effects of its existing pension plans in its financial statements using various
assumptions and the use of independent actuaries. If any of the underlying
assumptions were to change, the carrying value of the pension assets and
obligations may require adjustment, and (vi) the Company's financial covenants,
as defined in its credit facilities, were based, in part, by estimates of future
results of the Company's operations. If actual results were not to meet those
expectations, the Company may not meet its financial covenants and may be
required to obtain waivers for those covenants.
18
Inflation
Inflation has not been material to the Company's operations for the periods
presented.
Backlog
The Company's backlog of orders as of December 31, 2001, was approximately $33.4
million. The Company includes in its backlog only 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
On January 1, 2001, the Company adopted Financial Accounting Standard ("FAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement did not have a material impact on the Company's consolidated financial
statements.
In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning
after December 15, 2001.
The provisions of SFAS 141 provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill. SFAS 141 also requires
that upon adoption of SFAS 142 the Company reclassify the carrying amount of
certain intangible assets into or out of goodwill.
The provisions of SFAS 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur which would impact the carrying value of
such assets), and (iii) require that the Company's operations be formally
identified into reporting units for the purpose of assessing potential future
impairments of goodwill. Goodwill amortization for the years ended December 31,
2001, 2000 and 1999 was approximately $3.6 million, $2.6 million and $2.5
million, respectively.
In the first quarter of 2002 the Company will apply the new rules on accounting
for goodwill and other intangible assets and will make determinations as to what
amounts of goodwill, intangible assets and long term debt should be allocated to
its reporting units. In addition, the Company will perform the first of the
required impairment tests of goodwill. The Company has not yet determined what
the effect, if any, that these tests will have on the earnings and financial
position of the Company.
In October 2001, FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 provides guidance on the accounting for
long-lived assets to be held and used and for assets to be disposed of through
sale or other means. FAS 144 also broadens the definition of what constitutes a
discontinued operation and how such results are to be measured and presented.
FAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company does not expect the adoption of FAS 144 to have a material impact on the
earnings or financial position of the Company.
19
Other Matters
Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.
Item 7A. 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 $85.0 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 4.43% until March 15, 2002, when the
underlying LIBOR contract is up for renewal. At December 31, 2001 the Company
had no borrowings under its line of credit and was two payments ahead of
schedule on its term debt. A 1% change in the interest rate for the Company's
credit facilities in place in Fiscal 2001 would have resulted in a change in the
Company's interest expense of approximately $940,000. 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, 2001, together with the report of PricewaterhouseCoopers LLP dated
February 15, 2002, 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
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,
2001. 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.
20
Name Age Position
- ---- --- --------
John S. Dyson 59 Chairman of the Board of Directors of KCI and KCLLC
Clay B. Lifflander 39 Director of KCI and KCLLC. Chief Executive Officer of
KCLLC.
Robert B. Kay 39 Director of KCI and KCLLC. President of KCLLC.
Alan L. Rivera 39 Director of KCI and KCLLC, Vice President and Secretary of
KCI and KCLLC
George M. Scherer 48 Director of KCI and KCLLC, Vice President of KCI and
President of BWE
Philip E. Berney 38 Director of KCI and KCLLC
Tom R. Wall, IV 42 Director of KCI and KCLLC
Albert W. Weggeman 38 Senior Vice President of Operations
Keith A. McGowan 39 Chief Financial Officer and Vice President of KCLLC
J. Marty O'Donohue 51 President of Marinco
Daryl A. Lilly 41 President of Gits
Michael L. Colecchi 52 President of Hudson and ESP
A. Jack Hoppenjans 65 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. From 1996 to December 2001 he served as Chairman of the
Mayor of the City of New York's Council of Economic Advisors. From 1994 to 1996,
Mr. Dyson served as Deputy Mayor for Finance and Economic Development for the
City of New York. From 1982 to 1993 Mr. Dyson was the Chairman of Dyson-Sinclair
Associates, a management company and the predecessor of Millbrook. From 1976 to
1979, he served as Commissioner of the New York State Department of Commerce.
Mr. Dyson was Vice Chairman of Dyson-Kissner-Moran Corporation from 1970 to
1975, at which time he was appointed to the position of Commissioner of the New
York State Department of Agriculture.
Clay B. Lifflander has served as a director of KCI and KCLLC since their
inception. Mr. Lifflander was elected Chief Executive Officer in November 1999.
Before November 1999, Mr. Lifflander had 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 had served as the Chief Financial Officer of KCLLC since February
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, Millbrook
has employed Mr. Rivera, 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.
21
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 Kelso. Mr. Berney joined Kelso & Company, a private investment firm
in 1999, as one of its Managing Directors. Previously, Mr. Berney worked at
Bear, Stearns & Co. Inc. where he was a Senior Managing Director. He also serves
as a director of CDT Acquisition Corp. and Armkel, LLC.
Thomas R. Wall, IV has served as a director since May 2000, and is a board
designee of Kelso. Mr. Wall has held various positions of increasing
responsibility with Kelso & Company, a private investment firm, since 1983, and
currently serves as one of its Managing Directors. Mr. Wall also serves as a
director of AMF Bowling, Inc., Citation Corporation, Consolidated Vision Group,
Inc., Cygnus Publishing, Inc., IXL Enterprises Inc., Mitchell Supreme Fuel
Company, Mosler, Inc., Peebles Inc., and 21st Century Newspapers, Inc.
Mr. Albert W. Weggeman joined the Company in March 2001 as Senior Vice President
of Operations. From November 1997 to March 2001, Mr. Weggeman held positions in
General Electric Company ("GE") Industrial Systems division as Manager - Mergers
& Acquisitions, and most recently as President and General Manager of Midwest
Electric (a GE subsidiary). Prior to GE, Mr. Weggeman was the Director of
Marketing for Norton Coated Abrasives.
Keith A. McGowan was appointed 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.
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.
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.
Daryl Lilly has been the President of Gits since June of 2000. From February
1999 through June 2000, Mr. Lilly served as Executive Vice President, Vice
President of Product Development and Engineering Manager for Gits. From January
1997 to February 1999, Mr. Lilly was the Plant Engineering Manager for Reman,
Inc. 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.
22
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, 2001.
Long Term
Compensation
Annual Compensation Awards
-------------------------------------------------- ---------------------
Other Annual Securities
Name and Principal Compensation Underlying Options
Position Year Salary ($) Bonus ($) (2)
- ------------------------------ -------- --------------- ---------------- ----------------- ---------------------
Clay B. Lifflander (1),
Chief Executive Officer 2001 -- -- -- --
2000 -- -- -- 30,000
1999 -- -- -- --
Robert B. Kay (3),
President 2001 $295,000 $ -- (4) -- --
2000 $266,178 $138,000 $100,000 30,000
1999 $250,000 $125,000 30,000
Alan L. Rivera (1),
Secretary 2001 -- -- -- --
2000 -- -- -- 7,500
1999 -- -- -- --
--
Albert W. Weggeman (3), SVP
of Operations 2001 $ 174,262 $ -- (4) -- 5,000
2000 -- -- -- --
1999 -- -- -- --
Keith A. McGowan,
Chief Financial Officer 2001 $ 170,000 $ -- (4) -- 192
2000 $ 143,584 $ 48,000 $ 60,000 5,250
1999 $ 90,000 $ 40,000 -- 5,000
George M. Scherer (3),
President of BWE 2001 $ 225,000 $ -- (4) -- --
2000 $ 225,000 $ 23,144 $ 72,500 4,000
1999 $ 225,000 $ 23,000 -- --
(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) Long terms awards related to options granted to purchase KCI common stock.
(3) The Company is a party to employment agreements with certain of its key
employees.
(4) The 2001 bonuses for Robert B. Kay, Albert W. Weggeman, George M. 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.
23
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, 2001.
- -----------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates for Option
Individual Grants Term (1)
- ------------------------------------------------------------------------------ -------------------------------
Number of Percent of
Securities Total
Underlying Options
Options /SARS Granted
/SARS to Employees Exercise Expiration
Name Granted (#) in Fiscal Year Price ($/sh) Date 5% 10%
- ------------------ ------------- --------------- --------------- ------------ --------------- --------------
Albert W. Weggeman 5,000 39.3% $125.00 1/02/11 $444,000 $1,159,000
Keith A. McGowan 192 1.5% $125.00 1/02/11 $16,000 $40,000
(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.
AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 2001 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, 2001.
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 3,333 26,667 $ - $ -
Robert B. Kay 15,714 34,286 $1,207,115 $92,885
George M. Scherer 444 3,556 $ - $ -
Alan L. Rivera 833 6,667 $ - $ -
Albert W. Weggeman 555 4,445 $ - $ -
Keith A. McGowan 3,522 4,720 $ 115,833 $ 417
(1) Assumes management's estimate of fair market value of $100.00 per share of
common stock at December 31, 2001.
24
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 consumer
price index, 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.
In March 2001, the Company signed an employment agreement with Albert W.
Weggeman, the Company's Senior Vice President of Operations, which terminates in
March 2006. The agreement provides for a base salary of $212,500 per annum and
entitles Mr. Weggeman to merit increases in his compensation after one year of
service. In addition, the agreement provides for incentive compensation based on
the performance of the Company and Mr. Weggeman. The agreement provides for
vacation and benefits commensurate with the plans and programs generally offered
by the Company to employees of the same level and responsibility of Mr.
Weggeman. The agreement also provides that Mr. Weggeman will not (i) compete
with Company for two years after termination of his agreement, and (ii) at any
time following the termination of the agreement directly or indirectly contact
or do business with any customers of the Company as defined in the agreement. In
connection with the execution of the agreement Mr. Weggeman received an option
to purchase 5,000 shares of the Company's common stock at $125 per share. The
option is exercisable for a period of ten years. One-third of the shares
underlying the option vest over a period of three years, beginning at December
31, 2001. The remaining shares vest upon certain events as defined in the option
agreement.
In December 2001, the Company signed a new employment agreement with George M.
Scherer, President of Elliott and board member of KCI and KCLLC, which
terminates in December 1, 2006. The agreement provides for a base salary of
$254,000 per annum, incentive compensation, as defined in the agreement and the
use of a company car. In addition, Mr. Scherer is entitled to vacation and other
benefits commensurate with the plans and programs generally offered by the
Company to employees of the same level and responsibility of Mr. Scherer. The
agreement also provides that Mr. Scherer will not (i) compete with Company for
three years after termination of his agreement, and (ii) for a period of three
years after the termination of the agreement directly or indirectly contact or
do business with any customers or former customers of the Company as defined in
the agreement.
1998 Long-Term Incentive Plan
KCI's 1998 Incentive Compensation Plan (the "1998 Plan") was adopted to attract
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and
consultants of KCI, KCLLC and its subsidiaries and to promote the success of the
Company's business. Options granted under the 1998 Plan may be either incentive
stock options, as defined in Section 422A of the Internal Revenue Code of 1986,
as amended, or non-qualified stock options. In addition, stock appreciation
rights, and restricted stock awards and other stock-based awards may be granted
under the 1998 Plan. No further grants will be made under the 1998 Plan. As of
December 31, 2001, options to purchase an aggregate of 51,972 shares were
outstanding under the 1998 Plan at a weighted average exercise price of $40 per
share, of which options to purchase 43,587 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.
25
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. At
December 31, 2001, the Company had options for approximately 130,000 shares of
common stock at a weighted average exercise price of approximately $118 per
share outstanding under the Plan. Options for approximately 45,000 shares vest
over the next three years. The options for the approximately 85,000 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, 2001, options to purchase approximately 15,100 shares issued under
the KCI Plan were vested.
The KCI Plan is administered by a committee as determined by the Board of
Directors of KCI and in accordance with the Shareholders Agreement. Any options
granted under the KCI Plan must be assigned an exercise price equal to the
market value of KCI Common Stock on the date of the grant of the option. Options
and awards granted under the KCI Plan are generally not transferable, and each
option or award is exercisable during the lifetime of the optionee only by such
optionee. The term of the options under the KCI Plan may not exceed ten years.
The specific terms of each option grant or award are approved by KCI's Board of
Directors and are reflected in a written stock option or award agreement.
Stock Appreciation Rights
In connection with the VFC acquisition, KCI issued SARs to certain members of
operating subsidiary management. The SARs, which were fully vested, entitle the
holder to receive, in cash, the difference between the exercise price and market
value of KCI stock as of the date of exercise. The Company was required to
record as compensation expense any net accretion in the value of the SARs based
on current market value of KCI stock. For Fiscal 2000 and Fiscal 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 cov