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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 2002
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 333-58675
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KEY COMPONENTS, LLC
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(Exact name of Registrant as Specified in its charter)
Delaware 04-3425424
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown NY 10591
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(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
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(Registrant's Telephone Number, Including Area Code)
Commission File Number 333-58675-01
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KEY COMPONENTS FINANCE CORP. *
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(Exact name of Registrant as specified in its charter)
Delaware 14-1805946
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
200 White Plains Road, Tarrytown NY 10591
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(914) 332-8088
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of November 14, 2002, all of 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.
*Key Components Finance Corp. meets the conditions set forth in General
Instruction (H (1) (a) and (b) of Form 10-Q and is therefore filing this Form
with reduced disclosure format.
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KEY COMPONENTS, LLC
Form 10-Q Index
September 30, 2002
Page
Number
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PART I
Item 1.-- Consolidated Financial Statements (unaudited):
Balance Sheets............................................................. 3
Statements of Income....................................................... 4
Statements of Cash Flows................................................... 5
Notes to Consolidated Financial Statements................................. 6
Item 2. -- Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 12
Item 3.-- Quantitative and Qualitative Disclosures about Market Risk................. 23
Item 4.-- Controls and Procedures.................................................... 23
PART II
Item 6.-- Exhibits and Reports on Form 8-K........................................... 23
Signatures ........................................................................... 25
2
PART I -- FINANCIAL INFORMATION
Item 1 -- Consolidated Financial Statements
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2002 2001
--------------- ---------------
Assets: (unaudited)
Current
Cash $ 5,006 $ 5,080
Accounts receivable, net of allowance for doubtful accounts
of $1,268 and $1,004 at September 30, 2002 and December
31, 2001, respectively 24,639 25,461
Inventories 29,599 30,412
Prepaid expenses and other current assets 2,738 1,986
Prepaid income taxes 1,104 1,316
Deferred income taxes 3,839 4,025
Assets held for sale -- 2,250
--------------- ---------------
Total current assets 66,925 70,530
Property and equipment, net 24,463 25,891
Goodwill, net 107,903 119,067
Deferred financing costs, net 4,454 5,259
Prepaid pension cost 3,239 3,588
Other assets 610 1,384
--------------- ---------------
$ 207,594 $ 225,719
=============== ===============
Liabilities and Member's Equity:
Current
Current portion of long-term debt $ 9,994 $ 6,305
Accounts payable 8,229 8,876
Accrued compensation 3,894 2,814
Accrued expenses 6,412 7,572
Accrued acquisition costs 770 1,414
Accrued interest 2,828 888
--------------- ---------------
Total current liabilities 32,127 27,869
Long term debt 140,517 159,532
Deferred income taxes 1,923 5,056
Other long-term liabilities 1,466 1,587
--------------- ---------------
Total liabilities 176,033 194,044
Commitments and contingencies
Member's equity 31,561 31,675
--------------- ---------------
$ 207,594 $ 225,719
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands)
Nine months ended Three months ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net sales $ 144,378 $ 147,394 $ 47,981 $ 46,527
Cost of goods sold 89,981 92,912 29,452 28,988
--------------- --------------- --------------- ---------------
Gross profit 54,397 54,482 18,529 17,539
Selling, general and administrative expenses 28,832 31,545 9,599 10,229
Cumulative adjustment for Aerospace -- (721) -- --
Amortization of goodwill -- 2,504 -- 824
Other 1,220 76 632 65
--------------- --------------- --------------- ---------------
Income from operations 24,345 21,078 8,298 6,421
Other income (expense):
Other income 122 244 24 103
Interest expense (10,083) (13,021) (3,311) (3,899)
--------------- --------------- --------------- ---------------
Income before provision for income taxes
and cumulative effect in change in
accounting principle 14,384 8,301 5,011 2,625
Provision for income taxes 6,341 4,372 2,060 1,772
--------------- --------------- --------------- ---------------
Income before cumulative effect in
change in accounting principle 8,043 3,929 2,951 853
Cumulative effect in change of accounting
principle, net of taxes of $3,013 (8,157) -- -- --
--------------- --------------- --------------- ---------------
Net (loss) income $ (114) $ 3,929 $ 2,951 $ 853
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
4
KEY COMPONENTS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Nine Months Ended September 30, 2002 2001
--------------- ---------------
Cash flows from operating activities:
Net (loss) income $ (114) $ 3,929
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle 8,157 --
Depreciation and amortization 3,754 6,370
Amortization of deferred finance costs 665 768
Writedown of deferred finance costs 145 --
Deferred taxes 60 322
Changes in operating assets and liabilities:
Accounts receivable 822 1,692
Inventories 813 3,537
Prepaid expenses and other assets 2,324 1,059
Accounts payable (728) (4,162)
Accrued expenses 1,095 (968)
--------------- ---------------
Net cash provided by operating activities 16,993 12,547
--------------- ---------------
Cash flows from investing activities:
Proceeds from assets held for sale 364 1,329
Capital expenditures (2,100) (3,273)
--------------- ---------------
Net cash used in investing activities (1,736) (1,944)
--------------- ---------------
Cash flows from financing activities:
Payments of long-term debt and capital lease obligations (15,331) (14,654)
Proceeds from debt issued -- 2,800
Member withdrawals -- (906)
--------------- ---------------
Net cash used in financing activities (15,331) (12,760)
--------------- ---------------
Net decrease in cash and cash equivalents (74) (2,157)
Cash and cash equivalents, beginning of period 5,080 3,775
--------------- ---------------
Cash and cash equivalents, end of period $ 5,006 $ 1,618
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
KEY COMPONENTS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements include the financial statements of Key
Components, LLC ("KCLLC"), and 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." All significant intercompany transactions have been eliminated.
The Company manufactures and sells custom engineered essential componentry in a
diverse array of end use markets. Through its two business segments, electrical
components and mechanical engineered components, the Company targets its
products to original equipment manufacturers. The Company's electrical
components business products include power conversion products, specialty
electrical components and high-voltage utility switches. The Company's
mechanical engineered components business products primarily consist of medium
security lock products and accessories, flexible shaft and remote valve control
components and turbo-charger actuators.
KCLLC's assets are limited to the Company's corporate office and its investments
in its subsidiaries. KCLLC's financial statements include the related expenses
of operating the Company's corporate office. KCLLC is wholly-owned by Key
Components, Inc. ("KCI"), a New York corporation. KCI holds no other assets
other than its investments in KCLLC and has no operations.
The accompanying unaudited financial statements of the Company contain all
adjustments that are, in the opinion of management, necessary for a fair
statement of results for the interim periods presented. While certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, the Company
believes that the disclosures herein are adequate to make the information not
misleading. The results of operations for the interim periods are not
necessarily indicative of the results for full years. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the year ended December 31, 2001 included in the Company's
Annual Report on Form 10-K.
Certain reclassifications were made to conform the prior periods to the current
year presentation.
2. Acquisitions and Dispositions
On November 21, 2000, the Company acquired all of the outstanding shares of Acme
Electric Corporation ("Acme") for a purchase price of approximately $47.3
million and assumed liabilities of approximately $28.8 million. In conjunction
with the acquisition, the Company repaid approximately $10.4 million of Acme's
outstanding long-term debt out of the approximately $28.8 million of liabilities
assumed as part of the acquisition. The Company recorded the excess purchase
price over net assets acquired of approximately $33.1 million as goodwill.
At the time of the acquisition, the Company decided to sell the Acme Aerospace
("Aerospace") division and the Acme Electronics ("Electronics") division.
Aerospace manufactures lightweight high power battery chargers and related power
systems for aerospace applications. Electronics is a contract electronics
manufacturer for data storage, telecommunications and medical electronic
applications.
Based on the strength of the operating performance of Aerospace, on June 1,
2001, the Company decided to retain Aerospace. On that date and in accordance
with 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 of 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.
In December 2001, the Company entered into an agreement to sell Electronics.
Pursuant to this transaction, which closed on February 15, 2002, the Company
received $100,000 in cash and a $300,000 note due on February 15, 2006, which
bears interest at a rate of 7% per annum. In addition, contingent consideration
of up to $2.1 million will be earned if Electronics meets certain annual revenue
targets during the 48 months following such closing. Contingent consideration
earned, if any, including interest at 7% per annum accruing on such amount, will
be paid on the fourth anniversary from the date such contingent consideration is
earned and will be recorded against goodwill.
6
As part of the Company's plan of integrating the Acme acquisition, the Company
accrued approximately $1.9 million of severance and related costs and $266,000
of lease exit costs related to the closure of Acme's corporate office. At
September 30, 2002, $1.6 million of payments had been made related to these
accruals. The Acme corporate office was closed in October 2001. The accrued
acquisition costs represents a significant estimate and is subject to change
based on actual results.
3. Inventories
Inventories consist of the following:
(In thousands) September 30, December 31,
2002 2001
--------------- ---------------
Raw materials $ 14,917 $ 15,566
Work-in-process 7,171 6,808
Finished goods 7,511 8,038
--------------- ---------------
Total inventory $ 29,599 $ 30,412
=============== ===============
7
4. Operating Segments
The Company conducts its operations through its two businesses, the manufacture
and sale of electrical components ("EC") and mechanical engineered components
("MEC"). The EC business produces an array of electrical componentry items for
recreational and industrial applications and switches for utility companies,
which are utilized in industrial markets. The MEC business manufactures flexible
shaft products, specialty locks and related accessories and turbo charger
actuators and related componentry.
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest, taxes and depreciation and amortization
("EBITDA"). In its calculation of EBITDA, certain charges that management
determines are non-recurring or not attributable to segment results are
excluded. Segment information for the nine and three months ended September 30,
2002 and 2001 is as follows:
(In thousands) Mechanical
Electrical Engineered
Components Components Total
--------------- --------------- ---------------
Nine months ended September 30, 2002:
Net sales to external customers $ 93,953 $ 50,425 $ 144,378
Intersegment net sales -- 105 105
Segment profit - EBITDA 17,733 14,258 31,991
Segment assets 112,145 87,695 199,840
Depreciation and amortization 1,924 1,811 3,735
=============== =============== ===============
Nine months ended September 30, 2001:
Net sales to external customers $ 90,622 $ 56,772 $ 147,394
Intersegment net sales -- 106 106
Segment profit - EBITDA 15,745 16,444 32,189
Segment assets 121,131 102,920 224,051
Depreciation and amortization 2,672 3,109 5,781
=============== =============== ===============
Three months ended September 30, 2002:
Net sales to external customers $ 30,988 $ 16,993 $ 47,981
Intersegment net sales -- 30 30
Segment profit - EBITDA 6,264 4,706 10,970
Segment assets 112,145 87,695 199,840
Depreciation and amortization 637 598 1,235
=============== =============== ===============
Three months ended September 30, 2001:
Net sales to external customers $ 29,727 $ 16,800 $ 46,527
Intersegment net sales -- 55 55
Segment profit - EBITDA 5,120 4,954 10,074
Segment assets 121,131 102,920 224,051
Depreciation and amortization 895 1,040 1,935
=============== =============== ===============
December 31, 2001:
Segment assets $ 116,576 $ 100,265 $ 216,841
=============== =============== ===============
8
Reconciliation of Selected Segment Information to the Company's Consolidated
Totals:
(In thousands) Nine months ended Three Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Profit or loss:
Total profit from reportable segments-
EBITDA $ 31,991 $ 32,189 $ 10,970 $ 10,074
Reconciling items:
Corporate expenses (2,173) (3,404) (654) (1,095)
Depreciation and amortization (3,754) (6,262) (1,236) (2,087)
Interest expense (10,083) (13,021) (3,311) (3,899)
Management fee (377) (935) (126) (303)
Other expenses (1,220) (266) (632) (65)
--------------- --------------- --------------- ---------------
Total consolidated income before taxes
and cumulative effect on change in
accounting principle $ 14,384 $ 8,301 $ 5,011 $ 2,625
=============== =============== =============== ===============
September December
31, 2002 31, 2001
--------------- ---------------
Assets:
Total assets for reportable segments $ 199,840 $ 216,841
Corporate assets 7,754 6,628
Assets held for sale -- 2,250
--------------- ---------------
Total consolidated assets $ 207,594 $ 225,719
=============== ===============
(In thousands) Nine Months Ended Three Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Geographical Sales Information:
United States $ 126,481 $ 132,355 $ 41,660 $ 41,811
China 3,759 2,778 1,391 809
England 3,331 2,586 1,204 780
Canada 2,663 2,826 951 848
Mexico 1,273 2,249 238 485
Netherlands 1,725 508 427 344
Other 5,146 4,092 2,110 1,450
--------------- --------------- --------------- ---------------
Total $ 144,378 $ 147,394 $ 47,981 $ 46,527
=============== =============== =============== ===============
5. Provision for Income Taxes
For the nine and three months ended September 30, 2002 and 2001, the Company's
provision for income taxes primarily relates to the federal and state income
taxes of its sole member, KCI. Deferred income taxes have been recorded to
reflect the tax consequences on future years of temporary differences between
the tax bases of assets and liabilities and their financial reporting amounts at
year-end. Valuation allowances are recorded when necessary to reduce deferred
tax assets to expected realizable amounts.
9
6. Financing amendment
In June 2002, the Company amended its credit agreement (the "Amendment") to
provide for revised financial covenant ratios from September 30, 2002 through
December 2003 from the original covenant ratios stipulated in the credit
agreement. In addition, the Amendment revised the Company's applicable margin on
borrowings, the maximum allowable capital expenditures through 2003 and reduces
the amount allowed for permitted acquisitions (as defined in the credit
agreement) from $15 million to $7.5 million through the end of 2003. Concurrent
with the Amendment, the Company voluntarily reduced the availability under its
revolving credit facility by $15 million from $40 million to $25 million through
the end of 2003. At September 30, 2002, the Company was in compliance with the
covenants of the credit agreement set forth in the Amendment. As a result of the
Company voluntarily reducing its borrowing capacity through the end of 2003, the
Company wrote off $145,000 of the deferred finance costs related to amending the
Company's credit facility.
7. Goodwill
In July 2001, Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("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.
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.
Upon the adoption of SFAS 142, the Company stopped recording goodwill
amortization, which totaled $2.5 million and $824,000 in the nine months and
three months ended September 30, 2001, respectively. In June 2002, the Company
completed the assessment of its reporting units and its initial step one
impairment test on January 1, 2002 financial information. As a result, the
Company identified one reporting unit in the MEC business with a book value of
goodwill that exceeded its fair market value, which was estimated using
valuation methodology involving discounted cash flows and market and
transactional multiples of the reporting units. In accordance with SFAS 142, the
Company, during the second quarter 2002, estimated the amount of the impairment
and recorded a cumulative effect in change of accounting principle, as of
January 1, 2002, of approximately $7.8 million, net of taxes of approximately
$3.4 million, to write down the goodwill associated with the Company's lock
product line resulting from the market conditions of that product line. The
Company finalized its impairment testing, as prescribed by SFAS 142, during the
third quarter to determine the amount of final impairment. As a result, the
Company reduced the tax impact of the charge by approximately $353,000 to
reflect the proper deferred tax basis of the adjusted goodwill. No further
impairment charges were taken against the Company's goodwill.
10
8. New Accounting Pronouncements
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 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. SFAS 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
adoption of SFAS 144 did not have a material impact on the earnings or financial
position of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from
the extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. SFAS 145 requires that
most gains and losses from the extinguishment of debt no longer be classified as
extraordinary items and that they be recorded as part of the results of
operations. In additions, SFAS 145 amends FASB Statement No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Lastly, SFAS 145 makes technical corrections to existing pronouncements. While
those corrections are not substantive in nature, in some instances, they may
change accounting practice. The Company adopted the statement as of January 1,
2002. The adoption of SFAS 145 did not have a material effect to the Company's
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued and
recorded as liabilities in financial statements. This statement is effective for
exit or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of this statement to determine the effect, if
any, it may have on its consolidated results of operations and financial
position.
11
Item 2-- Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
GENERAL
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"), 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 ("MEC") business. 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 EC
business product offerings include power conversion products, specialty
electrical components and high-voltage utility switches. The product offerings
of the MEC business consist of flexible shaft and remote valve control
components, turbo-charger actuators and medium security lock products and
accessories.
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 acquisition and 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.
12
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. 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-Q.
Nine months ended Three months ended
September 30, September 30,
------------------------------------------------- -------------------------------------------------
2002 2001 2002 2001
----------------------- ----------------------- ----------------------- -----------------------
(In thousands) % of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Sales $ 144,378 100.0% $ 147,394 100.0% $ 47,981 100.0% $ 46,527 100.0%
Cost of Goods Sold 89,981 62.3 92,912 63.0 29,452 61.4 28,988 62.3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 54,397 37.7 54,482 37.0 18,529 38.6 17,539 37.7
Selling, general and
administrative expenses 28,832 20.0 31,545 21.4 9,599 20.0 10,229 22.0
Cumulative adjustment for
Aerospace -- -- (721) (0.5) -- -- -- --
Amortization of goodwill -- -- 2,504 1.7 -- -- 824 1.8
Other 1,220 0.8 76 0.1 632 1.3 65 0.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations 24,345 16.9 21,078 14.3 8,298 17.3 6,421 13.8
Other income 122 0.1 244 0.2 24 0.1 103 0.2
Interest expense (10,083) (7.0) (13,021) (8.8) (3,311) (6.9) (3,899) (8.4)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before provision for
income taxes and cumulative
effect in change of
accounting principle 14,384 10.0 8,301 5.6 5,011 10.4 2,625 5.6
Provision for income taxes 6,341 4.4 4,372 3.0 2,060 4.3 1,772 3.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before change in
accounting principle 8,043 5.6 3,929 2.7 2,951 6.2 853 1.8
Change in accounting
principle, net of
taxes of $3,013 (8,157) (5.7) -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) income $ (114) (0.1)% $ 3,929 2.7% $ 2,951 6.2% $ 853 1.8%
========== ========== ========== ========== ========== ========== ========== ==========
13
A summary of the Company's segments is as follows:
Electrical Components
Business
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------------------- -------------------------------------------------
2002 2001 2002 2001
----------------------- ----------------------- ----------------------- -----------------------
% of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Net Sales $ 93,953 100.0% $ 90,622 100.0% $ 30,988 100.0% $ 29,727 100.0%
Cost of Sales 58,226 62.0 57,825 63.8 18,697 60.3 18,669 62.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 35,727 38.0 32,797 36.2 12,291 39.7 11,058 37.2
Selling, general and
administrative expenses 19,983 21.3 19,559 21.6 6,764 21.8 6,520 21.9
Cumulative adjustment for
Aerospace -- -- (721) (0.8) -- -- -- --
Amortization of goodwill -- -- 1,204 1.3 -- -- 388 1.3
Other 420 0.4 -- -- 99 0.3 -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations $ 15,324 16.3% $ 12,755 14.1% $ 5,428 17.5% $ 4,150 14.0%
========== ========== ========== ========== ========== ========== ========== ==========
Mechanical Engineered Components
Business
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------------------- -------------------------------------------------
2002 2001 2002 2001
----------------------- ----------------------- ----------------------- -----------------------
% of % of % of % of
Net Net Net Net
Amount Sales Amount Sales Amount Sales Amount Sales
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
Net Sales $ 50,425 100.0% $ 56,772 100.0% $ 16,993 100.0% $ 16,800 100.0%
Cost of Sales 31,755 63.0 35,087 61.8 10,755 63.3 10,319 61.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 18,670 37.0 21,685 38.2 6,238 36.7 6,481 38.6
Selling, general and
administrative expenses 6,275 12.4 7,068 12.4 2,134 12.6 2,131 12.7
Amortization of goodwill -- -- 1,300 2.3 -- -- 436 2.6
Other 803 1.6 76 0.1 453 2.7 65 0.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations $ 11,592 23.0% $ 13,241 23.3% 3,651 21.5% $ 3,849 22.9%
========== ========== ========== ========== ========== ========== ========== ==========
Nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001
Net Sales: Net sales for the nine months ended September 30, 2002 ("Nine months
2002") decreased by approximately $3.0 million, or 2.0%, from approximately
$147.4 million for the nine months ended September 30, 2001 ("Nine months 2001")
to $144.4 million for the Nine months 2002. This decrease was the result of the
approximately $3.3 million, or 3.7%, increase in the net sales of the EC
business offset by the approximately $6.3 million, or 11.2%, decrease in net
sales of the MEC business.
14
For the first five months of 2001, the results of operations of the aerospace
division of Acme ("Aerospace") were excluded from the consolidated results of
the Company due to its classification as being held for sale during that period.
Net sales of the EC business, pro forma to include the net sales of Aerospace
for the entire period in the results of operations for the Nine months 2001,
declined by approximately $1.7 million, or 1.7% for the Nine months 2002. The
primary driver was the decline in sales for the power conversion product line of
the EC business. Net sales of the power conversion business for the Nine months
2002, pro forma to include the net sales of Aerospace for the entire period in
the results of operations for the Nine months 2001, declined by approximately
$2.7 million or 5.8%. This decline was the result of lower demand in the
industrial and telecom markets for power distribution products.
Net sales in the MEC business decreased by approximately $6.3 million for the
Nine months 2002 as compared to the Nine months 2001. This decrease is primarily
related to the decline in sales of the Company's lock product line, which has
continued to experience softness in demand across its major markets.
Gross Profit: Gross profit decreased by approximately $85,000, or 0.2%, from
approximately $54.5 million for the Nine months 2001 to approximately $54.4
million the Nine months 2002, resulting from the $2.9 million, or 8.9%, increase
in the gross profit of the EC business less the decline in gross profit of the
MEC business for Nine months 2002 of approximately $3.0 million, or 13.9%.
Gross profit of the EC business, pro forma to include the results of operations
of Aerospace for the entire period in the results of operations for the Nine
months 2001, increased by approximately $1.1 million for the Nine months 2002 as
compared to the Nine months 2001. The gross profit gains resulted from
productivity improvements experienced during 2002 as well as from a sales
product mix that resulted in higher margins.
The approximately $3.0 million decline in gross profit for the MEC business for
the Nine months 2002 as compared to the Nine months 2001 is primarily due to the
decline in sales of the lock product line of the MEC business for the Nine
months 2002.
The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business increased by approximately 1.8% from 36.2% for the Nine months 2001 to
38.0% to the Nine months 2002. For the MEC business, the GP percentage declined
by approximately 1.2% from 38.2% for the Nine months 2001 to 37.0% to the Nine
months 2002. The GP percentage for the EC business, pro forma to include the
results of operations of Aerospace for the entire period in the results of
operations for the Nine months 2001, increased by approximately 2.2% from 37.5%
for the Nine months 2001 to 39.7% for the Nine months 2001. The increase in GP
percentage for the EC business is the result of product mix and productivity
gains. The decline in GP percentage of the MEC business is primarily related to
a change in product mix and margin compression resulting from fixed overheads
being absorbed by lower sales levels primarily related to the lock product line.
Selling, General and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses declined by approximately $2.7 million, or
8.6%, from approximately $31.5 million for the Nine months 2001 to approximately
$28.8 million for the Nine months 2002. As a percentage of net sales, SG&A
decreased by 1.4% from 21.4% for the Nine months 2001 to 20.0% for the Nine
months 2002.
SG&A of the EC business increased by approximately $424,000 or 2.2%, for the
Nine months 2002 as compared to the Nine months 2001 and, as a percentage of net
sales, declined 0.3% for the Nine months 2002. SG&A of the EC business, pro
forma to include the results of operations of Aerospace for the entire period in
Nine months 2001, declined by approximately $1.2 million, or 5.9%, for the Nine
months 2002 as compared to the Nine months 2001, and, as a percentage of net
sales, SG&A, pro forma to include the results of operations of Aerospace for the
entire period in the results of operations for the Nine months 2001, decreased
0.9% for the Nine months 2002.
SG&A of the MEC business, which declined by approximately $793,000, or 11.2%,
for the Nine months 2002 as compared to the Nine months 2001, remained at 12.4%
of sales for the Nine Months 2002.
The decrease in SG&A expenses for the Nine months 2002 as compared to the Nine
months 2001 is primarily related to the closure of the corporate office of Acme.
For the Nine months 2001, the corporate office, which was closed in October
2001, added approximately $2.1 million to the consolidated SG&A expenses of the
Company during the Nine months 2001, including approximately $457,000 of
depreciation. Upon the close of the Acme corporate office, all remaining related
expenses of that office terminated.
The decrease in the SG&A of the EC business, pro forma to include the results of
Aerospace in the Nine months 2001, and decrease in SG&A of the MEC business were
primarily related to the Company's cost reduction initiatives put in place
during 2001 in response to the downturn in the economy and lower commissions due
to the lower sales volumes and commission mix of the sales volume.
15
Acme Aerospace Division Cumulative Adjustment: On September 1, 2001, the
Company, based on management's conclusion that the aerospace division of Acme
("Aerospace"), which was previously held for sale, was more valuable than what
current market conditions dictated and decided to retain rather than divest
Aerospace. On that date and in accordance with 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 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, which had been excluded from the results of operations of
the Company and had been included in goodwill.
Amortization of Goodwill: Goodwill amortization decreased by approximately $2.5
million during Nine months 2002 as compared to Nine months 2001, due to the
Company ceasing the amortization of goodwill as of January 1, 2002 as required
by Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets."
Other expenses: Other expenses increased approximately $1.1 million for the Nine
Months 2002 as compared to the Nine Months 2001. For the Nine Months 2002, the
other expenses include approximately $803,000 of start up expenses related to
the Company's new lock production facility in Mexico, approximately $320,000 of
expense related to the Acme Pension Plan and approximately $145,000 of deferred
finance costs which were written off when the Company amended its bank agreement
in June (see Liquidity and Capital Resources).
Income from Operations: Income from operations increased by approximately $3.3
million, or 15.5%, from approximately $21.1 million for the Nine months 2001 to
$24.3 million for the Nine months 2002. This increase resulted from the decrease
in gross profit of approximately $85,000 offset by the decreases in SG&A
expenses of approximately $2.7 million and goodwill amortization of
approximately $2.5 million. The decrease in operating expenses was reduced by
$721,000 of cumulative income recorded during the Nine months 2001 related to
Aerospace and the increase of other operating expenses of approximately $1.1
million discussed above. The Company finalized its impairment testing, as
prescribed by SFAS 142, during the third quarter to determine the amount of
final impairment.
Interest Expense: Interest expense declined by approximately $2.9 million, or
22.6%, during the Nine months 2002. This decrease is primarily due to lower
levels of outstanding borrowings during the Nine months 2002 as compared to the
Nine months 2001, as well as reduced rates of interest charged on the
outstanding principal on the variable rate term loan during the Nine months 2002
as compared to the Nine months 2001.
Provision for Income Taxes: The provision for income taxes increased by
approximately $2.0 million, or 45.0%, for the Nine months 2002 as compared to
the Nine months 2001. The increase is directly related to the increase in income
before taxes. The Company's effective tax rate for Nine months 2002 was
approximately 44% on income before taxes. The effective rate for the Nine months
2001 was 52.7%. Primary driver in the change in effective rate is due to the
removal of Goodwill amortization from the Company's permanent differences.
Cumulative effect in Change of Accounting Principle: In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, which are 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.
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.
16
In June 2002, the Company completed the assessment of its reporting units and
its initial step one impairment test on January 1, 2002 financial information.
As a result, the Company identified one reporting unit in the MEC business with
a book value of goodwill that exceeded its fair market value, which was
estimated using valuation methodology involving discounted cash flows and market
and transactional multiples of the reporting units. In accordance with SFAS 142,
the Company estimated the amount of the impairment and recorded a cumulative
effect in change of accounting principle, as of January 1, 2002, of
approximately $7.8 million, net of taxes of approximately $3.3 million, to write
down the goodwill associated with the Company's lock product line resulting from
the current market conditions of that product line. The Company finalized its
impairment testing, as prescribed by SFAS 142, during the third quarter to
determine the amount of final impairment. As a result, the Company reduced the
tax impact of the charge by approximately $353,000 to reflect the proper
deferred tax basis of the adjusted goodwill. No further impairment charges were
taken against the Company's goodwill.
Net (loss) Income: Net (loss) income decreased by approximately $4.0 million
from net income of approximately $3.9 million for the Nine months 2001 to a net
loss of approximately $114,000 for the Nine months 2002. While income from
operations increased by approximately $3.3 million and interest expense declined
approximately $2.9 million, other income declined by approximately $122,000 and
the Company's provision for taxes increased by approximately $2.0 million due to
the factors discussed above. The net increase in income before change in
accounting principle of approximately $4.1 million was more than offset by the
approximately $8.2 million charge taken to reduce the Company's carrying value
of its goodwill.
Three months ended September 30, 2002 compared to the three months ended
September 30, 2001
Net Sales: Net sales for the three months ended September 30, 2002 ("Quarter
2002") increased by approximately $1.5 million, or 3.1%, from approximately
$46.5 million for the three months ended September 30, 2001 ("Quarter 2001") to
approximately $48.0 million for the Quarter 2002. This increase was the result
of the approximately $1.3 million, or 4.2%, increase in the net sales of the EC
business and the approximately $193,000, or 1.1%, increase in net sales of the
MEC business for the Quarter 2002.
The increase in net sales for the EC business was driven by an increase in sales
in its specialty electrical components product line. The approximate $2.2
million increase in sales of the specialty electrical product line was driven by
growth in both its recreational and industrial markets. Further, net sales in
September 2001 were negatively impacted as a result of the terrorist attacks.
While the net sales of the power conversion product line remained in line with
Quarter 2001, the utility product line experienced a decline in net sales of
approximately $ 863,000 resulting from reduced capital spending by utilities in
response to the unsteady conditions which currently exist in their end markets.
Net sales in the MEC business increased by approximately $193,000 for the
Quarter 2002 as compared to the Quarter 2001. This increase is primarily the
combination of an approximately $1.8 million increase in sales by the Company's
turbocharger product line offset by an approximately $1.9 million decline in
sales of the Company's lock product line. The turbocharger product line has
experienced growth in overseas sales and an increase in domestic production in
anticipation of new environmental guidelines, which went into effect in October.
The decline in the sales of the Lock product line relate to continued softness
in demand across its major markets.
Gross Profit: Gross profit increased by $990,000, or 5.6%, from approximately
$17.5 million in the Quarter 2001 to approximately $18.5 million in the Quarter
2002, resulting from the $1.2 million or 11.2%, increase in the gross profit of
the EC business less the decline in gross profit of the MEC business for the
Quarter 2002 of approximately $243,000, or 3.7%.
The increase in gross profit of the EC business was driven by volume increases
experienced by the Company's specialty electrical component product line. In
addition, the Company's power conversion product line experienced approximately
$365,000 in increased gross profit for the Quarter 2002 as compared to the
Quarter 2001, resulting from productivity gains and mix.
The approximately $243,000 decline in gross profit of the MEC business for the
Quarter 2002 as compared to the Quarter 2001 is primarily due to the decline in
sales of the lock product line of the MEC business for the Quarter 2002 being
mostly offset by the increase in gross profit for the Quarter 2002 of the
Company's turbocharger product line.
The GP percentage, for the EC business increased by approximately 2.5% from
37.2% for the Quarter 2001 to 39.7% for the Quarter 2002. For the MEC business,
the GP percentage declined by approximately 1.9% from 38.6% for the Quarter 2001
to 36.7% for the Quarter 2002. The change in GP percentage for the EC business
is the result of volume leverage, product mix and productivity gains. The change
in GP percentage for the MEC business is primarily related to a change in
product mix and margin compression resulting from fixed overheads being absorbed
by lower sales levels related to the lock product line.
17
Selling, General and Administrative Expenses: SG&A expenses declined by
approximately $630,000, or 6.2%, from approximately $10.2 million for the
Quarter 2001 to approximately $9.6 million for the Quarter 2002. As a percentage
of net sales, SG&A decreased by approximately 2.0% for the Quarter 2002 as
compared to the Quarter 2001. SG&A of the EC business increased by approximately
$244,000, or 3.7%, for the Quarter 2002 as compared to the Quarter 2001 and, as
a percentage of net sales, decreased by 0.1% to 21.8% for the Quarter 2002. SG&A
of the MEC business, which remained in line with Quarter 2001, was approximately
$2.1 million for the Quarter 2002.
The decrease in SG&A expenses for the Quarter 2002 as compared to the Quarter
2001 is primarily related to the closing of the corporate office of Acme. For
the Quarter 2001, the corporate office, which was closed in October 2001, added
approximately $372,000 to the consolidated SG&A expenses of the Company during
the Quarter 2001. Upon the close of the Acme corporate office, all remaining
related expenses of that office terminated.
The increase in SG&A of the EC business is primarily related to commissions
based on higher sales of certain product lines as compared to Quarter 2001. The
MEC business remained in line with the prior year as the decline in SG&A of the
Lock product line for the Quarter 2002 was offset by the increase in SGA of the
turbocharger product line for the Quarter 2002.
Amortization of Goodwill: Goodwill amortization decreased by approximately
$824,000 during the Quarter 2002 as compared to the Quarter 2001, due to the
Company ceasing the amortization of goodwill as of January 1, 2002 as required
by Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets."
Other expenses: Other expenses increased by approximately $567,000. For the
Quarter 2002 the other expenses include approximately $453,000 of start up
expenses related to the Company's new lock production facility in Mexico and
approximately $180,000 of expense related to the Acme Pension Plan (see
Liquidity and Capital Resources).
Income from Operations: Income from operations increased by approximately $1.9
million, or 29.2%, from approximately $6.4 million in the Quarter 2001 to
approximately $8.3 million in the Quarter 2002. This increase resulted from the
increase in gross profit of approximately $990,000 and decreases in SG&A
expenses of approximately $630,000 and goodwill amortization of approximately
$824,000. The decrease in operating expenses was reduced by an increase in other
operating expenses of approximately $567,000.
Interest Expense: Interest expense decreased by approximately $588,000, or
15.1%, during the Quarter 2002. This decrease is primarily due to lower levels
of outstanding borrowings during the Quarter 2002 as compared to the Quarter
2001, as well as reduced rates of interest charged on the outstanding principal
on the variable rate term loan during Quarter 2002 as compared to Quarter 2001.
Provision for Income Taxes: The provision for income taxes increased by
approximately $288,000, or 16.3%, for the Quarter 2002 as compared to the
Quarter 2001. The increase in provision for taxes is primarily related to the
increase in income before taxes. The Company's effective tax rate for the
Quarter 2002 was approximately 41.1% on income before taxes. The Company's
effective rate declined approximately 4.5% due to the elimination of goodwill
amortization beginning on January 1, 2002. Principally all of the company's
goodwill is non-deductible for tax purposes.
Net Income: Net Income increased by approximately $2.1 million from
approximately $853,000 for the Quarter 2001 to approximately $3.0 million for
the Quarter 2002. The increase resulted from the increase in income from
operations of approximately $1.9 million, a decrease in interest expense of
approximately $588,000 and an increase in provision for taxes of approximately
$288,000, due to the factors discussed above.
18
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 $80.0 million of uncollateralized 10.5% senior notes due 2008 and
its outstanding credit facilities. The credit facility provides for a six-year
$40.0 million revolving credit facility and a six-year $100.0 million term loan
facility. The 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 September 30, 2002
or 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 3.5% and require the payment of a commitment fee of 0.5% on
the unused portion of the facility as well as quarterly commitment fees.
The credit facility also allows for up to $5.0 million of outstanding letters of
credit. At September 30, 2002, the Company had one letter of credit outstanding
for approximately $443,000. The letter of credit primarily relates to
outstanding Acme workman's compensation claims.
The 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.
In June 2002, the Company amended its credit agreement (the "Amendment") to
provide for revised financial covenant ratios from September 30, 2002 through
December 2003 from the original covenant ratios stipulated in the credit
agreement. In addition, the Amendment revised the Company's applicable margin on
borrowings, the maximum allowable capital expenditures through 2003 and reduced
the amount allowed for permitted acquisitions (as defined in the credit
agreement) from $15 million to $7.5 million through the end of 2003. Concurrent
with the Amendment, the Company voluntarily reduced the availability under its
revolving credit facility by $15 million from $40 million to $25 million through
the end of 2003. At September 30, 2002, the Company was in compliance with the
covenants of the credit agreement set forth in the Amendment. In connection with
the Amendment and as a result of the Company voluntarily reducing its borrowing
capacity through the end of 2003, the Company wrote off $145,000 of the deferred
finance costs related to amending the Company's credit facility.
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 $10.0 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 September 30, 2002, the Company had no outstanding
commitments for capital expenditures. The Company anticipates its capital
expenditures for the year ended December 31, 2002 to be approximately $3.0
million. The expenditures are primarily needed to maintain its facilities and
expand its production capacity for the Company's ongoing initiative 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.
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 liquidation preferences of $107 million for its preferred stock plus any
dividends payable in arrears (at September 30, 2002 there were approximately
$2.5 million in cumulative dividends in arrears, payable in-kind), 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 September 30,
2002 approximately 1.3 million KCI common shares plus potentially 190,000 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 the
tax obligations of KCI in its tax provision.
19
Cash flows provided by operating activities were approximately $17.0 million and
$12.6 million for the Nine months 2002 and 2001, respectively. The net increase
of approximately $4.4 million for the Nine months 2002 resulted primarily from
the increase in net income plus non-cash charges of the Company of approximately
$1.3 million as compared to the Nine months 2001 and an increase resulting from
the net change in accrued expenses and other liabilities and prepaid expenses
and other assets of approximately $2.1 million and $1.3 million, respectively.
The working capital accounts (accounts receivable, inventory and accounts
payables) provided net cash of approximately $907,000 for the Nine months 2002
compared to the approximately $1.1 million of net cash provided during the Nine
months 2001, for a net decline of approximately $160,000. Accrued expenses and
other liabilities attributed $2.1 million of the approximately $4.4 million
increase in cash flows from operations over the Nine months 2001 primarily
related to the changes in accrued expenses related to the Acme acquisition and
accrued compensation resulting from changes in accrued bonuses for certain
operating divisions. The increase in prepaid expenses relates directly to the
increase in prepaid insurance.
Cash flows used in investing activities were approximately $1.7 million and $1.9
million for the Nine months 2002 and the Nine months 2001, respectively. Capital
expenditures for the Nine months 2002 and the Nine months 2001 were
approximately $2.1 million and $3.3 million, respectively. The decrease in
capital expenditures from the Nine months 2002 to the Nine months 2001 was
primarily due to the Company's cost containment strategies in response to the
downturn in the economy. Proceeds from the assets held for sale were
approximately $364,000 and $1.3 million for the Nine months 2002 and the Nine
months 2001, respectively.
Cash flows from financing activities used net cash of approximately $15.3
million and approximately $12.8 million during the Nine months 2002 and the Nine
months 2001, respectively. The net cash used in financing activities for the
Nine months 2002 was related to the Company's net repayment of outstanding debt
under its existing credit facilities during the two periods. The debt payments
during the Nine months 2002 were primarily prepayments against its outstanding
term loan. The payments are first applied to the Company's next two scheduled
payments and then are ratably applied to the remaining required principal
payments. During the Nine months 2001, the Company repaid a net of approximately
$11.8 million of term debt and $2.8 million of debt outstanding on the revolving
credit facility. The Company also distributed approximately $906,000 during the
Nine months 2001 to its member so that it could repurchase common stock from a
shareholder.
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 next twelve
months.
Significant Accounting Policies
Financial Reporting Release No. 60 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
in the Company's 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 value, 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 September 30, 2002, the Company
had recorded approximately $108.1 million in goodwill and other intangible
assets, net of accumulated amortization 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.
20
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's 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 carrying amounts of its long lived assets; 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 effects of
its existing pension plans in its financial statements which the Company records
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, (vi) the Company's ability to evaluate
the fair market value of its reporting units to assess the book value of
goodwill, and (vii) estimates of future results of the Company's operations on
which the Company's financial covenants, as defined in its credit facilities,
were based, in part; 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.
Inflation
Inflation has not been material to the Company's operations for the periods
presented.
Backlog
The Company's backlog of orders as of September 30, 2002, was approximately
$26.7 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
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.
21
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 June 2002, the Company completed the assessment of its reporting units and
its initial step one impairment test on January 1, 2002 financial information.
As a result, the Company identified one reporting unit in the MEC business with
a book value of goodwill that exceeded its fair market value, which was
estimated using valuation methodology involving discounted cash flows and market
and transactional multiples of the reporting units. In accordance with SFAS 142,
the Company estimated the amount of the impairment and recorded a cumulative
effect in change of accounting principle, as of January 1, 2002, of
approximately $7.8 million, net of taxes of approximately $3.4 million, to write
down the goodwill associated with the Company's lock product line resulting from
the current market conditions of that product line. The Company finalized its
impairment testing, as prescribed by SFAS 142, during the third quarter to
determine the amount of final impairment. As a result, the Company reduced the
tax impact of the charge by approximately $353,000 to reflect the proper
deferred tax basis of the adjusted goodwill. No further impairment charges were
taken against the Company's goodwill.
In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 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. SFAS 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
adoption of SFAS 144 did not have a material impact on the earnings or financial
position of the Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from
the extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. SFAS 145 requires that
most gains and losses from the extinguishment of debt no longer be classified as
extraordinary items and that they be recorded as part of the results of
operations. In additions, SFAS 145 amends FASB Statement No. 13 to require that
certain lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
Lastly, SFAS 145 makes technical corrections to existing pronouncements. While
those corrections are not substantive in nature, in some instances, they may
change accounting practice. The Company adopted the statement as of January 1,
2002. The adoption of SFAS 145 did not have a material effect to the Company's
financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement sets forth various
modifications to existing accounting guidance which prescribes the conditions
which must be met in order for costs associated with contract terminations,
facility consolidations, employee relocations and terminations to be accrued and
recorded as liabilities in financial statements. This statement is effective for
exit or disposal activities initiated after December 31, 2002. The Company is
currently evaluating the impact of this statement to determine the effect, if
any, it may have on its consolidated results of operations and financial
position.
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.
22
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risk is related to the variability in
interest rates associated with the $69.7 million outstanding under its term loan
and with any amounts outstanding under its $40-million revolving credit
facility. In connection with the Amendment to the credit facility (see Liquidity
and Capital Resources) the Company has voluntarily reduced its borrowing
capacity under the revolving credit facility by $15.0 million through the end of
2003. There were no borrowings outstanding on September 30, 2002 under the
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 5.1% until November 25, 2002, when the
underlying LIBOR contract is up for renewal. At September 30, 2002, the Company
had no borrowings under its revolving credit facility and was one payment ahead
of its amended schedule on its term loan. A 1% change in the interest rate for
the Company's credit facilities in place at December 31, 2001 would have
resulted in a change in the Company's annual 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 4. Controls and Procedures.
Within the 90 days prior to the date of this report, under the supervision and
with the participation of management, including KCLLC's Chief Executive Officer,
President and KCLLC's Chief Financial Officer, KCLLC evaluated the effectiveness
of the design and operation of its disclosure controls and procedures pursuant
to Exchange Act Rule 15d-14. Based upon that evaluation, KCLLC's Chief Executive
Officer, President and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in timely alerting the Chief
Executive Officer, President and Chief Financial Officer to material information
relating to KCLLC (including its consolidated subsidiaries) required to be
included in its periodic SEC filings. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date of their evaluation.
Within the 90 days prior to the date of this report, under the supervision and
with the participation of management, including Finance Corp.'s Chief Executive
Officer, President and Finance Corp.'s Chief Financial Officer, Finance Corp.
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 15d-14. Based upon that
evaluation, Finance Corp.'s Chief Executive Officer, President and Chief
Financial Officer have concluded that the Finance Corp.'s disclosure controls
and procedures are effective in timely alerting the Chief Executive Officer,
President and Chief Financial Officer to material information relating to
Finance Corp. required to be included in its periodic SEC filings. There have
been no significant changes in Finance Corp.'s internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
23
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the third
quarter of the year ending December 31, 2002:
Date of Report Date Report Filed with SEC Items Reported
-------------- -------------------------- --------------
August 14, 2002 August 14, 2002 Item 9. Regulation FD Disclosure
24
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS, LLC
Date: November 14, 2002 By: /s/Clay B. Lifflander
----------------------
Clay B. Lifflander
Chief Executive Officer
Date: November 14, 2002 By: /s/ Robert. B. Kay
--------------------
Robert B. Kay
President
Date: November 14, 2002 By: /s/Keith A. McGowan
--------------------
Keith A. McGowan
Chief Financial Officer
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEY COMPONENTS FINANCE CORP.
Date: November 14, 2002 By: /s/ Clay B. Lifflander
-----------------------
Clay B. Lifflander
Chief Executive Officer
Date: November 14, 2002 By: /s/ Robert. B. Kay
--------------------
Robert B. Kay
President
Date: November 14, 2002 By: /s/ Keith A. McGowan
---------------------
Keith A. McGowan
Chief Financial Officer
25
Certifications
I, Clay B. Lifflander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Clay B. Lifflander
- ----------------------
Clay B. Lifflander
Chief Executive Officer
I, Robert B. Kay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert B. Kay
- -----------------
Robert B. Kay
President
I, Keith A. McGowan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Keith A. McGowan
- --------------------
Keith A. McGowan
Chief Financial Officer
I, Clay B. Lifflander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components Finance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Clay B. Lifflander
- ----------------------
Clay B. Lifflander
Chief Executive Officer
I, Robert B. Kay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components Finance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Robert B. Kay
- -----------------
Robert B. Kay
President
I, Keith A. McGowan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Key Components Finance
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Keith A. McGowan
- --------------------
Keith A. McGowan
Chief Financial Officer