KEY COMPONENTS LLC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2002

OR
|_| TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from ________ to ____________

Commission File Number: 333-58675-01
------------

KEY COMPONENTS, LLC
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Delaware 04-3425424
- -------------------------------------------- ------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

200 White Plains Road, Tarrytown, New York 10591
- -------------------------------------------- ------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(914) 332-8088
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: None
----
Commission File Number: 333-58675-01
------------
KEY COMPONENTS FINANCE CORP.*
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)

Delaware 14-180594
- ------------------------------------------- ------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

200 White Plains Road, Tarrytown, New York 10591
- ------------------------------------------- ------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

(914) 332-8088
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes |_| No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K. Not Applicable

Indicate by checkmark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2) Yes__ No X_

State the aggregate market value of common equity held by
non-affiliates as of March 6, 2003: Not applicable since the membership
interests in Key Components, LLC were owned by Key Components, Inc., a privately
held New York corporation, and all of the shares of common stock of Key
Components Finance Corp. were owned by Key Components, LLC.

Documents Incorporated by Reference: None

* Key Components Finance Corp. meets the conditions set forth in
General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this
form with the reduced disclosure format.

PART I

Key Components LLC ("KCLLC"), a Delaware limited liability corporation, is the
parent holding company for its wholly owned subsidiaries, including Key
Components Finance Corp. ("Finance Corp."). KCLLC, together with such
subsidiaries, including Finance Corp., are collectively referred to herein as
the "Company." Key Components, Inc. ("KCI"), a New York corporation, is the sole
member of KCLLC. KCI has no other assets other than its interest in KCLLC and
has no operations. Accordingly, any transactions of KCI or obligations related
to KCI are reflected in the consolidated financials statements of the Company
and are reflected in the disclosures in this Form 10-K.

Item 1. Business

KCLLC, a Delaware limited liability corporation organized on May 15, 1998,
maintains its principal office at 200 White Plains Road, Tarrytown, New York
10591 and its telephone number is (914) 332-8088. The Company files current,
quarterly and annual reports on Form 8-K, Form 10-Q and Form 10-K, respectively.
They can be accessed through the EDGAR database at www.sec.gov. Any debenture
holder can request a copy of filings in writing to the Company's principal
office.

The Company is a leading manufacturer of custom engineered essential componentry
for application in a diverse array of end-use products. The Company targets
original equipment manufacturer ("OEM") markets where the Company believes its
value-added engineering and manufacturing capabilities, along with its timely
delivery, reliability and customer service, enable it to differentiate the
Company from its competitors and enhance profitability. The Company conducts its
operations through its two businesses, its electrical components ("EC") business
and its mechanical engineered components ("MEC") business. The EC business
product offerings include power conversion products, specialty electrical wiring
devices and connectors and high-voltage utility switches which are manufactured
by its subsidiaries Acme Electric Corporation ("Acme"), Marine Industries, LLC
("Marinco"), Atlantic Guest, Inc. ("Guest") and Turner Electric, LLC ("Turner").
The product offerings of the MEC business consist primarily of flexible shaft
and remote valve control components, turbo-charger components and medium
security lock products and accessories, which are manufactured by its
subsidiaries B.W. Elliott Manufacturing Co., LLC ("BWE"), Gits Manufacturing,
LLC ("Gits"), Hudson Lock, LLC ("Hudson") and ESP Lock Products, LLC ("ESP"). No
one customer accounted for more than ten percent of sales of the Company for any
of the three years ended December 31, 2002. For the years ended December 31,
2002, 2001 and 2000, four customers, who are subsidiaries of one company,
accounted for approximately 14%, 13% and 12% of sales, respectively, of the MEC
business. (See Note 5 to the Company's consolidated financial statements
elsewhere in this Form 10-K for information concerning the Company's business
segments).

Acquisition History

The 1992 acquisition of BWE began the acquisition program of the Company to
acquire small to medium size manufacturers of essential niche components for use
in various OEM customer products. In 1993, the Company acquired the flexible
shaft division of Stow Manufacturing Company, Inc., as a consolidation
opportunity for BWE. During 1997 and 1998, the Company added to the MEC's
product offerings with the acquisitions of Hudson and ESP. During 1999, the
Company complemented its MEC product offerings and formed its EC business
through its acquisition of Valley Forge Corporation ("VFC"). The Company
expanded its EC business with the acquisition of Acme in November 2000 (see Note
2 to the consolidated financial statements contained elsewhere in this Form
10-K).

The Company has historically acquired complementary or related manufacturing
businesses and sought to integrate them into existing operations. Following an
acquisition, management seeks to rationalize operations, reduce overhead costs,
develop additional cross-selling opportunities and establish new customer
relationships. As a result of its integration efforts and internal growth, the
Company's consolidated net sales have increased from approximately $9.1 million
in fiscal year 1992 to approximately $187.9 million for fiscal year 2002.

The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies (see Note 13 to the Company's consolidated financial
statements elsewhere in this Form 10-K).

1

Electrical Components

The Company's EC business features three major product lines: (i) power
conversion products, (ii) specialty electrical components ("SPEC") and (iii)
electric utility components.

Power Conversion Products

The Company's acquisition of Acme enabled the Company's EC business to enter
into the production of power conversion products. Power conversion product net
sales were approximately 30% of the Company's consolidated net sales for the
year ended December 31, 2002. Acme's primary products are transformers that
range in size from 1/4 KVA (1,000 volts x Amps) to 1,000 KVA. A transformer is
an electrical device designed to convert alternating current from one voltage to
another. A transformer has no moving parts and is a completely static
solid-state device, which insures a long and maintenance-free life under normal
operating conditions. It consists, in its simplest form, of two or more wires or
coils wound on a laminated steel core. The Company has 1,400 active transformer
models, which are sold through two primary sales channels, its wholesale
distribution network and through direct sales to OEMs. Products sold through the
wholesale distribution network are generally smaller sized transformer models.
Due to the small size of the average order, the margins achieved are generally
higher than those achieved selling to OEMs. In the OEM sales channel, customers
are offered custom-built products, which generally achieve lower margins as
products are price-reduced in anticipation of a higher volume of orders. The
Company believes the OEM sales channel will drive the transformer product line's
revenue growth. Transformer designs rarely change and most transformers have a
long useful life.

Acme operates in a segment of the transformer market which was estimated by the
National Electrical Manufacturers Association to be approximately $315 million
for 2002. This segment is defined as being comprised of dry type transformers,
which are less than 600 volts and range from 1/4 to 1,000 KVA. The competition
in this segment is divided into two tiers: the large switch gear manufacturers,
that sell transformers as part of a package of products, such as General
Electric, Electrical Distribution Products, a division of Schneider Electric
("Square D"), Hammond Manufacturing Inc., Eaton Corporation and Siemens, and
transformer specialists, such as Acme, Sola/Heavy-Duty, Jefferson Electric, Inc.
and Federal Pacific. Acme supplies products that comprise approximately 15% of
the total market, which is approximately one half that of General Electric and
Square D's market share but twice that of any other competitor.

In June 2001, the Company determined to retain the aerospace division of Acme as
part of the power conversion product line (see Note 2 to the consolidated
financial statements elsewhere in this Form 10-K). This expanded the power
conversion product line to include battery charger systems and the manufacturing
of fibrous nickel cadmium batteries for use in such battery systems, power
control systems, power supplies and converters used primarily in aerospace
applications. Major customers of this product line include governmental defense
manufacturers and OEM aerospace manufacturers. The aerospace aftermarket is an
increasing share of the product line's revenues as the quantity of batteries and
systems sold by the Company that are designed into OEM applications has grown
over the last five years.

Specialty Electrical

Within the SPEC market, the Company's core market niches are the recreational
and industrial markets, where the Company sells to both OEM customers and
after-market retail customers under brand names such as Marinco, Guest, AFI,
Nicro, Park Power, and various private labels. In the recreational marine
market, where the Company sells the entire range of its product offerings, the
Company specifically targets the blue water/leisure boating and inland
fishing/bass boat market segments and has a strong market presence. Customers
include OEMs and major after-market distributors. The Company's wiring devices
and components are designed to withstand hostile weather and corrosive
environments, while remaining easy to install in less than ideal conditions.
SPEC products include; (i) weather and corrosion resistant wiring devices, such
as ship-to-shore electrical connectors for marine and vehicle-to-outlet
connectors for recreational vehicle applications; (ii) onboard "potted" (i.e.,
completely insulated) battery chargers for outdoor applications including bass
boat and other marine applications; and (iii) various accessory products such as
plugs, receptacles, electrical switches, solar ventilation products, and boat
accessories such as horns, windshield wiper systems, lighting products, and teak
accessories. Net sales of the Company's SPEC products accounted for
approximately 24% of the Company's consolidated net sales for the year ended
December 31, 2002. The SPEC product line enjoys a dominant market position in
its core market where the Company's brands are highly regarded by both OEM and
aftermarket customers.

2

The Company's SPEC product line also has products targeted for industrial
applications. The market share of the Company's SPEC's products has grown
dramatically since these products were targeted to the industrial marketplace
approximately six years ago. The primary product offerings include; (i) onboard
"potted" battery chargers for industrial and healthcare applications such as
fork and "scissor" lifts, personal mobility carts, and electric wheelchairs; and
(ii) specialty wiring devices designed for industrial applications where
protection from water, chemicals, dust, or other elements is required. Growth in
this market has resulted from the development of customized products for
applications such as outdoor power generators, movie and theatrical production,
and semiconductor equipment manufacturing.

Electric Utility Components

The Company dominates the design and manufacture of high-voltage switchgear for
electric utilities in the power transmission segment of the electric utility
industry. While the Company competes in the distribution and substation segments
of the electric utility marketplace as well, it is in the transmission segment
that the Company has, over time, secured its relative position through superior
quality and service, and by creating high barriers to entry through
specialization, reputation, and investments in machinery and equipment. Net
sales of the Company's electric ulitilty products were approximately 9% of the
Company's consolidated net sales for the year ended December 31, 2002.
Significant customers include large utilities. The EC business switchgear
products consist primarily of air break switches, load break interrupters, and
accessory equipment. Air break switches are used for sectionalizing and routing
power from one point to another. Load break interrupters allow the
sectionalizing and routing of power under full load conditions. Accessory
equipment enables the utility operator to program parameters and related
functions that will automatically sectionalize and switch power flow in the
event of a fault. Once switched, the faulted line can be repaired, re-energized,
and returned to service with minimal downtime or loss of service revenue.

Mechanical Engineered Components

The MEC business features three major product lines: (i) flexible shafts for the
transmission of rotary power, (ii) turbocharger components, including wastegate
actuators, and (iii) medium-security locks and locking systems.

Flexible Shafts

The Company is the leading domestic designer and manufacturer of flexible shaft
products and assemblies. Net sales of flexible shaft products were approximately
10% of the Company's net sales for the year ended December 31, 2002. Flexible
shafting is constructed utilizing unique wire winding technology. Flexible shaft
assemblies are custom designed for the transmission of rotary power at low
torque levels (less than ten horsepower), and can be incorporated into almost
any machine, product, or device replacing conventional power transmission
components such as rigid shafts, gearboxes, universal joints, and couplings.
Flexible shafts are integrally designed into the OEM's final product to offer
benefits, such as lighter weight, fewer component parts, less assembly time, and
greater freedom in design, resulting in a lower manufacturing cost for the OEM's
final product. The flexible shaft assemblies are critical components utilized in
weed trimmers, concrete vibrators, lawn tractors, aircraft engines and wings,
plant processing equipment, large vessels such as Navy ships, nuclear power
plants, and many other applications in a variety of industries. The potential
applications for flexible shafting are limited only by the Company's ability to
develop new solutions to integrate flexible shafts into new OEM designs or to
displace conventional power transmission products in existing applications.

Turbocharger components

The Company is a primary outsource supplier of turbocharger components to the
domestic and international market for turbocharged diesel engines. The Company's
turbocharger components are essential components of diesel engine turbocharger
systems which, through the use of flow valve controls, increase engine power,
efficiency, and economy while reducing emissions. As the primary supplier of
turbocharger components and exhaust gas systems to nearly every major OEM
turbocharger manufacturer, the Company's products can be found on a variety of
truck, pick-up, and heavy-duty diesel-operated platforms. End-use customers for
the Company's products include high-end truck and vehicle manufacturers such as
Ford Motor Company. Net sales of the Company's turbocharger components products
accounted for approximately 14% of the Company's consolidated net sales. The
Company holds multiple patents and is very active in the development of new
products to expand the Company's product line, including related emission
control products.

3

Medium-Security Locks and Locking Systems

The Company competes in the medium-security segment for cylindrical lock
applications. Medium-security locks are used in applications that involve
non-life-threatening situations or when articles of low to moderate financial
value are being secured. The Company produces highly engineered, custom, and
specialty medium-security locks and locking systems to meet OEM customers'
specifications for use in office furniture, point of sale terminals, bank bags,
post office boxes, storage lockers, and other applications. Net sales of the
Company's lock products were approximately 12% of the Company's consolidated net
sales for the year ended December 31, 2002. The Company's lock products are
typically small and low-cost but are precision-engineered and custom-designed
critical components of a larger, more expensive end product. The Company also
produces locking systems, which provide a safety feature used to prevent
multiple drawers from being opened simultaneously in filing cabinets and desks.
The Company is a sole or primary source for locks to leading furniture OEMs.

Sales and Marketing

The Company employs both salaried and commission-based sales personnel, as well
as independent sales representatives and distributors to facilitate the
marketing and sales of its products. The Company's sales and marketing teams
have adopted an integrated approach to product development, marketing and sales.
They seek to work closely with the Company's engineers to address customer
specific design requirements and the hurdles associated therewith, as well as
potential product profitability. In addition, the sales team is responsible for
keeping the Company's engineering, manufacturing and management personnel
advised of possible future trends and requirements of customers. The Company's
sales and marketing personnel also focus on bringing customers a level of
personal service the Company believes to be superior to its competitors.

Raw Materials and Suppliers

The primary raw materials used by the Company are copper, brass, zinc, stainless
steel, steel wire and rubber, all of which are commodity items, readily
available from a wide range of sources. The Company has enjoyed and continues to
enjoy good relations with its suppliers and has not suffered any significant
interruptions in the delivery of its required materials. Additionally, the
Company is not dependent on any single supplier. In the event a supply
arrangement is terminated, the Company would be forced to look elsewhere for its
raw materials. Management believes these can be obtained with minimal, if any,
business interruption. However, the prices for such materials can fluctuate, and
such fluctuations can be material. A significant increase in raw material prices
could adversely affect the results of operations of the Company.

Competition

While the Company faces competition in each of its business segments, management
believes that its products are able to achieve a significant share of their
related market niches due to a variety of factors. The Company's strategy is to
differentiate its products from its competitors', by providing high product
quality, customer service, superior design capabilities and proprietary,
vertically integrated manufacturing processes. The Company's strategy of
providing custom engineered solutions and a high level of service to its
customer base it has protected and strengthened its market share in the markets
that it serves. Although it is possible other competitors may seek to serve
these markets, the Company believes significant barriers to entry exist,
including the unwillingness of OEMs to expand their vendor relationships for the
same products purchased, the availability of customized processes which enable
the Company to service its customers' needs on an efficient basis and the
capital investment required to purchase the equipment needed to manufacture
products of similar quality.

Environmental and Safety Regulations

The Company's operations are subject to federal, state and local environmental
laws and regulations, which impose limitations on the discharge of pollutants
into the air and water and establish standards for treatment, storage and
disposal of solid and hazardous wastes. The Company believes that it is in
substantial compliance with applicable environmental laws and regulations. The
Company also maintains environmental insurance at certain of its locations.

4

Employees

As of December 31, 2002, the Company employed 1,457 persons on a full-time
basis. Of these employees, 722 were employed in the EC business, 727 were
employed in the MEC business and the Company's corporate office had 8 employees
as of December 31, 2002. One of the Company's subsidiaries had a collective
bargaining agreement, which covered 67 employees. Neither KCLLC nor any of its
subsidiaries has ever had a work stoppage and each of KCLLC and its subsidiaries
considers its relationship with its employees to be satisfactory.

Item 2. Properties

At December 31, 2002 the Company's principal properties consisted of:

Manufacturing Use/ Corporate Square
Facility office Location Footage Owned/Leased
- --------------------------------------------------------------------------------------------------------------------

KCLLC Corporate office Tarrytown, NY 3,000 Leased

Electrical Engineered
Components:
Acme Power conversion Lumberton, NC 128,000 Owned
Acme Power conversion Monterrey, Mexico 45,000 Leased
Acme Power conversion Tempe, AZ 35,000 Leased
Marinco SPEC Napa, CA 77,000 Leased
Guest SPEC Meriden, CT 33,000 Owned
Turner Utility switchgear Fairview Heights, IL 52,000 Owned
Turner Utility switchgear Milstadt, IL 28,000 Leased

Mechanical Engineered
Components:
BWE Flexible shaft products Binghamton, NY 250,000 Owned
Gits Turbocharger components Creston, Iowa 60,400 Owned
Gits Turbocharger components Chonburi, Thailand 17,200 Leased
Hudson Lock products Hudson, MA 218,000 Owned
Hudson Lock products Monterrey, Mexico 37,500 Leased
ESP * Lock products Leominster, MA 55,000 Leased

* The lease for ESP Facility terminates in May 2003. During 2002 the Company
moved most of the production from this facility into its Hudson facility and
into its lock product facility in Mexico. The Company does not intend to
renew the lease for the ESP facility.

Item 3. Legal Proceedings

None.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2002.

5

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

KCLLC's membership interests are not publicly traded (see "Certain Relationships
and Related Transactions").

Item 6. Selected Financial Data

The following selected financial data has been derived from the consolidated
financial statements of the Company included elsewhere in this Form 10-K. The
financial data set forth includes the results of operations of its wholly owned
subsidiaries from their respective dates of acquisition. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and the Company's consolidated
financial statements and notes thereto.

Year ended December 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------

Net Sales $187,943 $193,817 $160,465 $144,400 $61,862
Income from operations 17,287 26,486 31,368 22,346 11,953
Income from continuing operations 4,154 4,731 3,899 4,843 4,619
Net (loss) income (a)(b) (c) (d) (6,631) 4,731 (1,316) 4,815 3
Total assets 192,714 225,719 245,671 181,256 93,144
Long term debt (including current
maturities) (e) (f) 143,844 165,837 182,711 149,149 81,278

(a) Upon the adoption of SFAS 142, the Company stopped recording goodwill
amortization effective January 1, 2002. In June 2002, the Company completed
the assessment of its reporting units and its initial assessment of
impairment upon adoption. 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 a valuation methodology that
triangulates the discounted cash flows, market multiples 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 of change in 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, as prescribed by SFAS 142, finalized its
impairment testing by comparing the implied fair value of the reporting
unit's goodwill to its carrying value during the third quarter to determine
the amount of the final impairment upon adoption of SFAS 142. 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 December 2002, in accordance with SFAS 142, the Company performed its
required annual fair value testing of its recorded goodwill for its
reporting units using a valuation approach consistent with the one used upon
adoption of SFAS 142. As a result of the analysis, the Company recorded a
charge of approximately $12.4 million, which is included in the Company's
operating expenses, related to its lock reporting unit, which experienced a
further decline of its fair value since the January 1, 2002 assessment, due
to a deterioration in the current year of its results of operations compared
to its operating plan and projected future financial results as well as a
decline in the market multiple ascribed to the product line in its fair
market valuation. Through December 31, 2002, the Company's cumulative
impairment of goodwill was approximately $23.5 million, all of which related
to its lock product line.

(b) Effective May 31, 1997, BWE, Hudson and ESP each elected to be treated as an
S corporation, which caused the shareholders of their then parent company,
KCI, to be personally liable for the taxes on the income of the Company.
Through August 31, 1999, VFC was a C corporation and was responsible for
paying taxes on its income. Effective August 31, 1999, VFC was merged into
KCLLC and most of VFC's subsidiaries, as well as BWE, Hudson and ESP, were
converted to limited liability company ("LLC"). Corporations that elect to
be treated as S corporations and LLCs are not liable for the majority of
taxes on their income, which are imposed instead on their shareholders or
members. Accordingly, subsequent to May 31, 1997 through December 31, 1998,
the provision for income taxes includes only those taxes applicable to
certain states.

6

For the year ended December 31, 1999, the Company's provision for income
taxes related primarily to VFC's consolidated taxable income (as a C
corporation) and the taxable income of the subsidiaries not converted to LLC
status. On May 22, 2000, KCI's S election terminated and KCI became
responsible for taxes on the income of the Company (See Notes 1 and 9(a) to
the consolidated financial statements)

(c) Net (loss) income for the years ended December 31, 2000 and 1998 reflects an
extraordinary loss, net of tax, on early extinguishment of debt of
approximately $1.2 million and $4.6 million, respectively.

(d) Net (loss) income for the years ended December 31, 2000 and 1999 reflects
loss from discontinued operations, net of tax, of approximately $4.0 million
and $28,000 respectively.

(e) Does not include approximately $5.9 million related to accrued stock
appreciation rights as of December 31, 1999.

(f) Includes approximately $13.1 million of redeemable member's equity at
December 31, 1999.

Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations

General

KCLLC is the parent holding company of the wholly owned subsidiaries of the
Company. KCI, the sole member of KCLLC, holds no other assets other than its
investment in KCLLC and has no operations. The Company has two operating
business segments, its electrical components ("EC") business and mechanical
engineered components ("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
primarily of flexible shaft and remote valve control components, turbo-charger
actuators and medium security lock products and accessories. The Company's EC
business was formed through its acquisition of VFC in 1999. The Company expanded
the product offerings of its EC business with the power conversion product lines
it acquired through its acquisition of Acme in November 2000. (See Note 2 to the
Company's consolidated financial statements contained elsewhere in this Form
10-K). The Company's MEC business, which was comprised of its flexible shaft and
lock product lines prior to the VFC acquisition, was expanded with the addition
of the Company's turbocharger line, which it acquired in 1999 when the Company
completed its acquisition of VFC.

The Company has historically acquired complementary or related manufacturing
businesses and sought to integrate them into existing operations. Following an
acquisition, management seeks to rationalize operations, reduce overhead costs,
develop additional cross-selling opportunities and establish new customer
relationships. As a result of its integration efforts and internal growth, the
Company's consolidated net sales have increased from approximately $9.1 million
in fiscal year 1992 to approximately $187.9 million for fiscal year 2002.

The Company continues to seek to make selective acquisitions of light industrial
manufacturing companies (see Note 13 to the Company's consolidated financial
statements elsewhere in this Form 10-K).

Results of Operations

The following table sets forth, for the periods indicated, consolidated
statement of operations data for the Company expressed in dollar amounts (in
thousands) and as a percentage of net sales. The financial data set forth
includes the results of operations of KCLLC's wholly owned subsidiaries from
their respective dates of acquisition (see Note 2 to the Company's consolidated
financial statements elsewhere in this Form 10-K). The data set forth below
should be read in conjunction with the Company's consolidated financial
statements and notes thereto contained elsewhere in this Form 10-K.

7

Consolidated Statement of Operations Data:

Fiscal Year Ended December 31,
------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- -------------------------- ----------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
- --------------------------------------------------------------------------------------------------------------------

Net Sales $187,943 100.0% $193,817 100.0% $160,465 100.0%

Cost of Goods Sold 117,566 62.6 122,975 63.4 93,847 58.5
------------------------------------------------------------------------------------
Gross Profit 70,377 37.4 70,842 36.6 66,618 41.5
Selling, general and
administrative expenses 38,624 20.6 41,208 21.3 30,290 18.9
Goodwill Impairment 12,350 6.6 - - - -
Amortization of goodwill - - 3,558 1.8 2,626 1.6
Cumulative adjustment for
Aerospace - - (721) (0.4) - -
Other operating expenses 2,116 1.1 311 0.2 2,334 1.5
------------------------------------------------------------------------------------
Income from operations 17,287 9.2 26,486 13.7 31,368 19.5

Other income 168 0.1 376 0.2 799 0.5
Recapitialization expenses - - - - (7,937) (4.9)
Interest expense (13,301) (7.1) (16,573) (8.6) (15,159) (9.4)
------------------------------------------------------------------------------------
Income before provision for 4,154 2.2 10,289 5.3 9,071 5.7
taxes, discontinued
operations, extraordinary
item and cumulative effect
of change in accounting
principle
Provision for income taxes 2,628 1.4 5,558 2.9 5,172 3.3
------------------------------------------------------------------------------------
Income from continuing 1,526 0.8 4,731 2.4 3,899 2.4
operations
Loss from discontinued
operations, net - - - - (3,988) (2.5)
Extraordinary loss on early
extinguishment of debt, net - - - - (1,227) (0.7)
Cumulative effect of change
in accounting principle, net (8,157) (4.3) - - - -
------------------------------------------------------------------------------------
Net (loss) income $ (6,631) (3.5)% $ 4,731 2.4% $ (1,316) (0.8)%
====================================================================================

8

A summary of the Company's segments is as follows:

Electrical Components Business Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2002 2001 2000
--------------------------- -------------------------- --------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
---------------------------------------------------------------------------------

Net Sales $121,051 100.0% $120,401 100.0% $71,656 100.0%
Cost of Sales 75,384 62.3 77,683 64.5 40,935 57.1
---------------------------------------------------------------------------------
Gross Profit 45,667 37.7 42,718 35.5 30,721 42.9
Selling, general and administrative
expenses 26,383 21.8 26,096 21.7 16,917 23.6
Amortization of goodwill - - 1,824 1.5 895 1.2
Cumulative adjustment for Aerospace - - (721) (0.6) - -

Other expenses 777 0.6 - - - -
---------------------------------------------------------------------------------
Income from operations $18,507 15.3% $15,519 12.9% $12,909 18.0%
=================================================================================

Mechanical Engineered Components Fiscal Year Ended December 31,
---------------------------------------------------------------------------------
2002 2001 2000
--------------------------- --------------------------- -------------------------
% of % of % of
Amount Net Sales Amount Net Sales Amount Net Sales
----------- --------------- ------------ -------------- ------------- -----------
Net Sales $66,892 100.0% $73,416 100.0% $88,809 100.0%
Cost of Sales 42,182 63.1 45,322 61.7 52,912 59.6
---------------------------------------------------------------------------------
Gross Profit 24,710 36.9 28,094 38.3 35,897 40.4
Selling, general and administrative
expenses 8,946 13.4 8,962 12.2 10,074 11.3
Goodwill Impairment 12,350 18.5 - - - -
Amortization of goodwill - - 1,734 2.4 1,731 1.9

Other expenses 1,487 2.2 311 0.4 6 -
---------------------------------------------------------------------------------
Income from operations $1,927 2.9% $17,087 23.3% $24,086 27.1%
=================================================================================

Year ended December 31, 2002 compared to the year ended December 31, 2001

Net Sales: Net sales for the year ended December 31, 2002 ("Fiscal 2002")
decreased by approximately $5.9 million, or 3.0%, from approximately $193.8
million for the year ended December 31, 2001 ("Fiscal 2001") to $187.9 million
for Fiscal 2002. This decrease was the result of the approximately $650,000, or
0.5%, increase in the net sales of the EC business offset by the approximately
$6.5 million, or 8.9%, decrease in net sales of the MEC business.

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 Fiscal 2001, declined by
approximately $4.3 million, or 3.5% for Fiscal 2002. The primary driver of this
decline was the decline in sales for the power conversion product line of the EC
business. Net sales of the power conversion business for Fiscal 2002, pro forma
to include the net sales of Aerospace for the entire period in the results of
operations for Fiscal 2001, declined by approximately $6.2 million or 9.7%. This
decline was the result of lower demand in the industrial and telecom markets for
power distribution products. The decline in the power conversion product sales
were slightly offset by growth in the Company's specialty electrical product
sales, which increased by approximately $3.8 million or 9.0%. However, weakness
in the utility marketplace resulted in the Company's utility product sales
declining approximately $1.9 million or 10.0%.

9

Net sales in the MEC business decreased by approximately $6.5 million from
approximately $73.4 million in Fiscal 2001 to approximately $66.9 million in
Fiscal 2002. 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 $465,000, or 0.7%, from
approximately $70.8 million for Fiscal 2001 to approximately $70.4 million
Fiscal 2002, resulting from the $2.9 million, or 6.9%, increase in the gross
profit of the EC business less the decline in gross profit of the MEC business
for Fiscal 2002 of approximately $3.4 million, or 12.0%.

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 Fiscal 2001,
increased by approximately $887,000 for Fiscal 2002 as compared to Fiscal 2001.
The gross profit gains resulted from productivity improvements experienced
during Fiscal 2002 as well as from a sales product mix that resulted in higher
margins.

The approximately $3.4 million decline in gross profit for the MEC business for
Fiscal 2002 as compared to Fiscal 2001 is primarily due to the decline in sales
of the lock product line of the MEC business for Fiscal 2002.

The gross profit, as a percentage of net sales ("GP percentage"), for the EC
business increased by approximately 2.2% from 35.5% for Fiscal 2001 to 37.7% to
Fiscal 2002. For the MEC business, the GP percentage declined by approximately
1.3% from 38.3% for Fiscal 2001 to 36.9% to Fiscal 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 Fiscal 2001, increased by
approximately 2.0% from 35.7% for Fiscal 2001 to 37.7% for Fiscal 2002. The
increase in GP percentage for the EC business is the result of product mix and
productivity gains. The Company's power conversion product line benefited from
high margin aftermarket aerospace produce sales and from significant
productivity gains as it consolidated distribution operations, negotiated
material cost savings and increased labor efficiency at its Mexico manufacturing
facility. The Company's SPEC product line's margins benefited from an increase
in sales volume during Fiscal 2002. The decline in GP percentage of the MEC
business is primarily related to 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 $2.6 million, or
6.3%, from approximately $41.2 million for Fiscal 2001 to approximately $38.6
million for Fiscal 2002. As a percentage of net sales, SG&A decreased by 0.7%
from 21.3% for Fiscal 2001 to 20.6% for Fiscal 2002.

SG&A of the EC business increased by approximately $287,000, or 1.1%, for Fiscal
2002 as compared to Fiscal 2001 and, as a percentage of net sales, increased
0.1% for Fiscal 2002. SG&A of the EC business, pro forma to include the results
of operations of Aerospace for the entire period in Fiscal 2001, declined by
approximately $771,000, or 2.8%, for Fiscal 2002 as compared to Fiscal 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
Fiscal 2001, increased 0.1% for Fiscal 2002.

SG&A of the MEC business, which declined by approximately $16,000, or 0.2%, for
Fiscal 2002 as compared to Fiscal 2001, increased as a percentage of sales by
1.2% from 12.2% for Fiscal 2001 to 13.4% for Fiscal 2002.

The decrease in SG&A expenses for Fiscal 2002 as compared to Fiscal 2001 is
primarily related to the expenses of the former corporate office of Acme, which
was closed in October 2001. That office added approximately $2.3 million to the
consolidated SG&A expenses of the Company during Fiscal 2001, including
approximately $425,000 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
operations of Aerospace for the entire period in Fiscal 2001, was primarily
related to the Company's cost reduction initiatives put in place during Fiscal
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.

10

Goodwill Impairment: In December 2002, in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets",
the Company performed its required annual fair value testing of its recorded
goodwill for its reporting units. The fair value assessment was estimated using
a valuation methodology that triangulates the discounted cash flows, market
multiples and transactional multiples of the reporting units. As a result of the
analysis, the Company recorded a charge of approximately $12.4 million, related
to its lock reporting unit, which experienced a further decline of its fair
value since the January 1, 2002 assessment, due to a deterioration in the
current year of its results of operations compared to its operating plan and
projected future financial results as well as a decline in the market multiple
ascribed to the product line in its fair market valuation. Through December 31,
2002, the Company's cumulative impairment of goodwill was approximately $23.5
million, all of which related to its lock product line.

Amortization of Goodwill: Goodwill amortization decreased by approximately $3.6
million during Fiscal 2002 as compared to Fiscal 2001, due to the Company
ceasing the amortization of goodwill as of January 1, 2002 as required by SFAS
142 (See Cumulative Effect of Change in Accounting Principle).

Acme Aerospace Division Cumulative Adjustment: On September 1, 2001, the
Company, based on management's conclusion that Aerospace, which had previously
been held for sale, was more valuable than what current market conditions
dictated, 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 Acme 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.

Other Expenses: Other expenses increased by approximately $1.8 million for
Fiscal 2002 as compared to Fiscal 2001. For Fiscal 2002, the other expenses
include approximately $1.4 million of redundant facility and start up expenses
related to the Company's new lock production facility in Mexico. The Company
expects that the remainder of the startup expenses related to moving production
to Mexico to occur before the end of 2003. In addition, approximately $532,000
of expenses related to the Acme Pension Plan is primarily attributed to non-cash
accelerated amortization of the deferred loss in the pension asset over a Plan
life expectancy assuming termination of the plan. In addition, 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) were
included.

Income from Operations: Income from operations decreased by approximately $9.2
million, or 34.7%, from approximately $26.5 million for Fiscal 2001 to $17.3
million for Fiscal 2002. This decrease resulted from the decrease in gross
profit of approximately $465,000 offset by the decreases in SG&A expenses of
approximately $2.6 million and goodwill amortization of approximately $3.6
million. The decrease in operating expenses was reduced by the $12.3 million
charge taken for impairment of goodwill and by $721,000 of cumulative income
recorded during Fiscal 2001 related to the inclusion of Aerospace in the
Company's reporting and the increase in other operating expenses of
approximately $1.8 million discussed above.

Interest Expense: Interest expense declined by approximately $3.3 million, or
19.7%, during Fiscal 2002. This decrease is primarily due to lower levels of
outstanding borrowings during Fiscal 2002 as compared to Fiscal 2001, as well as
reduced rates of interest charged on the outstanding principal on the Company's
variable rate term loan during Fiscal 2002 as compared to Fiscal 2001.

Provision for Income Taxes: The provision for income taxes declined by
approximately $2.9 million, or 52.7%, for Fiscal 2002 as compared to Fiscal
2001. The decline is primarily related to the decline in pretax income. In
addition, the Company was able to take advantage of certain foreign tax credits,
which reduced the Company's tax liability. The Company's effective tax rate for
Fiscal 2002, however, increased to 63.3% on income before taxes from Fiscal 2001
when the Company's effective tax rate was 54.0%. The increase in the effective
tax rate is primarily related to the impairment charges taken against goodwill,
which are not deductible for tax purposes.

Income from continuing operations: Income from continuing operations decreased
by approximately $3.2 million from approximately $4.7 million for Fiscal 2001 to
approximately $1.5 million for Fiscal 2002. The primary drivers of this decrease
were the approximately $9.2 million decrease in income from operations, the
approximately $3.3 million decrease in interest expense and the approximately
$2.9 million decrease in Company's provision for taxes due to the factors
discussed above.

Cumulative effect of Change in Accounting Principle: In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, which were effective for fiscal years beginning after December
15, 2001.

11

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.

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 of change in 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.

Net (Loss) income: Net loss increased by approximately $11.4 million from net
income in Fiscal 2001 of approximately $4.7 million to a net loss in Fiscal 2002
of approximately $6.6 million. This increase resulted from the decline in Fiscal
2002 in income from continuing operations of approximately $3.2 million from
Fiscal 2001, primarily driven by the 2002 goodwill impairment charge of
approximately $12.4 million and the approximately $8.2 million charge taken to
reduce the Company's carrying value of its goodwill as of January 1, 2002.

Year ended December 31, 2001 compared to the year ended December 31, 2000

Net Sales: Net sales for Fiscal 2001 increased by approximately $33.4 million,
or 20.8% over net sales for the year ended December 31, 2000 ("Fiscal 2000").
This increase was the result of the sum of the $48.7 million, or 68.0%, increase
in the net sales of the EC business less the $15.4 million, or 17.3%, decrease
in net sales of the MEC business.

The growth within the EC business was primarily due to the full year inclusion
of the results of operations of the transformer power conversion product line
for Fiscal 2001 as compared to the one-month inclusion of sales for December of
2000 in the results for Fiscal 2000. The transformer power conversion product
line contributed approximately $50.4 million in net sales for Fiscal 2001,
representing an increase of $45.1 million over Fiscal 2000. This product line
was acquired in November 2000 when the Company completed the acquisition of
Acme. In addition, in June 2001, the Company decided to retain rather than sell
Aerospace of Acme. Aerospace was merged into the power conversion product line
of the Company. The Company recorded a $721,000 cumulative adjustment (see Note
2 to the consolidated financial statements elsewhere in this Form 10-K)
representing the net result of Aerospace's operations from date of acquisition
to June 1, 2001. Subsequent to June 1, 2001 the results of Aerospace's
operations have been included in the respective categories of operations.
Included in net sales for Fiscal 2001 is approximately $8.8 million of net sales
from Aerospace for the period June 1, 2001 to December 31, 2001.

Net sales in the MEC business decreased approximately $15.4 million to
approximately $73.4 million for Fiscal 2001. This decrease is primarily related
to the decline in sales of the Company's lock and turbocharger product lines,
which resulted from a downturn in the domestic economy and a reduction in
customer demand.

Gross Profit: Gross profit increased $4.2 million, or 6.3%, in Fiscal 2001 as a
result of an increase of approximately $12.0 million, or 39.1%, in the gross
profit of the EC business less the decline in gross profit of the MEC business
for Fiscal 2001 of approximately $7.8 million, or 21.7%.

12

The increase in the gross profit of the EC business is primarily related to the
inclusion of the results of operations of the transformer power conversion
product line for the full year in Fiscal 2001, as compared to Fiscal 2000, in
which only the results of operations of this product line for the month of
December 2000 were included due to the acquisition of this product line with
Acme at the end of November 2000. The transformer power conversion product line
contributed approximately $14.3 million in gross profit for Fiscal 2001,
representing an increase of approximately $12.7 million over Fiscal 2000. In
addition, the gross profit of the EC business for Fiscal 2001 increased
approximately $2.9 million as a result of the operations of Aerospace, which was
merged into the power conversion product line in June 2001 (see Note 2 to the
consolidated financial statements elsewhere in this Form 10-K). These increases
were slightly offset by a decline in gross profit of the specialty electrical
components product line, which was primarily driven by a decline in sales due to
the downturn in the domestic economy.

The approximately $7.8 million decline in gross profit of the MEC business for
Fiscal 2001 is primarily due to the decline in sales of the lock and
turbocharger product lines of MEC business for Fiscal 2001 that resulted from a
downturn in the domestic economy and a reduction in customer demand.

The GP percentage, for the EC business declined approximately 7.4% for Fiscal
2001. For the MEC business the GP percentage declined approximately 2.1% during
Fiscal 2001.

The decline in the GP percentage of the EC business was primarily the result of
the inclusion of the results of the transformer power conversion product line
for the full year in Fiscal 2001 as compared to Fiscal 2000, in which only the
results of December 2000 were included. The gross margin profile of the
transformer product line is lower than the margins experienced in the remainder
of the product lines of the EC business. The decrease in GP percentage of the
MEC business is primarily related to a change in product mix and margin
compression due to lower sales levels.

Selling, General and Administrative Expenses: SG&A expenses increased
approximately $10.9 million, or 36.0%, in Fiscal 2001. As a percentage of net
sales, SG&A increased 2.4% from Fiscal 2000. SG&A of the EC business increased
approximately $9.2 million, or 54.4%, for Fiscal 2001 and, as a percentage of
net sales, declined 1.9% during Fiscal 2001. SG&A of the MEC business, which
declined approximately $1.1 million during Fiscal 2001, increased as a
percentage of net sales by approximately 0.9%.

The increase in SG&A expenses for Fiscal 2001 is primarily related to the
acquisition of Acme, which resulted in the Company integrating the transformer
and aerospace product lines of Acme into the EC business. The results of the
transformer power conversion product line were included for the full year in
Fiscal 2001 as compared to Fiscal 2000 where the results of this product line
were only included for the month of December 2000. SG&A of the transformer power
conversion product line for Fiscal 2001 was approximately $9.4 million,
representing an increase of approximately $8.4 million over SG&A of the Company
and the EC business for Fiscal 2001. Aerospace, which was merged into the power
conversion product line in June 2001 (see Note 2 to the consolidated financial
statements elsewhere in this Form 10-K), added approximately $1.6 million to
SG&A for Fiscal 2001. In addition, the corporate office of Acme, which was
closed in October 2001, added approximately $2.3 million of SG&A expenses for
Fiscal 2001, including approximately $425,000 of depreciation. This is an
increase over Fiscal 2000 of approximately $2.0 million. Upon the close of the
Acme corporate office, all remaining related expenses of that office terminated.

The decline in SG&A of the EC business as a percentage of net sales and in SG&A
of the MEC business was primarily related to the Company's cost reduction
initiatives in response to the slowing economy. The increase in SG&A as a
percentage of net sales of the MEC business primarily resulted from the impact
of the sharper decline in the net sales of the MEC business as compared to the
cost reductions made by the Company in SG&A. The Company's MEC business has a
lower overhead structure than its EC business due to lower sales and marketing
expenses of the MEC's business, which limits the ability of the Company to
reduce the expenses of the MEC business beyond a certain level.

On a pro forma comparative basis, assuming that the effects of the Acme
acquisition were reflected in Fiscal 2000 results, exclusive of the impact of
the additional corporate office expenses of Acme, all the product lines, except
for the Company's utility product line, which has experienced sales growth over
Fiscal 2000, have experienced a reduction in operating expense levels for Fiscal
2001, primarily driven by the Company's cost reduction initiatives.

Amortization of Goodwill: Goodwill amortization increased by approximately
$932,000 during Fiscal 2001, primarily related to the full year inclusion of
amortization of goodwill acquired in the Acme acquisition.

Cumulative Adjustment for Aerospace: On June 1, 2001, the Company decided to
retain Aerospace, which had been previously classified as held for sale. On that
date the Company reallocated the purchase price paid for Acme as if Aerospace
had never been held for sale and recorded a cumulative adjustment for the
results of operations of Aerospace from the date of acquisition through May 31,
2001 of $721,000.

13

Other expenses: For the year ended December 31, 2001, the Company's nonrecurring
charges primarily related to administrative expenses incurred in connection with
the establishment of a production facility in Mexico for the Company's lock
products. At December 31, 2001, the Company had not begun production at its new
Mexico facility. For December 31, 2000 the nonrecurring charges primarily
related to approximately $1.6 million recorded in connection with outstanding
stock appreciation rights ("SARs"). The SARs were issued in conjunction with the
VFC acquisition in lieu of cash consideration for the purchase of equity held by
operating management of former VFC subsidiaries who continued with the Company.
The Company was required to report any change in the valuation of the SARs as a
charge against earnings. In connection with the Recapitalization (see Liquidity
and Capital Resources), all of the SARs were exercised and the holders of the
SARs purchased KCI Common Stock with a substantial portion of the after-tax
proceeds of such exercise.

Income from Operations: The decline in income from operations of approximately
$4.9 million, or 15.6%, resulted from the increase in gross profit of
approximately $4.2 million offset by the increase in SG&A expenses of
approximately $10.9 million and the increase in goodwill amortization of
approximately $932,000. The increase in operating expenses were reduced by the
$721,000 cumulative income adjustment for Aerospace and the decrease in stock
appreciation compensation and other non-recurring expenses of approximately $2.0
million due to the factors discussed above.

Recapitalization expenses: In connection with the Recapitalization (see
"Liquidity and Capital Resources") completed during Fiscal 2000, the Company
incurred approximately $7.9 million of transaction fees.

Interest Expense: Interest expense increased by approximately $1.4 million, or
9.3%, during Fiscal 2001. This increase is primarily due to higher levels of
outstanding borrowings during Fiscal 2001 as compared to Fiscal 2000, primarily
due to the additional borrowings used to finance the acquisition of Acme in
November 2000 (see Liquidity and Capital Resources below). The impact of the
higher debt levels, however, was partially offset by the reduced rates of
interest charged on the outstanding principal on the variable rate term loan and
revolving credit facility due to declining interest rates of Fiscal 2001.

Provision for Income Taxes: The provision for income taxes increased
approximately $386,000, or 7.5%, from approximately $5.2 million in Fiscal 2000.
The Company's effective tax rate for Fiscal 2001 was approximately 54.0% on
income before taxes, which resulted primarily from the Company's estimated
additional foreign tax liabilities as well as non-deductible expenses relating
primarily to goodwill amortization and non-deductible professional fees in
connection with the Acme acquisition. The effective rate for Fiscal 2000 was
57.0% which resulted primarily due to the change in tax status of the Company
during 2000 to a C corporation as well as non-deductibility of expenses relating
primarily to the Reorganization expenses and goodwill amortization.

Income from Continuing Operations: Income from continuing operations increased
by approximately $832,000, or 21.3%, during Fiscal 2001. The increase resulted
from the decrease in income from operations of approximately $4.9 million, a
decrease in other income of approximately $423,000, an increase in interest
expense of approximately $1.4 million and a decrease in the Recapitalization
expenses of approximately $7.9 million, due to the factors discussed above.

Loss from Discontinued Operations, net: In Fiscal 2000, the Company incurred a
loss from discontinued operations of approximately $4.0 million. In April 2000,
the Company consummated the sale of Heart Interface Corporation ("Heart") and
Cruising Equipment Company ("Cruising"). The Company received approximately $9.0
million in proceeds before any transaction related expenses. Of the $9.0 million
of proceeds, $600,000 was placed in escrow in accordance with the agreement. The
Company recorded a loss on disposal of Heart and Cruising of approximately $3.3
million. In 2002, the escrow was settled with the buyer and the Company received
approximately $148,000. In July 2001, the Company received notice of a claim
against the escrow. The Company has responded to the claim and is awaiting
further response from the new owners of Heart and Cruising. The Company believes
that the escrow will cover any potential settlement of the claim.

On December 29, 2000, the Company sold its interests in Mastervolt B.V. and
subsidiaries ("Mastervolt"), which had been acquired as part of VFC (see Note 2
to the consolidated financial statements elsewhere in this Form 10-K). The
Company received approximately $2.3 million in proceeds and recorded a loss on
disposal of approximately $525,000.

Extraordinary loss on early extinguishment of debt, net: In November 2000, the
Company closed on its new credit facility (see Liquidity and Capital Resources).
As a result, in Fiscal 2000, the Company wrote off the unamortized balance of
the deferred financing costs relating to the prior credit facility of
approximately $2.1 million. The expense is reflected, net of a tax benefit of
approximately $828,000, as an extraordinary item.

Net Income (Loss): Net income increased by approximately $6.0 million for Fiscal
2001. The increase in net income is the result of the sum of an increase in
income from continuing operations of approximately $832,000 and a decrease in
loss from discontinued operations of approximately $4.0 million and the
extraordinary charge of approximately $1.2 million, due to the factors discussed
above.

14

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
it's outstanding credit facilities. The credit facility provides for a six-year
$40.0 million revolving credit facility, which as a result of the amendment
discussed below was reduced to $25.0 million through 2003, 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 December 31, 2002. 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 December 31, 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 31, 2003 from the original covenant ratios stipulated in the credit
agreement. The Company anticipated that certain of the original covenants, which
became more stringent over the term of the agreement, would not be met due to
the general decline in the economy. 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 December 31,
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. At December 31, 2002, the Company had prepaid its next two
principal payments. Principal payments required for the next 12 months will be
approximately $7.2 million. Under the revolving credit facility and term loan,
the Company has the option to lock in a specified interest rate by entering into
a contract, for different periods, which cannot exceed 180 days. As the
underlying contract comes up for renewal, the interest associated with the
contract becomes due. As of December 31, 2002, the Company had no outstanding
commitments for capital expenditures. The Company anticipates its capital
expenditures for the year ended December 2003 to be approximately $3.5 million.
The expenditures are primarily needed to maintain its facilities and expand its
production capacity for the Company's ongoing plan to expand foreign operations
in order to take advantage of profitable market opportunities. To the extent
cash flow from operations is insufficient to cover the Company's capital
expenditures, debt service and other general requirements, the Company would
seek to utilize its borrowing availability under its existing revolving credit
facility.

In connection with the Company's desire to continue to grow through acquisition
and remain a leading supplier of essential componentry, in May 2000, KCI and its
shareholders consummated a Recapitalization of KCI with affiliates of Kelso &
Company ("Kelso") pursuant to which, among other things:

o KCI was recapitalized with Common Stock and Preferred Stock;

15

o KCI shareholders exchanged approximately 862,000 shares of their
Common Stock for Preferred Stock and KCI optionholders exercised
options to purchase 20,533 shares of Common Stock, all of which were
then exchanged for shares of Preferred Stock. All such Preferred Stock
was immediately sold to Kelso for cash at approximately $117 per share;

o SGC Partners II LLC ("SG"), which owned all of the stock of
Keyhold, Inc. ("Keyhold"), which owned approximately 11.1% of the
membership interests of KCLLC prior to the Recapitalization, exchanged
all of its Keyhold stock for shares of Preferred Stock which were
immediately sold to Kelso for cash at approximately $117 per share,
terminating Keyhold's right to require KCLLC to repurchase Keyhold's
outstanding investment in KCLLC at the then current market value
thereof;

o Holders of KCI SARs exercised their SARs and with a substantial
portion of their after-tax proceeds from the exercise, purchased Common
Stock;

o Kelso purchased an aggregate of approximately 35,000 shares of
Preferred Stock from KCI at approximately $117 per share.

At the closing of the Recapitalization, KCI, Kelso and certain shareholders of
KCI entered into a Shareholders Agreement and a Registration Rights Agreement
and KCI and Kelso entered into an Advisory Agreement.

Effective upon the consummation of the Recapitalization, Kelso owns all of the
Preferred Stock. The Preferred Stock is not entitled to vote for the election of
directors but is entitled to designate two members of KCI's seven member Board
of Directors. In addition, the Preferred Stock has certain approval rights and
is convertible into Common Stock at the holder's option (upon conversion the
Preferred Stock would constitute over 60% of the total outstanding common equity
of KCI on a fully diluted basis). The Preferred Stock has a liquidation
preference equal to its purchase price plus accrued dividends, bears a 1%
cumulative annual dividend payable in kind and is redeemable at the option of
the holder after June 2, 2009. All of the outstanding Common Stock and options
to purchase Common Stock of KCI continue to be held by parties that held such
securities prior to the Recapitalization and by the parties who purchased Common
Stock with the after-tax proceeds from the exercise of their SARs. The aggregate
purchase price of the Preferred Stock paid by Kelso was approximately $107.0
million of which approximately $4.1 million was paid to KCI. The Company paid
fees in connection with the Recapitalization of $7.9 million during Fiscal 2000.
All proceeds received by KCI from the Recapitalization were contributed to KCLLC
for additional membership interest.

KCI has no operations and is dependent on KCLLC for financial resources in the
form of capital distributions to meet its obligations. KCI obligations include
the $107.0 million of its Preferred Stock plus any dividends payable in arrears
(approximately $2.8 million in cumulative dividends in arrears, payable in kind,
at December 31, 2002), which are redeemable for cash at the option of the holder
after June 2, 2009, the requirement to purchase shares from its common
shareholders under certain circumstances and its tax obligations. Repurchases of
KCI Common Stock are made at fair market value as defined in KCI's shareholder
agreement. At December 31, 2002 approximately 1.3 million KCI common shares plus
potentially 191,000 shares covered by stock options were subject to repurchase
by KCI. The ability of KCLLC to make such capital distributions will be limited
by its available resources and is limited by restrictions of debt and other
agreements. KCLLC reflects in its tax provision the obligations of KCI.

Cash flows provided by operating activities were approximately $22.4 million,
$21.9 million, and $7.7 million for Fiscal 2002, 2001 and 2000, respectively.
The net increase in cash flows of approximately $444,000 for Fiscal 2002
resulted primarily from the increase in the cash provided by Net income plus non
cash adjustments which year over year increased approximately $1.3 million
offset by the year over year net use of cash from the operating assets of the
business. The working capital accounts (accounts receivable, inventory and
accounts payable) provided net cash to operations of approximately $5.0 million
in Fiscal 2002 as compared to approximately $7.8 million in Fiscal 2001. The net
cash flow decline from the working capital accounts is due to certain of the
Company's product lines operations rebounding in Fiscal 2002 and the Company
increasing inventory safety stock levels to maintain high customer satisfaction
as it continues to move production to Mexico. Accrued expenses used net cash in
operations of approximately $801,000 in Fiscal 2002 as compared to approximately
$5.0 million in 2001, which is the result of accrued expenses returning to
normalized levels at the end of Fiscal 2001. As a result, accrued expenses at
December 31, 2002 were fairly constant as compared to accrued expenses as of
December 31, 2001, however, accrued expenses at December 31, 2001 were
significantly lower than accrued expenses as of December 31, 2000 primarily due
to the Company having paid, during fiscal 2001, a substantial portion of the
December 31, 2000 accrued expenses related to the acquisition of Acme.

16

The net increase in cash flows from operations of approximately $14.2 million
for Fiscal 2001 over Fiscal 2000 resulted primarily from the decrease in use of
cash by the operating assets of the business. During 2001 the Company, in
response to the downturn in the economy, initiated cost cutting programs and
focused on the Company's working capital accounts, specifically accounts
receivable, inventory and accounts payable. In addition, as business declined
during Fiscal 2001 less cash was used in accounts receivable and inventory. For
Fiscal 2001, accounts receivable and inventory had a net decline of
approximately $11.8 million as compared to Fiscal 2000 when accounts receivable
and inventory resulted in a net increase of $6.6 million over Fiscal 1999.
Prepaid expenses and other current assets declined by approximately $2.7
million, primarily driven by the Company's use of tax overpayments in the prior
year. Offsetting these increases in cash flows from operations was a decrease in
accounts payable and accrued expenses of approximately $8.4 million, reflecting
lower levels of spending due to the current economic conditions.

Cash flows from operations of discontinued operations used approximately $99,000
for Fiscal 2000.

Cash flows used in investing activities were approximately $2.4 million, $3.5
million and $38.7 million for Fiscal 2002, 2001 and 2000, respectively. The
decrease in cash used in investing activities of approximately $1.1 million for
Fiscal 2002 as compared to Fiscal 2001 is primarily related to the decreased
level of capital expenditures made by the Company. In Fiscal 2002, the Company
spent approximately $2.7 million of capital expenditures as compared to Fiscal
2001 when the Company's capital expenditures were approximately $4.1 million.

The decline in cash used in investing activities of approximately $35.2 million
for Fiscal 2001 as compared to Fiscal 2000, is primarily related to the
acquisition of Acme made in 2000. On November 21, 2000, the Company acquired all
of the outstanding shares of Acme for a purchase price of approximately $47.3
million and assumed liabilities of approximately $28.8 million. In addition, the
Company realized $10.7 million of proceeds from the sale of Heart, Cruising and
Mastervolt (See Note 2 to the consolidated financial statements elsewhere in
this Form 10-K) during Fiscal 2000. Capital expenditures for Fiscal 2000 were
approximately $3.1 million.

Cash flows from financing activities used net cash of approximately $22.2
million and $17.2 million during Fiscal 2002 and 2001, respectively. Cash flows
from financing activities provided net cash of approximately $30.6 million in
Fiscal 2000. The net cash used in financing activities for Fiscal 2002 and 2001
was primarily driven by the Company's net repayment of debt under its existing
credit facilities of approximately $22.0 million and $16.3 million in Fiscal
2002 and 2001, respectively. At December 31, 2002, the Company was two payments
ahead of schedule under its current term debt facility.

During Fiscal 2000 the Company acquired Acme, which resulted in the Company
renegotiating its current debt facilities during that year. Proceeds received
under the Company's existing credit facility for Fiscal 2001 totaled $103.7
million. The Company used such proceeds to repay its prior credit facility,
finance the acquisition of Acme, which included repaying approximately $10.4
million of debt assumed in the Acme acquisition, and working capital purposes.

For Fiscal 2002 and 2000, the Company paid deferred financing costs of
approximately $229,000 and $3.8 million, respectively, related to the Company's
existing and previous credit facilities.

During Fiscal 2000 the Company was the recipient of approximately $7.1 million
in capital contributions. The capital contributions received during Fiscal 2000
were contributed by KCI in connection with Recapitalization described above.
Approximately $7.5 million was used to repay the outstanding SARs, including,
approximately $420,000 related to outstanding vested SARs with certain members
of operating management of Glendinning and the inverter business, which were
divested in fiscal years 1999 and 2000, respectively. The remaining holders of
the SAR's who were members of operating management purchased Common Stock as
part of the Recapitalization with a substantial portion of their after-tax
proceeds from the exercise of their SARs.

17

During Fiscal 2001 and 2000, the Company paid member withdrawals of
approximately $906,000 and $1.4 million, respectively. KCI used approximately
$906,000 and $1.1 million of the funds received during Fiscal 2001 and 2000,
respectively, to repurchase outstanding shares of its common stock from former
shareholders. The remaining withdrawals in 2000 of approximately $300,000 were
for tax distributions to the members of KCLLC.

Management believes that the Company's cash flow from operations, together with
its borrowing availability under its existing credit facilities, will be
adequate to meet its anticipated capital requirements for the foreseeable
future.

Critical 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
elsewhere in this Form 10-K, includes a summary of the significant accounting
policies and methods used in the preparation of the Company's consolidated
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by the Company.

Revenue recognition: The Company recognizes revenue upon shipment of
products to customers, when title passes and all risks and rewards of
ownership have transferred. The Company considers revenue realized or
realizable and earned when the product has been shipped, the sales price
is fixed or determinable and collectibility is reasonably assured. The
Company reduces revenue for estimated customer returns.

Inventory: Inventories are stated at the lower of cost or market, on a
first-in, first-out basis. The Company purchases materials for the
manufacture of inventory for sale in its various markets. The decision to
purchase a set quantity of a particular inventory item is influenced by
several factors including current and projected cost, future estimated
availability and existing and projected sales to produce certain items.
The Company evaluates the net realizable value of its inventories and
establishes allowances to reduce the carrying amount of these inventories
as deemed necessary.

Goodwill and other intangible assets: At December 31, 2002, the Company
has recorded approximately $95.6 million in goodwill and other intangible
assets related to acquisitions made in 2000 and prior years. The
recoverability of these assets is subject to an impairment test based on
the estimated fair value of the underlying businesses. These estimated
fair values are determined using a valuation methodology that triangulates
the discounted cash flows, market multiples and transactional multiples of
the reporting units. 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.

Pension Plans: The Company's assets and liabilities recorded in connection
with the Company's pension plans using estimates that include but are not
limited to expected return on assets and life expectancy of participants.
In preparation of the consolidated financial statements the Company
reviews these estimates by reviewing current market conditions and
internal information at its disposal.

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.

18

Significant estimates used by the Company that are subject to change include,
but are not limited to the following:

(i) The Company's allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required
payments for their open accounts receivable with the Company; if the
financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances could be required;

(ii) Allowances established against its inventory carrying value to
record its inventories at net realizable value; if actual market
conditions are less favorable than those projected by management,
additional inventory allowances may be required;

(iii) The Company records as necessary, valuation allowances against its
deferred tax assets; if the Company were to determine that it would
not be able to realize its deferred tax assets in the future,
additional valuation allowances could be required;

(iv) The Company evaluates the carrying amounts of its long-lived assets
for recoverability; if the Company were to determine that the value
ascribed to any of its long-lived assets was not recoverable an
allowance could be required;

(v) The Company records the effects of its existing pension plans in its
financial statements using various assumptions and the use of
independent actuaries; if any of the underlying assumptions were to
change, the carrying value of the pension assets and obligations may
require adjustment; and,

(vi) The Company's financial covenants, as defined in its credit
facilities, were based, in part, by estimates of future results of
the Company's operations; if actual results were not to meet those
expectations, the Company may not meet its financial covenants and
may be required to obtain waivers for those covenants.

Inflation

Inflation has not been material to the Company's operations for the periods
presented.

Backlog

The Company's backlog of orders as of December 31, 2002, was approximately $25.5
million. During Fiscal 2002 the Company changed the way it reports its backlog
to include only those orders to be filled within the next 12 months. Comparable
backlog at December 31, 2001 was $29.2 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 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 SFAS 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 SFAS 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. This statement is effective for all years beginning after
December 15, 2002, with early adoption allowable. The Company plans on adopting
this statement effective January 1, 2003 and does not expect the adoption of
this statement to have a material effect on its future results of operations or
its financial position. Had the Company adopted this standard, all prior
extraordinary losses due to the early extinguishment of debt, would be
reclassified to other losses in the statement of operations.

19

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.

In November 2002, the FASB released Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees it has issued. The Interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The Company has adopted the required disclosures of this
Interpretation and has yet to assess the impact that the valuation of future
guarantees may have on the financial statement in accordance with the
Interpretation.

Other Matters

Forward-Looking Statements
This report contains forward-looking statements based on current expectations
that involve a number of risks and uncertainties. Generally, forward-looking
statements include words or phrases such as "management anticipates," "the
Company believes," "the Company anticipates," and words and phrases of similar
impact, and include but are not limited to statements regarding future
operations and business environment. The forward-looking statements are made
pursuant to safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. The factors that could cause actual results to differ materially
from the forward-looking statements include the following: (i) industry
conditions and competition, (ii) operational risks and insurance, (iii)
environmental liabilities which may arise in the future and not covered by
insurance or indemnity, (iv) the impact of current and future laws and
government regulations, and (v) the risks described from time to time in the
Company's reports to the Securities and Exchange Commission.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company's primary exposure to market risk is related to the variability in
interest rates associated with the $63.0 million outstanding under its term loan
and with any amounts outstanding under its $25-million revolving credit
facility. Under both the term loan and the revolving credit facility, the
Company has the option to lock in a certain interest rate based on either the
base rate, which is equivalent to prime, or LIBOR plus an applicable margin
specified in the agreement. Principally all of the borrowings under the term
loan are locked in at approximately 4.38% until March 27, 2003, when the
underlying LIBOR contract is up for renewal. At December 31, 2002 the Company
had no borrowings under its line of credit and was two payments ahead of
schedule on its term debt. A 1% change in the interest rate for the Company's
credit facilities in place in Fiscal 2002 would have resulted in a change in the
Company's interest expense of approximately $736,000. 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.

As the Company has operations outside the United States of America, it is
subject to foreign currency exchange risk. To date those risks have not had a
material impact on the Company's results of operations or financial position.

Item 8. Financial Statements and Supplementary Data

The Company's consolidated financial statements for the three years ended
December 31, 2002, together with the report of PricewaterhouseCoopers LLP dated
February 13, 2003, are included elsewhere herein. See Item 15 for a list of the
consolidated financial statements and consolidated financial statement schedule.

20

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

PART III

Item 10. Directors, Executive Officers and Key Employees of the Company

The following table sets forth information with respect to the directors,
executive officers and other key employees of the Company as of December 31,
2002. All directors and officers of the Company hold office until the annual
meeting of stockholders next following their election, or until their successors
are elected and qualified.

Name Age Position
- ------------------------------- ----------- ------------------------------------------------------------------

John S Dyson 60 Chairman of the Board of Directors of KCI and KCLLC
Clay B. Lifflander 40 Director of KCI and KCLLC. Chief Executive Officer of KCLLC.
Robert B Kay 40 Director of KCI and KCLLC. President of KCLLC.
Alan Rivera 40 Director of KCI and KCLLC, Vice President and Secretary of KCI
and KCLLC
George M. Scherer 49 Director of KCI and KCLLC, Vice President of KCI and President
of BWE
Philip E. Berney 39 Director of KCI and KCLLC
Tom R. Wall, IV 43 Director of KCI and KCLLC
Albert W. Weggeman 39 Chief Operating Officer and Vice President of KCLLC
Keith A. McGowan 40 Chief Financial Officer and Vice President of KCLLC
J. Marty O'Donohue 52 President of Marinco
Daryl A. Lilly 42 President of Gits
Michael L. Colecchi 53 President of Hudson and ESP

John S. Dyson has been Chairman of the Board of Directors of the KCI, KCLLC and
Finance Corp. since their inception. Since 1996, Mr. Dyson has been Chairman of
the Board of Directors of Millbrook Capital Management ("Millbrook"), a
management company providing executive level services to the Company under the
Management Agreement. From 1996 to December 2001 he served as Chairman of the
Mayor of the City of New York's Council of Economic Advisors. From 1994 to 1996,
Mr. Dyson served as Deputy Mayor for Finance and Economic Development for the
City of New York. From 1982 to 1993 Mr. Dyson was the Chairman of Dyson-Sinclair
Associates, a management company and the predecessor of Millbrook. From 1976 to
1979, he served as Commissioner of the New York State Department of Commerce.
Mr. Dyson was Vice Chairman of Dyson-Kissner-Moran Corporation from 1970 to
1975, at which time he was appointed to the position of Commissioner of the New
York State Department of Agriculture.

Clay B. Lifflander has served as a director of KCI and KCLLC since their
inception. Mr. Lifflander was elected Chief Executive Officer in November 1999.
Before November 1999, Mr. Lifflander had been President of KCI since its
inception. Mr. Lifflander has been President of Millbrook since 1995, and from
1994 to 1995, Mr. Lifflander was President of the New York City Economic
Development Corporation. Previously, Mr. Lifflander was Managing Director in the
Mergers and Acquisitions Group at Smith Barney Inc., where he worked from 1984
to 1994.

Robert B. Kay was elected President of KCLLC in November 1999. Prior to his
election he had served as the Chief Financial Officer of KCLLC since February
1999. Mr. Kay became a director of KCI and KCLLC in March 1999. From August 1998
through December 1998, Mr. Kay was the Senior Vice-President and Chief Financial
Officer, as well as a director, of Tiffen Manufacturing Corp., a manufacturer
and distributor of photographic and imaging products. From January 1994 through
August 1998, Mr. Kay was a Senior Vice-President and Chief Financial Officer of
Oxford Resources Corp. (renamed NationsBank Auto Leasing, Inc.), a publicly
traded consumer finance company.

21

Alan L. Rivera has been the Vice President, Secretary and a Director of KCI,
KCLLC and Finance Corp. since their inception. Since September 1996, Millbrook
has employed Mr. Rivera, as Chief Financial Officer and General Counsel. From
1994 to 1996, Mr. Rivera served as Executive Vice President of Finance and
Administration and General Counsel of the New York City Economic Development
Corporation. From 1990 to 1994, Mr. Rivera was an associate with the New York
City law firm of Townley & Updike, specializing in corporate finance matters,
and from 1987 to 1990, Mr. Rivera was an associate with Mudge, Rose, Guthrie,
Alexander and Ferdon, specializing in public finance matters.

George M. Scherer has been the Vice President-Manufacturing and a Director of
KCI and KCLLC since their inception. Mr. Scherer has been with BWE since 1978
when he began as Engineering Manager. He has served as the President and a
Director of BWE since 1982. Prior to joining BWE, Mr. Scherer was a product
application engineer for Stow Manufacturing Company, Inc. in Binghamton, N.Y.
from 1975 to 1978. Prior to his position at Stow Manufacturing Company, Inc.,
Mr. Scherer was a plant engineer at GAF Corporation in Binghamton, N.Y. from
1973 to 1975.

Philip E. Berney has served as a director since May 2000, and is a board
designee of Kelso. Mr. Berney joined Kelso & Company, a private investment firm
in 1999, as one of its Managing Directors. From 1986 to 1999, Mr. Berney worked
at Bear, Stearns & Co. Inc. where he was promoted to Senior Managing Director.
He also serves as a director of CDT Acquisition Corp. and Armkel, LLC.

Thomas R. Wall, IV has served as a director since May 2000, and is a board
designee of Kelso. Mr. Wall has held various positions of increasing
responsibility with Kelso & Company, a private investment firm, since 1983, and
currently serves as one of its Managing Directors. Mr. Wall also serves as a
director of AMF Bowling, Inc., Citation Corporation, Consolidated Vision Group,
Inc., Cygnus Publishing, Inc., IXL Enterprises Inc., Mitchell Supreme Fuel
Company, Mosler, Inc., Peebles Inc., and 21st Century Newspapers, Inc.

Mr. Albert W. Weggeman joined the Company in March 2001 as Senior Vice President
of Operations. From November 1997 to March 2001, Mr. Weggeman held positions in
General Electric Company ("GE") Industrial Systems division as Manager - Mergers
& Acquisitions, and most recently as President and General Manager of Midwest
Electric (a GE subsidiary). Prior to GE, Mr. Weggeman was the Director of
Marketing for Norton Coated Abrasives.

Keith A. McGowan was appointed the Chief Financial Officer of KCLLC in November
1999. Prior to this promotion, he had served as KCLLC's Principal Accounting
Officer since April 1999. From July 1997 to April 1998, he served as the Vice
President of Finance of Digitec 2000, Inc., a distributor of prepaid phone
products. From November 1985 to June 1997, Mr. McGowan was employed by BDO
Seidman, LLP, an accounting and consulting firm, where he was promoted to
Partner in July 1995.

J. Marty O'Donohue has been President of Marinco since 1991. Mr. O'Donohue
managed his own marketing consulting firm, O'Donohue and Associates, from 1988
to 1991.

Michael L. Colecchi has been with Hudson since 1970, when he began as a tool and
die maker. He subsequently assumed various positions of responsibility in
Hudson's manufacturing department until 1980, when he was appointed Plant
Manager. In 1984, Mr. Colecchi was promoted to Vice President of Manufacturing.
In 1989, Mr. Colecchi was promoted to Vice President and General Manager. Mr.
Colecchi has served as President of Hudson since 1996.

Daryl Lilly has been the President of Gits since June of 2000. From February
1999 through June 2000, Mr. Lilly served as Executive Vice President, Vice
President of Product Development and Engineering Manager for Gits. From January
1997 to February 1999, Mr. Lilly was the Plant Engineering Manager for Reman,
Inc. In addition to his experience with the Company, Mr. Lilly has 15 years of
experience in various automotive component manufacturing industries.

22

Item 11. Executive Compensation

SUMMARY COMPENSATION TABLE

Long Term
Annual Compensation Compensation
Awards

Number
Securities
Name and Principal Other Annual Underlying Options
Position Year Salary Bonus Compensation (2)
- --------------------------------------------------------------------------------------------------------------------------

Clay B. Lifflander
(1), Chief
Executive Officer 2002 $ -- $ -- $ -- --
2001 $ -- $ -- $ -- --
2000 $ -- $ -- $ -- 30,000

Robert B. Kay (3),
President 2002 $ 304,999 $ --(4) $ -- --
2001 $ 295,000 $ -- $ -- --
2000 $ 266,178 $ 138,000 $ 100,000 30,000

Alan L. Rivera (1),
Secretary 2002 $ -- $ -- $ -- --
2001 $ -- $ -- $ -- --
2000 $ -- $ -- $ -- 7,500

Albert W. Weggeman
(3), SVP of
Operations 2002 $ 216,749 $ --(4) $ -- 2,500
2001 $ 174,262 $ 54,250 $ -- 5,000
2000 $ -- $ -- $ -- --

Keith A. McGowan,
Chief Financial
Officer 2002 $ 176,249 $ --(4) $ -- 1,000
2001 $ 170,000 $ -- $ -- 192
2000 $ 143,584 $ 48,000 $ 60,000 5,250

George M. Scherer
(3), President of --
BWE 2002 $ 254,000 $ --(4) $ --
2001 $ 225,000 $ 26,144 $ -- --
2000 $ 225,000 $ 23,144 $ -- 4,000

The summary table sets forth information with respect to the compensation of
each of the named executive officers and key employees for services provided in
all capacities to the Company for the three years in the period ended December
31, 2002.

23

(1) The salaries of Clay B. Lifflander and Alan L. Rivera are paid by Millbrook
Capital Management, Inc. ("Millbrook") pursuant to the terms of a Management
Agreement. See "Certain Relationships and Related Transactions --Management
Agreement."
(2) Long terms awards related to options granted to purchase KCI common stock.
(3) The Company is a party to employment agreements with certain of its key
employees.
(4) The 2002 bonuses for Robert B. Kay, Albert W. Weggeman, George M. Scherer
and Keith McGowan have yet to be determined. The bonuses of these
individuals are determined based on certain performance goals and are at the
discretion of the Board of Directors of KCLLC.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table summarizes the options that were granted to named executive
officers of the Company in the fiscal year ended December 31, 2002.

- -------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates for Option
Individual Grants Term (1)
- ------------------------------------------------------------------------------ ---------------------------------
Number of
Securities Percent of
Underlying Total Options/
Options SARS Granted
/SARS to Employees Exercise Price Expiration
Name Granted (#) in Fiscal Year ($/sh) Date 5% 10%
- ------------------------------------------------------------------------------ --------------- ----------------

Albert W.
Weggeman 2,500 22.1% $100.00 1/02/12 $178,000 $463,000

Keith A.
McGowan 1,000 8.8% $100.00 1/02/12 $65,000 $166,000

(1) Market value was determined by the Board of Directors to equal the exercise
price at date of grant.

Amounts represent hypothetical gains that could be achieved for the options if
exercised at the end of the term of the options. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from the
date the respective options were granted to their expiration date and are not
intended to forecast possible future appreciation, if any, in the price of the
KCI common stock. The gains shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the exercise
of the options or the sale of the underlying shares. The actual gains, if any,
on the stock option exercises will depend on the future performance of the KCI
common stock, the holder's continued employment through applicable vesting
periods and the date on which the options are exercised. The potential
realizable value of the foregoing options is calculated by assuming that the
fair market value of the KCI common stock on the date of grant of such options
equaled the exercise price of such options.

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AGGREGATED OPTION/SAR EXERCISES DURING FISCAL 2002 AND
YEAR END OPTION/SAR VALUES

The following table provides information related to the number and value of
options held by the named executive officers at December 31, 2002.

Number of Securities underlying Unexercised Value of Unexercised In-the-Money Options
Options at Year End at Year End (1)
-----------------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------

Clay B. Lifflander 6,666 23,334 $ 50,995 $178,505
Robert B.Kay 26,666 23,334 1,850,995 178,505
George M. Scherer 888 3,112 6,793 23,807
Alan L. Rivera 1,667 5,833 12,749 44,626
Albert W. Weggeman 1,110 6,390 - 62,500
Keith A. McGowan 4,225 5,017 201,001 29,749

(1) Assumes management's estimate of fair market value of $125.00 per share of
common stock at December 31, 2002.

Employment and Related Agreements

The employment agreement with Robert B. Kay, President of the Company, is dated
March 1, 1999, terminates March 1, 2004 and provides for, among oth