10-Q 1 b319878_10q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly period ended June 30, 2002 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 333-58675 KEY COMPONENTS, LLC ------------------------------------------------------ (Exact name of Registrant as Specified in its charter) Delaware 04-3425424 ------------------------------- --------------------------------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 200 White Plains Road, Tarrytown NY 10591 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (914) 332-8088 (Registrant's Telephone Number, Including Area Code) ---------------------------------------------------- KEY COMPONENTS FINANCE CORP. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 14-1805946 ------------------------------- --------------------------------- (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 200 White Plains Road, Tarrytown NY 10591 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (914) 332-8088 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No As of August 14, 2002, all of the membership interests in Key Components, LLC were owned by Key Components, Inc., a privately held New York corporation. All of the shares of common stock of Key Components Finance Corp. were owned by Key Components, LLC. ================================================================================ KEY COMPONENTS, LLC Form 10-Q Index June 30, 2002

1 PART I -- FINANCIAL INFORMATION Item 1 -- Consolidated Financial Statements KEY COMPONENTS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)

The accompanying notes are an integral part of these financial statements. 2 KEY COMPONENTS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands)

The accompanying notes are an integral part of these financial statements. 3 KEY COMPONENTS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)

The accompanying notes are an integral part of these financial statements. 4 KEY COMPONENTS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements include the financial statements of Key Components, LLC ("KCLLC"), and its subsidiaries, all of which are wholly owned (collectively, the "Company"). All significant intercompany transactions have been eliminated. The Company manufactures and sells custom engineered essential componentry in a diverse array of end use markets. Through its two business segments, electrical components and mechanical engineered components, the Company targets its products to original equipment manufacturers. The Company's electrical components business products include power conversion products, specialty electrical components and high-voltage utility switches. The Company's mechanical engineered components business products primarily consist of medium security lock products and accessories, flexible shaft and remote valve control components and turbo-charger actuators. KCLLC's assets are limited to the Company's corporate office and its investments in its subsidiaries. KCLLC's financial statements include the related expenses of operating the Company's corporate office. KCLLC is wholly-owned by Key Components, Inc. ("KCI"), a New York corporation. KCI holds no other assets other than its investments in KCLLC and has no operations. The accompanying unaudited financial statements of the Company contain all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. While certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, the Company believes that the disclosures herein are adequate to make the information not misleading. The results of operations for the interim periods are not necessarily indicative of the results for full years. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001 included in the Company's Annual Report on Form 10-K. Certain reclassifications were made to conform the prior periods to the current year presentation. 2. Acquisitions and Dispositions On November 21, 2000, the Company acquired all of the outstanding shares of Acme Electric Corporation ("Acme") for a purchase price of approximately $47.3 million and assumed liabilities of approximately $28.8 million. In conjunction with the acquisition, the Company repaid approximately $10.4 million of Acme's outstanding long-term debt out of the approximately $28.8 million of liabilities assumed as part of the acquisition. The Company recorded the excess purchase price over net assets acquired of approximately $33.1 million as goodwill. At the time of the acquisition, the Company decided to divest the Acme Aerospace ("Aerospace") division and sell the Acme Electronics ("Electronics") division. Aerospace manufactures lightweight high power battery chargers and related power systems for aerospace applications. Electronics is a contract electronics manufacturer for data storage, telecommunications and medical electronic applications. Based on the strength of the operating performance of Aerospace, on June 1, 2001, the Company decided to retain rather than divest Aerospace. On that date and in accordance with EITF 90-6, "Accounting for Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold," the Company reallocated the purchase price of Acme as if Aerospace had never been held for sale and recorded a cumulative adjustment for the results of operations of Aerospace from the date of acquisition through May 31, 2001 of $721,000. 5 In December 2001, the Company entered into an agreement to sell the Electronics division of Acme. Pursuant to this transaction, which closed on February 15, 2002, the Company received $100,000 in cash and a $300,000 note due on February 15, 2006, which bears interest at a rate of 7% per annum. In addition, contingent consideration of up to $2.1 million will be earned if Electronics meets certain annual revenue targets during the 48 months following such closing. Contingent consideration earned, if any, including interest at 7% per annum accruing on such amount, will be paid on the fourth anniversary from the date such contingent consideration is earned and will be recorded against goodwill. As part of the Company's plan of integrating the Acme acquisition, the Company accrued approximately $2.3 million of severance and related costs and $260,000 of lease exit costs related to the closure of Acme's corporate office. At June 30, 2002, $1.5 million of payments had been made related to these accruals. The Acme corporate office was closed in October 2001. The accrued acquisition costs represents a significant estimate and is subject to change based on actual results. 3. Inventories Inventories consist of the following: (In thousands) June 30, December 31, 2002 2001 ------------------------------------------------------------------------------ Raw materials $15,239 $15,566 Work-in-process 7,372 6,808 Finished goods 7,119 8,038 ------------------------------------------------------------------------------ Total inventory $29,730 $30,412 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ 6 4. Operating Segments The Company conducts its operations through its two businesses, the manufacture and sale of electrical components ("EC") and mechanical engineered components ("MEC"). The EC business produces an array of electrical componentry items for recreational and industrial applications and switches for utility companies, which are utilized in industrial markets. The MEC business manufactures flexible shaft products, specialty locks and related accessories and turbo charger actuators and related componentry. The Company evaluates performance and allocates resources based on profit or loss from operations before interest, taxes and depreciation and amortization ("EBITDA"). In its calculation of EBITDA, certain charges that management determines are non-recurring are excluded. Segment information for the six and three months ended June 30, 2002 and 2001 is as follows: (In thousands) Mechanical Electrical Engineered Components Components Total -------------------------------------------------------------------------------- Six months ended June 30, 2002: Net sales to external customers $ 62,965 $ 33,432 $ 96,397 Intersegment net sales -- 75 75 Segment profit - EBITDA 11,469 9,552 21,021 Segment assets 113,300 88,777 202,077 Depreciation and amortization 1,287 1,213 2,500 -------------------------------------------------------------------------------- Six months ended June 30, 2001: Net sales to external customers $ 60,895 $ 39,973 $100,868 Intersegment net sales -- 65 65 Segment profit - EBITDA 10,625 11,490 22,115 Segment assets 121,628 103,552 225,180 Depreciation and amortization 1,600 2,069 3,669 -------------------------------------------------------------------------------- Three months ended June 30, 2002: Net sales to external customers $ 32,732 $ 17,046 $ 49,778 Intersegment net sales -- 43 43 Segment profit - EBITDA 6,423 5,040 11,463 Segment assets 113,300 88,777 202,077 Depreciation and amortization 637 601 1,238 -------------------------------------------------------------------------------- Three months ended June 30, 2001: Net sales to external customers $ 31,181 $ 18,890 $ 50,071 Intersegment net sales -- 39 39 Segment profit - EBITDA 5,946 5,643 11,589 Segment assets 121,628 103,552 225,180 Depreciation and amortization 720 1,034 1,754 -------------------------------------------------------------------------------- December 31, 2001: Segment assets $116,576 $100,265 $216,841 -------------------------------------------------------------------------------- 7 Reconciliation of Selected Segment Information to the Company's Consolidated Totals:

5. Provision for Income Taxes For the three and six months ended June 30, 2002 and 2001, the Company's provision for income taxes primarily relates to the federal and state income taxes of its sole member, KCI. Deferred income taxes have been recorded to reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end. Valuation allowances are recorded when necessary to reduce deferred tax assets to expected realizable amounts. 8 6. Financing amendment In June 2002, the Company amended its credit agreement (the "Amendment") to provide for revised financial covenant ratios from June 30, 2002 through December 2003 from the original covenant ratios stipulated in the agreement. In addition, the Amendment revises the Company's pricing, the allowed maximum capital expenditures through 2003 and reduces the amount to be paid for permitted acquisitions (as defined) from $15 million to $7.5 million through the end of 2003. In connection with the Amendment, the Company voluntarily reduced its revolving credit facility by $15 million from $40 million to $25 million through the end of 2003. At June 30, 2002, the Company was in compliance with the covenants of the credit agreement, as amended. In connection with the new amendment, as a result of the Company voluntarily reducing its loan commitment through the end of 2003, the Company wrote down $145,000 of the deferred finance costs related to closing the Company's credit facility. 7. Goodwill In July 2001, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. The provisions of SFAS 141 provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill. SFAS 141 also requires that upon adoption of SFAS 142 the Company reclassify the carrying amount of certain intangible assets. The provisions of SFAS 142 (i) prohibit the amortization of goodwill and indefinite-lived intangible assets, (ii) require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur which would impact the carrying value of such assets), and (iii) require that the Company's operations be formally identified into reporting units for the purpose of assessing potential future impairments of goodwill. Goodwill amortization for the years ended December 31, 2001, 2000 and 1999 was approximately $3.6 million, $2.6 million and $2.5 million, respectively. Upon the adoption of SFAS 142, the Company stopped recording goodwill amortization, which totaled $1. 6 million and $817,000 in the six months and three months ended June 30, 2001, respectively. In June 2002, the Company completed the assessment of its reporting units and completed 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, market and transactional multiples of the reporting units. Further procedures, as prescribed by SFAS 142 will be performed in the third quarter to determine the amount of final impairment. In accordance with SFAS 142, the Company estimated the amount of the impairment and recorded a cumulative effect in change of accounting principle, as of January 1, 2002, of approximately $7.8 million, net of taxes of approximately $3.4 million, to write down the goodwill associated with the Company's lock product line resulting from the current market conditions of that product line. 9 8. New Accounting Pronouncements In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS 144 provides guidance on the accounting for long-lived assets to be held and used and for assets to be disposed of through sale or other means. SFAS 144 also broadens the definition of what constitutes a discontinued operation and how such results are to be measured and presented. FAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material impact on the earnings or financial position of the Company. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. . SFAS 145 requires that most gains and losses from the extinguishment of debt no longer be classified as extraordinary items and that they be recorded as part of the results of operations. In additions, SFAS 145 amends FASB Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Lastly, SFAS 145 makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The Company adopted the statement as of January 1, 2002. The adoption of SFAS 145 did not have a material effect to the Company's financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement sets forth various modifications to existing accounting guidance which prescribes the conditions which must be met in order for costs associated with contract terminations, facility consolidations, employee relocations and terminations to be accrued and recorded as liabilities in financial statements. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of this statement to determine the effect, if any, it may have on its consolidated results of operations and financial position. 10 Item 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction GENERAL Key Components, LLC ("KCLLC") is the parent holding company of the wholly owned subsidiaries of the Company. Key Components, Inc. ("KCI"), the sole member of KCLLC, holds no other assets other than its investment in KCLLC and has no operations. The Company has two operating business segments, its electrical components ("EC") business and mechanical engineered components ("MEC") business. Through its two businesses, the Company is a leading manufacturer of custom-engineered essential componentry for application in a diverse array of end-use products. The Company targets original equipment manufacturer ("OEM") markets where the Company believes its value-added engineering and manufacturing capabilities, along with its timely delivery, reliability and customer service, enable it to differentiate the Company from its competitors and enhance profitability. The EC business' product offerings include power conversion products, specialty electrical components and high-voltage utility switches. The product offerings of the MEC business consist of flexible shaft and remote valve control components, turbo-charger actuators and medium security lock products and accessories. The Company has historically acquired complementary or related manufacturing businesses and sought to integrate them into existing operations. Following an acquisition, management seeks to rationalize operations, reduce overhead costs, develop additional cross-selling opportunities and establish new customer relationships. As a result of its integration efforts and internal growth, the Company's consolidated net sales have increased from approximately $9.1 million in fiscal year 1992 to approximately $193.8 million for fiscal year 2001. The Company continues to seek to make selective acquisitions of light industrial manufacturing companies, but there are no agreements regarding any such acquisitions existing as of the date hereof. 11 Results of Operations The following table sets forth, for the periods indicated, consolidated statement of operations data for the Company expressed in dollar amounts (in thousands) and as a percentage of net sales. The financial data set forth includes the result of operations of its wholly owned subsidiaries from their respective dates of acquisition. The data set forth below should be read in conjunction with the Company's consolidated financial statements and notes thereto contained elsewhere in this Form 10-Q.

12 A summary of the Company's segments is as follows: Electrical Components Business

Mechanical Engineered Components Business

Six months ended June 30, 2002 compared to the six months ended June 30, 2001 Net Sales: Net sales for the six months ended June 30, 2002 ("Six Months 2002") decreased by approximately $4.5 million, or 4.4%, from $100.9 million for the six months ended June 30, 2001 ("Six Months 2001") to $96.4 million for the Six Months 2002. This decrease was the result of the sum of the $2.1 million, or 3.4%, increase in the net sales of the EC business less the approximately $6.5 million, or 16.4%, decrease in net sales of the MEC business. 13 For the first five months of 2001, the results of operations of the aerospace division of Acme ("Aerospace") were excluded from the consolidated results of the Company due to its classification as being held for sale during that period. Net sales of the EC business, pro forma to include the net sales of Aerospace for the entire period in the results of operations for the Six Months 2001, declined by approximately $2.9 million, or 4.4% for the Six Months 2002. The primary driver was the decline in sales for the power conversion product line of the EC business. Net sales of the power conversion business for the Six Months 2002, pro forma to include the net sales of Aerospace for the entire period in the results of operations for the Six Months 2001, declined by approximately $5.1 million or 15.3%. This decline was the result of lower demand in the industrial and telecom markets for power distribution products. Net sales in the MEC business decreased by approximately $6.5 million for the Six Months 2002 as compared to the Six Months 2001. This decrease is primarily related to the decline in sales of the Company's lock product line, which has continued to experience softness in demand across its major markets. Gross Profit: Gross profit decreased by approximately $1.1 million, or 2.9%, from approximately $36.9 million for the Six Months 2001 to approximately $35.9 million the Six Months 2002, resulting from the $1.7 million, or 8.0%, increase in the gross profit of the EC business less the decline in gross profit of the MEC business for Six Months 2002 of approximately $2.8 million, or 18.2%. Gross profit of the EC business, pro forma to include the results of operations of Aerospace for the entire period in the results of operations for the Six Months 2001, remained at approximately $23.4 million for the Six Months 2002 as compared to the Six Months 2001. The gross margin lost in the decline in sales for the EC business was offset by productivity improvements experienced during 2002 as well as product mix. The approximately $2.8 million decline in gross profit for the MEC business for the Six Months 2002 as compared to the Six Months 2001 is primarily due to the decline in sales of the lock product line of the MEC business for the Six Months 2002. The gross profit, as a percentage of net sales ("GP percentage"), for the EC business increased by approximately 1.6% from 35.6% for the Six Months 2001 to 37.2% to the Six Months 2002. For the MEC business, the GP percentage declined approximately 0.8% from 38.0% for the Six Months 2001 to 37.2% to the Six Months 2002. The GP percentage for the EC business, pro forma to include the results of operations of Aerospace for the entire period in the results of operations for the Six Months 2001, increased approximately 1.7% from 35.5% for the Six Months 2001 to 37.2% for the Six Months 2001. The increase in GP percentage for the EC business is the result of product mix and productivity gains. The decline in GP percentage of the MEC business is primarily related to a change in product mix and margin compression resulting from fixed overheads being absorbed by lower sales levels primarily related to the lock product line. Selling, General and Administrative Expenses: Selling, general and administrative ("SG&A") expenses declined by approximately $2.1 million, or 9.8%, from approximately $21.3 million for the Six Months 2001 to approximately $19.2 million for the Six Months 2002. As a percentage of net sales, SG&A decreased by 1.1% from 21.1% for the Six Months 2001 to 20.0% for the Six Months 2002. SG&A of the EC business increased by approximately $437,000, or 3.4%, for the Six Months 2002 as compared to the Six Months 2001 and, as a percentage of net sales, remained at 21.1% for the Six Months 2002 and 2001. SG&A of the EC business, pro forma to include the results of operations of Aerospace for the entire period in Six Months 2001, declined by approximately $569,000, or 4.1%, for the Six Months 2002 as compared to the Six Months 2001, and, as a percentage of net sales, SG&A, pro forma to include the results of operations of Aerospace for the entire period in the results of operations for the Six Months 2001, increased 0.1% for the Six Months 2002. SG&A of the MEC business, which declined by approximately $795,000, or 16.1%, for the Six Months 2002 as compared to the Six Months 2001, increased as a percentage of net sales by approximately 0.1%. The decrease in SG&A expenses for the Six Months 2002 as compared to the Six Months 2001 is primarily related to the closure of the corporate office of Acme. For the Six Months 2001, the corporate office, which was closed in October 2001, added approximately $1.5 million to the consolidated SG&A expenses of the Company during the Six Months 2001, including approximately $312,000 of depreciation. Upon the close of the Acme corporate office, all remaining related expenses of that office terminated. 14 The decrease in the SG&A of the EC business, pro forma to include the results of Aerospace in the Six Months 2001, and decrease in SG&A of the MEC business were primarily related to the Company's cost reduction initiatives in response to the downturn in the economy, put in place during 2001 and lower commissions due to lower sales volumes. 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. The Company's MEC business has a lower overhead structure than its EC business due to the lower selling and marketing expenses, which limits the ability of the MEC business to reduce its expenses beyond a certain level. Acme Aerospace Division Cumulative Adjustment: On June 1, 2001, the Company, based on management's conclusion that the aerospace division of Acme ("Aerospace"), which was previously held for sale, was more valuable than what current market conditions dictated and decided to retain rather than divest Aerospace. On that date and in accordance with EITF 90-6, "Accounting for Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold", the Company reallocated the purchase price as if Aerospace had never been held for sale and recorded a cumulative adjustment for the results of operations of Aerospace from the date of acquisition through May 31, 2001 of $721,000, which had been excluded from the results of operations of the Company and had been included in goodwill. Amortization of Goodwill: Goodwill amortization decreased by approximately $1.7 million during Six Months 2002 as compared to Six Months 2001, due to the Company ceasing the amortization of goodwill as of January 1, 2002 as required by Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Other Operating expenses: Other operating expenses primarily relate to the start up expenses related to the Company's new lock production facility in Mexico. In addition the Company wrote down approximately $145,000 of deferred finance costs related to its credit facility (see Liquidity and Capital Resources). Income from Operations: Income from operations increased by approximately $1.4 million, or 9.5%, from approximately $14.7 million for the Six Months 2001 to $16.0 million for the Six Months 2002. This increase resulted from the decrease in gross profit of approximately $1.1 million offset by the decreases in SG&A expenses of approximately $2.1 million and goodwill amortization of approximately $1.7 million. The decrease in operating expenses was reduced by $721,000 of cumulative income recorded during the Six Months 2001 and an increase of other operating expenses of approximately $588,000. Interest Expense: Interest expense declined by approximately $2.4 million, or 25.8%, during the Six Months 2002. This decrease is primarily due to lower levels of outstanding borrowings during the Six Months 2002 as compared to the Six Months 2001, as well as reduced rates of interest charged on the outstanding principal on the variable rate term loan during the Six Months 2002 as compared to the Six Months 2001. Provision for Income Taxes: The provision for income taxes increased by approximately $1.7 million, or 64.7%, for the Six Months 2002 as compared to the Six Months 2001. The increase is directly related to the increase in income before taxes. The Company's effective tax rate for Six Months 2002 was approximately 45.0% on income before taxes. The effective rate for the Six Months 2001 was 45.7%. Cumulative effect in Change of Accounting Principle: In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, which are effective for fiscal years beginning after December 15, 2001. The provisions of SFAS 141 provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill. SFAS 141 also requires that upon adoption of SFAS 142 the company reclassify the carrying amount of certain intangible assets. The provisions of SFAS 142 (i) prohibit the amortization of goodwill and indefinite-lived intangible assets, (ii) require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur which would impact the carrying value of such assets), and (iii) require that the Company's operations be formally identified into reporting units for the purpose of assessing potential future impairments of goodwill. 15 In June 2002, the Company completed the assessment of its reporting units and completed its initial step one impairment test on January 1, 2002 financial information. As a result, the Company identified one reporting unit, the Company's Lock product line, in the MEC business that's had 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. This was primarily driven by the downturn in the economy, which has caused significant reductions in spending on new office furniture. Further procedures, as prescribed by SFAS 142 will be performed in the third quarter to determine the amount of final impairment. In accordance with SFAS 142, the Company estimated the amount of the impairment and recorded a cumulative effect in change of accounting principle, as of January 1, 2002, of approximately $7.8 million, net of taxes of approximately $3.4 million, to write down the goodwill associated with the Company's lock product line, resulting from the current market conditions of that product unit. Net (loss) Income: Net income decreased by approximately $5.8 million from net income of approximately $3.1 million for the Six Months 2001 to a net loss of approximately $2.7 million for the Six Months 2002. The increase resulted from an increase in income from operations of approximately $1.5 million, a decrease in other income of approximately $43,000, a decrease in interest expense of approximately $2.4 million, an increase in provision for taxes of approximately $1.7 million, and the increase in cumulative effect in accounting principle of approximately $7.8 million, due to the factors discussed above. Three months ended June 30, 2002 compared to the three months ended June 30, 2001 Net Sales: Net sales for the three months ended June 30, 2002 ("Quarter 2002") decreased by approximately $293,000, or 0.6%, from approximately $50.1 million for the three months ended June 30, 2001 ("Quarter 2001") to approximately $49.8 million for the Quarter 2002. This decrease was the result of the approximately $1.6 million, or 5.0%, increase in the net sales of the EC business less the approximately $1.8 million, or 9.8%, decline in net sales of the MEC business. For April and May 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 of 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 quarter in the results of operations of the Quarter 2001, declined approximately $550,000, or 1.7% for the Quarter 2002. The primary driver was the decline in sales for the power conversion product line of the EC business. Net sales of the power conversion business, including the net sales of Aerospace in the Quarter 2001, declined approximately $1.8 million. This decline was the result of lower demand in the industrial and telecom markets for power distribution products. Net sales in the MEC business decreased by approximately $1.8 million for the Quarter 2002 as compared to the Quarter 2001. This decrease is primarily related to the decline in sales of the Company's lock product line, which has continued to experience softness in demand across its major markets. Gross Profit: Gross profit increased by $551,000, or 3.0%, from approximately $18.4 million for the Quarter 2001 to approximately $19.0 million for the Quarter 2002, resulting from the $1.5 million or 13.4%, increase in the gross profit of the EC business less the decline in gross profit of the MEC business for the Quarter 2002 of approximately $928,000, or 12.5%. Gross profit of the EC business, pro forma to include the results of operations of Aerospace in the Quarter 2001, increased approximately $811,000, or 7.0%. The primary drivers were the result of continued productivity gains related to cost cutting efforts put in place during 2001 and product mix. The approximately $928,000 decline in gross profit of the MEC business for the Quarter 2002 as compared to the Quarter 2001 is primarily due to the decline in sales of the lock product line of the MEC business for the Quarter 2002. The gross profit, as a percentage of net sales ("GP percentage"), for the EC business increased by approximately 2.8% from 35.3% for the Quarter 2001 to 38.1% for the Quarter 2002. For the MEC business, the GP percentage declined approximately 1.2% for the Quarter 2002. The GP percentage for the EC business, pro forma to include the results of operations of Aerospace for the entire quarter in the results of operations for the Quarter 2001, increased by approximately 3.1%. The change in GP percentage for the EC business is the result of product mix and productivity gains. The change in GP percentage for the MEC business is primarily related to a change in product mix and margin compression resulting from fixed overheads being absorbed by lower sales levels related to the lock product line. Selling, General and Administrative Expenses: Selling, general and administrative ("SG&A") expenses declined by approximately $620,000, or 6.0%, from approximately $10.3 million for the Quarter 2001 to approximately $9.7 million for the Quarter 2002. As a percentage of net sales, SG&A decreased by approximately 1.2% for the Quarter 2002 as compared to the Quarter 2001. SG&A of the EC business increased by approximately $665,000, or 10.8%, for the Quarter 2002 as compared to the Quarter 2001 and, as a percentage of net sales, increased by 1.1% to 20.8% for the Quarter 2002. SG&A of the EC business, pro forma to include the results of operations of Aerospace for the entire quarter in the results of operations for the Quarter 2001, increased by approximately $218,000, or 3.3%. As a percentage of net sales, SG&A for the EC business, pro forma to include the results of operations of Aerospace for the entire quarter in the results of operations for the Quarter 2001, increased by 1.0% for the Quarter 2002. SG&A of the MEC business, which declined by approximately $299,000, or 12.6%, for the Quarter 2002 as compared to the Quarter 2001, decreased as a percentage of net sales by approximately 0.4% to 12.2% for the Quarter 2002. 16 The decrease in SG&A expenses for the Quarter 2002 as compared to the Quarter 2001 is primarily related to the closing of the corporate office of Acme. For the Quarter 2001, the corporate office, which was closed in October 2001, added approximately $750,000 to the consolidated SG&A expenses of the Company during the Quarter 2001, including approximately $168,000 of depreciation. Upon the close of the Acme corporate office, all remaining related expenses of that office terminated. The increase in SG&A of the EC business is primarily related to commissions resulting from increased volume as well as change in product sales mix. The decline in the SG&A and in SG&A as a percentage of sales of the MEC business were primarily related to the Company's cost reduction initiatives in response to the downturn in the MEC business. Acme Aerospace Division Cumulative Adjustment: On June 1, 2001, the Company, based on management's conclusion that the aerospace division of Acme ("Aerospace"), which was previously held for sale, was more valuable than market conditions dictated and decided to retain rather than divest Aerospace. On that date and in accordance with EITF 90-6, "Accounting for Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired Operating Unit to be Sold", the Company reallocated the purchase price as if Aerospace had never been held for sale and recorded a cumulative adjustment for the results of operations of Aerospace from the date of acquisition through May 31, 2001 of $721,000, which had been excluded from the results of operations of the Company and had been included in goodwill. Amortization of Goodwill: Goodwill amortization decreased by approximately $817,000 during the Quarter 2002 as compared to the Quarter 2001, due to the Company ceasing the amortization of goodwill as of January 1, 2002 as required by Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Other Operating expenses: Other operating expenses increased approximately $398,000 or 0.8% and relate primarily to the start up expenses of the Company's new lock production facility in Mexico. In addition, the Company wrote down approximately $145,000 of deferred finance costs related to its credit facility (see Liquidity and Capital Resources). Income from Operations: Income from operations increased by approximately $869,000, or 10.8%, from approximately $8.0 million for the Quarter 2001 to approximately $8.9 million for the Quarter 2002. This increase resulted from the increase in gross profit of approximately $551,000, decreases in SG&A expenses of approximately $700,000 and goodwill amortization of approximately $817,000. The decrease in operating expenses was reduced by the $721,000 cumulative income adjustment for Aerospace recorded in the Quarter 2001 and an increase in other operating expenses of approximately $478,000. Interest Expense: Interest expense decreased by approximately $877,000, or 20.7%, during the Quarter 2002. This decrease is primarily due to lower levels of outstanding borrowings during the Quarter 2002 as compared to the Quarter 2001, as well as reduced rates of interest charged on the outstanding principal on the variable rate term loan during Quarter 2002 as compared to Quarter 2001. Provision for Income Taxes: The provision for income taxes increased by approximately $695,000, or 37.6%, for the Quarter 2002 as compared to the Quarter 2001. The increase in provision for taxes is primarily related to the increase in income before taxes. The Company's effective tax rate for the Quarter 2002 was approximately 45.6% on income before taxes. The Company's effective rate declined approximately 3.0% due to the elimination of goodwill amortization beginning in Quarter 2002. Principally all of the company's goodwill is non-deductible for tax purposes. The effective rate for Quarter 2001 was 48.1%. Net Income: Net Income increased by approximately $1.0 million from approximately $2.0 million for the Quarter 2001 to approximately $3.0 million for the Quarter 2002. The increase resulted from the increase in income from operations of approximately $869,000, a decrease in interest expense of approximately $877,000 and an increase in provision for taxes of approximately $695,000, due to the factors discussed above. 17 Liquidity and Capital Resources The Company has historically generated funds from its operations and its working capital requirements generally have not materially fluctuated from quarter to quarter. The Company's other main sources of liquidity have historically been the Company's $80.0 million of uncollateralized 10.5% senior notes due 2008 and its outstanding credit facilities. The credit facility provides for a six-year $40.0 million revolving credit facility and a six-year $100.0 million term loan facility. The credit agreement, guaranteed by the Company's subsidiaries and KCI, is collateralized by all of the capital stock of the subsidiaries, receivables, inventories, equipment and certain intangible property. There were no amounts outstanding under the revolving credit facility at June 30, 2002 or December 31, 2001. The term loan is payable in quarterly installments through September 2006. Both the term loan and revolving credit facility bear interest at fluctuating interest rates determined by reference to a base rate or the London interbank offered rate ("LIBOR") plus an applicable margin which will vary from 1.0% to 3.5% and require the payment of a commitment fee of 0.5% on the unused portion of the facility as well as quarterly commitment fees. The credit facility also allows for up to $5.0 million of outstanding letters of credit. At June 30, 2002, the Company had one letter of credit outstanding for approximately $443,000. The letter of credit primarily relates to outstanding Acme workman's compensation claims. The credit agreement contains certain covenants and restrictions, which require the maintenance of financial ratios and restrict or limit dividends and other shareholder distributions, transactions with affiliates, capital expenditures, rental obligations and the incurrence of indebtedness. In June 2002, the Company amended its credit agreement (the "Amendment") to provide for revised financial covenant ratios from June 30, 2002 through December 2003 from the original covenant ratios stipulated in the agreement. In addition, the Amendment revises the Company's pricing, the allowed maximum capital expenditures through 2003 and reduces the amount to be paid for permitted acquisitions (as defined) from $15 million to $7.5 million through the end of 2003. In connection with the Amendment, the Company voluntarily reduced its revolving credit facility by $15 million from $40 million to $25 million through the end of 2003. At June 30, 2002, the Company was in compliance with the covenants of the credit agreement, as amended. In connection with the new amendment, as a result of the Company voluntarily reducing its loan commitment through the end of 2003, the Company wrote down $145,000 of the deferred finance costs related to closing the Company's credit facility. The Company's remaining liquidity demands will be for capital expenditures, general corporate purposes, and principal and interest payments on its outstanding debt. The Company's senior notes require semiannual interest payments on the outstanding principal. The term loan requires quarterly principal payments. Principal payments required for the next 12 months will be approximately $9.8 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 June 30, 2002, the Company had no outstanding commitments for capital expenditures. The Company anticipates its capital expenditures for the year ended December 31, 2002 to be approximately $3.6 million. The expenditures are primarily needed to maintain its facilities and expand its production capacity for the company's ongoing plan to expand operations in Mexico and in order to take advantage of profitable market opportunities. To the extent cash flow from operations is insufficient to cover the Company's capital expenditures, debt service and other general requirements, the Company would seek to utilize its borrowing availability under its existing revolving credit facility. KCI has no operations and is dependent on KCLLC for financial resources in the form of capital distributions to meet its obligations. KCI obligations include the liquidation preferences of $107 million for its preferred stock plus any dividends payable in arrears (at June 30, 2002 there were approximately $2.1 million in cumulative dividends in arrears, payable in-kind), which are redeemable for cash at the option of the holder after June 2, 2009, the requirement to purchase shares from its common shareholders under certain circumstances and its tax obligations. Repurchases of KCI Common Stock are made at fair market value as defined in KCI's shareholder agreement. At June 30, 2002 approximately 1.3 million KCI common shares plus potentially 190,000 shares covered by stock options were subject to repurchase by KCI. The ability of KCLLC to make such capital distributions will be limited by its available resources and is limited by restrictions of debt and other agreements. KCLLC reflects the tax obligations of KCI in its tax provision. 18 Cash flows provided by operating activities were approximately $11.7 million and $6.0 million for the Six Months 2002 and the Six Months 2001, respectively. The net increase of approximately $5.7 million for the Six Months 2002 resulted primarily from the increase in net income plus non-cash charges of the Company of approximately $523,000 as compared to the Six Months 2001 and the decrease in prepaid expenses for the Six Months 2002. The decrease in prepaid expenses is primarily attributable to the reduction of prepaid taxes as the Company has utilized its prepaid balances to offset current estimated payments. The working capital accounts (accounts receivable, inventory and accounts payables) used net cash of $269,000 for the Six Months 2002 compared to the approximately $185,000 of net cash used during the Six Months 2001. Accrued expenses attributed $2.4 million of the $5.7 million increase in cash flows from operations over the Six Months 2002 primarily related to the reduction of severance and other payments related to the acquisition of Acme that occurred during the Six Months 2001. Cash flows used in investing activities were approximately $943,000 and $519,000 for the Six Months 2002 and the Six Months 2001, respectively. Capital expenditures for the Six Months 2002 and the Six Months 2001 were approximately $1.3 million and $2.3 million, respectively. The decrease in capital expenditures from the Six Months 2002 to the Six Months 2001 was primarily due to the Company's cost containment strategies in response to the downturn in the economy. Proceeds from the assets held for sale were approximately $364,000 and $1.7 million for the Six Months 2002 and the Six Months 2001, respectively. Cash flows from financing activities used net cash of approximately $12.0 million and approximately $8.4 million during the Six Months 2002 and the Six Months 2001, respectively. The net cash used in financing activities for the Six Months 2002 was related to the Company's net repayment of outstanding debt under its existing credit facilities during the two periods. The debt payments during the Six Months 2002 were prepayments against its outstanding term loan. The payments are first applied to the Company's next two scheduled payments and then are ratably applied to the remaining required principal payments. During the Six Months 2001, the Company repaid a net of approximately $4.7 million of term debt and $2.8 million of debt outstanding on the revolving credit facility. The Company also distributed approximately $865,000 during the Six Months 2001 to its member so that it could repurchase common stock from a shareholder. Management believes that the Company's cash flow from operations, together with its borrowing availability under its existing credit facilities, will be adequate to meet its anticipated capital requirements for the next twelve months. Significant Accounting Policies Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 1 of the consolidated financial statements, included in the Company's Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. The following is a brief discussion of the more significant accounting policies and methods used by the Company. Revenue recognition: The Company recognizes revenue upon shipment of products to customers, when title passes and all risks and rewards of ownership have transferred. The Company considers revenue realized or realizable and earned when the product has been shipped, the sales price is fixed or determinable and collectibility is reasonably assured. The Company reduces revenue for estimated customer returns. Inventory: Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. The Company purchases materials for the manufacture of inventory for sale in its various markets. The decision to purchase a set quantity of a particular inventory item is influenced by several factors including current and projected cost, future estimated availability and existing and projected sales to produce certain items. The Company evaluates the net realizable value of its inventories and establishes allowances to reduce the carrying amount of these inventories as deemed necessary. Goodwill and other intangible assets: At June 30, 2002, the Company had recorded approximately $108.1 million in goodwill and other intangible assets, net of accumulated amortization related to acquisitions made in 2000 and prior years. The recoverability of these assets is subject to an impairment test based on the estimated fair value of the underlying businesses. These estimated fair values are based on estimates of the future cash flows of the businesses. Factors affecting these future cash flows include: the continued market acceptance of the products and services offered by the businesses; the development of new products and services by the businesses and the underlying cost of development; the future cost structure of the businesses; and future technological changes. 19 Management's Estimates The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, pensions and post retirement benefits, warranty obligations and contingencies and litigation. The Company bases its estimates on historical experience, the use of external resources and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Significant estimates used by the Company that are subject to change include, but are not limited to (i) the Company's allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for their open accounts receivable with the Company; if the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required, (ii) allowances established against its inventory carrying value to record its inventories at net realizable value; if actual market conditions are less favorable than those projected by management, additional inventory allowances may be required, (iii) the Company's valuation allowances against its deferred tax assets; were the Company to determine that it would not be able to realize its deferred tax assets in the future, additional valuation allowances could be required, (iv) the carrying amounts of its long lived assets; if the Company were to determine that the value ascribed to any of its long-lived assets was not recoverable an allowance could be required, (v) the effects of its existing pension plans in its financial statements which the Company records using various assumptions and the use of independent actuaries; if any of the underlying assumptions were to change, the carrying value of the pension assets and obligations may require adjustment, (vi) the Company's ability to evaluate the fair market value of its reporting units to assess the book value of goodwill, and (vii) estimates of future results of the Company's operations on which the Company's financial covenants, as defined in its credit facilities, were based, in part; if actual results were not to meet those expectations, the Company may not meet its financial covenants and may be required to obtain waivers for those covenants. Inflation Inflation has not been material to the Company's operations for the periods presented. Backlog The Company's backlog of orders as of June 30, 2002, was approximately $30.0 million. The Company includes in its backlog only accepted purchase orders. However, backlog is not necessarily indicative of future sales. In addition, purchase orders can generally be cancelled at any time without penalty. New Accounting Pronouncements In July 2001, FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" effective for fiscal years beginning after December 15, 2001. The provisions of SFAS 141 provide specific criteria for the initial recognition and measurement of intangible assets apart from goodwill. SFAS 141 also requires that upon adoption of SFAS 142 the Company reclassify the carrying amount of certain intangible assets into or out of goodwill. 20 The provisions of SFAS 142 (i) prohibit the amortization of goodwill and indefinite-lived intangible assets, (ii) require that goodwill and indefinite-lived intangible assets be tested annually for impairment (and in interim periods if certain events occur which would impact the carrying value of such assets), and (iii) require that the Company's operations be formally identified into reporting units for the purpose of assessing potential future impairments of goodwill. Goodwill amortization for the years ended December 31, 2001, 2000 and 1999 was approximately $3.6 million, $2.6 million and $2.5 million, respectively. In June 2002, the Company completed the assessment of its reporting units and completed 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. Further procedures, as prescribed by SFAS 142 will be performed in the third quarter to determine the amount of final impairment. In accordance with SFAS 142, the Company estimated the amount of the impairment and recorded a cumulative effect in change of accounting principle, as of January 1, 2002, of approximately $7.8 million, net of taxes of approximately $3.4 million, to write down the goodwill associated with the Company's lock product line, resulting from the current market conditions of that product line. In October 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 provides guidance on the accounting for long-lived assets to be held and used and for assets to be disposed of through sale or other means. SFAS 144 also broadens the definition of what constitutes a discontinued operation and how such results are to be measured and presented. FAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material impact on the earnings or financial position of the Company. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS 145 rescinds FASB Statement No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. . SFAS 145 requires that most gains and losses from the extinguishment of debt no longer be classified as extraordinary items and that they be recorded as part of the results of operations. In additions, SFAS 145 amends FASB Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Lastly, SFAS 145 makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The Company adopted the statement as of January 1, 2002. The adoption of SFAS 145 did not have a material effect to the Company's financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This statement sets forth various modifications to existing accounting guidance which prescribes the conditions which must be met in order for costs associated with contract terminations, facility consolidations, employee relocations and terminations to be accrued and recorded as liabilities in financial statements. This statement is effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of this statement to determine the effect, if any, it may have on its consolidated results of operations and financial position. Other Matters Forward-Looking Statements This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements include words or phrases such as "management anticipates," "the Company believes," "the Company anticipates," and words and phrases of similar impact, and include but are not limited to statements regarding future operations and business environment. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The factors that could cause actual results to differ materially from the forward-looking statements include the following: (i) industry conditions and competition, (ii) operational risks and insurance, (iii) environmental liabilities which may arise in the future and not covered by insurance or indemnity, (iv) the impact of current and future laws and government regulations, and (v) the risks described from time to time in the Company's reports to the Securities and Exchange Commission. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's primary exposure to market risk is related to the variability in interest rates associated with the $73.0 million outstanding under its term loan and with any amounts outstanding under its $40-million revolving credit facility. In connection with the Amendment to the credit facility (see Liquidity and Capital Resources) the Company has voluntarily reduced its borrowing capacity under the revolving credit facility by $15.0 million through the end of 2003. There were no borrowings were outstanding on June 30, 2002 under the revolving credit facility. Under both the term loan and the revolving credit facility, the Company has the option to lock in a certain interest rate based on either the base rate, which is equivalent to prime, or LIBOR plus an applicable margin specified in the agreement. Principally all of the borrowings under the term loan are locked in at approximately 4.75% until August 15, 2002, when the underlying LIBOR contract is up for renewal. At June 30, 2002, the Company had no borrowings under its revolving credit facility and was one payment ahead of its amended schedule on its term loan. A 1% change in the interest rate for the Company's credit facilities in place at December 31, 2001 would have resulted in a change in the Company's annual interest expense of approximately $940,000. The senior notes bear a fixed rate of interest and therefore are not subject to market risk. The Company does not hold derivative financial instruments or believe that material imbedded derivatives exist within its contracts. Part II - Other Information Item 6 -- Exhibits and Reports on Form 8-K (a) Exhibits 10.40 First Amendment to the Credit Agreement, dated June 28, 2002, among KCLLC, the Lenders (as defined) and Wachovia Bank, National Association (b) Reports on Form 8-K Form 8-K, dated August 14, 2002 22 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KEY COMPONENTS, LLC Date: August 14, 2002 By: /s/Clay B. Lifflander -------------------------------- Clay B. Lifflander Chief Executive Officer Date: August 14, 2002 By: /s/ Robert. B. Kay -------------------------------- Robert B. Kay President Date: August 14, 2002 By: /s/Keith A. McGowan -------------------------------- Keith A. McGowan Chief Financial Officer Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KEY COMPONENTS FINANCE CORP. Date: August 14, 2002 By: /s/ Clay B. Lifflander -------------------------------- Clay B. Lifflander Chief Executive Officer Date: August 14, 2002 By: /s/ Robert. B. Kay -------------------------------- Robert B. Kay President Date: August 14, 2002 By: /s/ Keith A. McGowan -------------------------------- Keith A. McGowan Chief Financial Officer 23

KEY COMPONENTS LLC 10-Q