##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission File Number: 333-107219 UNITED COMPONENTS, INC.  Delaware(State or Other Jurisdiction of
Incorporation or Organization)
    
    04-3759857
(I.R.S. Employer Identification No.)14601 Highway 41 NorthEvansville, Indiana
    
    47725(Address of Principal Executive Offices)
    
    (Zip Code)
 (812) 867-4156
(Registrants Telephone Number, Including Area Code)   Indicate by check mark whether the 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 the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes o No x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x The registrant had 1,000 shares of its $0.01 par value common stock
outstanding as of May 13, 2004.




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Index United Components, Inc. Part I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed balance sheetsMarch 31, 2004 and December 31, 2003Condensed income statementsThree months ended March 31, 2004 and 2003Condensed statements of cash flowsThree months ended March 31, 2004 and 2003Statement of changes in
shareholders equityDecember 31, 2003 and March 31, 2004Notes to condensed financial statementsItem 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Qualitative and Quantitative Information About Market RiskItem 4.
    
    Controls and ProceduresPart II
    
    OTHER INFORMATIONItem 6.
    
    Exhibits and Reports on Form 8-KSignaturesExhibits
 FORWARD-LOOKING STATEMENTS In this periodic report on Form 10-Q, United Components. Inc. (UCI) makes
some forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities
Act of 1933, as amended. These statements are included throughout this report
on Form 10-Q and relate to, among other things, analyses and other information
based on forecasts of future results and estimates of amounts not yet
determinable. These forward-looking statements are identified by their use of
terms and phrases such as anticipate, believe, could, estimate,
expect, intend, may, plan, predict, project, will, continue,
and other similar terms and phrases, including references to assumptions. These forward-looking statements are based on UCIs expectations and beliefs
concerning future events affecting UCI. They are subject to uncertainties and
factors relating to UCIs operations and business environment, all of which are
difficult to predict and many of which are beyond UCIs control. Although UCI
believes that the expectations reflected in its forward-looking statements are
reasonable, it does not know whether the expectations will prove correct. They
can be affected by inaccurate assumptions UCI might make or by known or unknown
risks and uncertainties. Many factors mentioned in UCIs discussion in this
report will be important in determining future results. 1




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##### 



Although UCI believes the expectations reflected in its forward-looking
statements are based upon reasonable assumptions, UCI can give no assurance
that UCI will attain these expectations or that any deviations will not be
material. Because of these factors, UCI cautions that investors should not
place undue reliance on any of these forward-looking statements. Except as otherwise required by the federal securities laws, UCI disclaims any
obligation or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this periodic report on Form 10-Q to
reflect any change in its expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based. 2




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##### 



PART I
FINANCIAL INFORMATION Item 1. Financial Statements United Components, Inc. (UCI) Condensed Balance Sheets(in thousands) UCI
    
    UCIConsolidated
    
    ConsolidatedMarch 31, 2004
    
    December 31, 2003(unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    31,248
    
    
    $
    46,130Accounts receivable, net
    
    
    242,379
    
    
    
    230,345Inventories
    
    
    173,203
    
    
    
    168,797Deferred tax
    
    
    15,411
    
    
    
    17,756Other current assets
    
    
    9,415
    
    
    
    10,877Total current assets
    
    
    471,656
    
    
    
    473,905Property, plant and equipment, net
    
    
    220,869
    
    
    
    219,973Goodwill
    
    
    163,823
    
    
    
    163,823Other intangible assets, net
    
    
    75,273
    
    
    
    77,124Deferred financing costs
    
    
    9,148
    
    
    
    10,146Deferred tax
    
    
    12,790
    
    
    
    13,609Pension and other assets
    
    
    10,316
    
    
    
    11,359Total assets
    
    $
    963,875
    
    
    $
    969,939Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    95,466
    
    
    $
    74,652Notes payable
    
    
    817
    
    
    
    752Current maturities of long-term debt
    
    
    186
    
    
    
    1,034Accrued expenses and other current liabilities
    
    
    69,887
    
    
    
    66,729Total current liabilities
    
    
    166,356
    
    
    
    143,167Long-term debt, less current maturities
    
    
    481,398
    
    
    
    520,472Pension and other postretirement liabilities
    
    
    51,306
    
    
    
    50,038Other liabilities
    
    
    2,772
    
    
    
    2,172Contingencies  Note JTotal liabilities
    
    
    701,832
    
    
    
    715,849Shareholders equityCommon stock
    
    
    
    
    
    
    Additional paid in capital
    
    
    261,357
    
    
    
    261,385Retained deficit
    
    
    (1,220
    )
    
    
    (8,755
    )Accumulated other comprehensive income
    
    
    1,906
    
    
    
    1,460Total shareholders equity
    
    
    262,043
    
    
    
    254,090Total liabilities and shareholders equity
    
    $
    963,875
    
    
    $
    969,939
 The accompanying notes are an integral part of these statements. 3




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##### 



United Components, Inc. Condensed Income Statements (unaudited)(in thousands) UCI
    
    PredecessorConsolidated
    
    CombinedThree Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003Net sales
    
    $
    256,811
    
    
    $
    236,325Cost of sales
    
    
    201,264
    
    
    
    187,274Gross profit
    
    
    55,547
    
    
    
    49,051Operating expensesSelling and warehousing
    
    
    19,045
    
    
    
    18,110General and administrative
    
    
    12,072
    
    
    
    8,263Amortization of intangible assets
    
    
    1,851
    
    
    
    30Operating income
    
    
    22,579
    
    
    
    22,648Other income (expense)Interest income
    
    
    65
    
    
    
    995Interest expense
    
    
    (9,631
    )
    
    
    (237
    )Management fee expense
    
    
    (500
    )
    
    
    (15
    )Miscellaneous, net
    
    
    85
    
    
    
    (153
    )Income before income taxes
    
    
    12,598
    
    
    
    23,238Income tax expense
    
    
    5,063
    
    
    
    965Net income
    
    $
    7,535
    
    
    $
    22,273Pro forma (unaudited), adjusted solely for change
in income tax filing status (Note C):Historical income before provision for income taxes
    
    $
    12,598
    
    
    $
    23,238Income tax expense
    
    
    5,063
    
    
    
    8,736Pro forma net income
    
    $
    7,535
    
    
    $
    14,502
 The accompanying notes are an integral part of these statements. 4




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##### 



United Components, Inc. Condensed Statements of Cash Flow (unaudited)(in thousands) UCI
    
    PredecessorConsolidated
    
    CombinedThree Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003Cash flows from operating activities:Net income (loss)
    
    $
    7,535
    
    
    $
    22,273Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation
    
    
    9,082
    
    
    
    6,687Amortization of intangible assets
    
    
    1,851
    
    
    
    30Amortization of deferred financing fees and debt
issuance costs
    
    
    1,156
    
    
    
    Loss on sale of assets, net
    
    
    
    
    
    
    151Changes in operating assets and liabilitiesAccounts receivable
    
    
    (12,034
    )
    
    
    (10,554
    )Inventories
    
    
    (4,406
    )
    
    
    (4,373
    )Other current assets
    
    
    3,807
    
    
    
    (2,237
    )Accounts payable
    
    
    20,814
    
    
    
    5,706Accrued expenses and other current liabilities
    
    
    3,758
    
    
    
    1,064Other assets
    
    
    1,022
    
    
    
    (237
    )Other liabilities
    
    
    1,268
    
    
    
    (800
    )Net cash provided by operating activities
    
    
    33,853
    
    
    
    17,710Cash flows from investing activities:Capital expenditures
    
    
    (8,931
    )
    
    
    (6,522
    )Proceeds from sale of assets
    
    
    129
    
    
    
    125Net cash used in investing activities
    
    
    (8,802
    )
    
    
    (6,397
    )Cash flows from financing activities:Debt (repayments) borrowings
    
    
    (40,015
    )
    
    
    587Dividends and transfers to UIS, Inc., net
    
    
    
    
    
    
    (9,195
    )Other
    
    
    (28
    )
    
    
    Net cash used in financing activities
    
    
    (40,043
    )
    
    
    (8,608
    )Effect of exchange rate changes on cash
    
    
    110
    
    
    
    (149
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (14,882
    )
    
    
    2,556Cash and cash equivalents at beginning of period
    
    
    46,130
    
    
    
    28,354Cash and cash equivalents at end of period
    
    $
    31,248
    
    
    $
    30,910
 The accompanying notes are an integral part of these statements 5




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##### 



United Components, Inc. Statements of Changes in Shareholders Equity (unaudited)(in thousands) AccumulatedAdditional
    
    Retained
    
    
    
    
    
    Other
    
    TotalPreferred
    
    Common
    
    Paid-In
    
    Earnings
    
    Division
    
    Comprehensive
    
    Shareholders
    
    ComprehensiveStock
    
    Stock
    
    Capital
    
    (Deficit)
    
    Equity
    
    Income (loss)
    
    Equity
    
    Income (loss)Predecessor combined balance at January 1, 2003
    
    $
    13
    
    
    $
    4,289
    
    
    $
    44,940
    
    
    $
    467,376
    
    
    $
    67,929
    
    
    $
    (16,512
    )
    
    $
    568,035Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,913
    )
    
    
    
    
    
    
    
    
    
    
    (17,913
    )Liability to UIS contributed to capital
    
    
    
    
    
    
    
    
    
    
    20,271
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,271Transfers with UIS, Inc., net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56,630
    )
    
    
    (10,120
    )
    
    
    
    
    
    
    (66,750
    )Comprehensive incomeNet earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,650
    
    
    
    15,132
    
    
    
    
    
    
    
    21,782
    
    
    $
    21,782Other comprehensive incomeForeign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,125
    
    
    
    4,125
    
    
    
    4,125Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    $
    25,907Predecessor combined balance at June 20, 2003
    
    $
    13
    
    
    $
    4,289
    
    
    $
    65,211
    
    
    $
    399,483
    
    
    $
    72,941
    
    
    $
    (12,387
    )
    
    $
    529,550UCI consolidated balance at June 20, 2003
    
    $
    
    
    
    $
    
    
    
    $
    260,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    260,000Additions to paid-in capital
    
    
    
    
    
    
    
    
    
    
    1,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,385Comprehensive incomeNet earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,755
    )
    
    
    
    
    
    
    
    
    
    
    (8,755
    )
    
    $
    (8,755
    )Other comprehensive income (loss)Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    (114
    )
    
    
    (114
    )Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,574
    
    
    
    1,574
    
    
    
    1,574Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7,295
    )UCI consolidated balance at December 31, 2003
    
    $
    
    
    
    $
    
    
    
    $
    261,385
    
    
    $
    (8,755
    )
    
    $
    
    
    
    $
    1,460
    
    
    $
    254,090UCI consolidated balance at December 31, 2003
    
    $
    
    
    
    $
    
    
    
    $
    261,385
    
    
    $
    (8,755
    )
    
    $
    
    
    
    $
    1,460
    
    
    $
    254,090Partial return of additions to paid-in capital
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )Comprehensive incomeNet earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,535
    
    
    
    
    
    
    
    
    
    
    
    7,535
    
    
    $
    7,535Other comprehensive income (loss)Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (340
    )
    
    
    (340
    )
    
    
    (340
    )Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    786
    
    
    
    786
    
    
    
    786Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,981UCI consolidated balance at March 31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    261,357
    
    
    $
    (1,220
    )
    
    $
    
    
    
    $
    1,906
    
    
    $
    262,043
 The accompanying notes are an integral part of these statements. 6




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United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE A  GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION General United Components, Inc. is a wholly owned subsidiary of UCI Acquisition
Holdings, Inc. UCI Acquisition Holdings, Inc. and United Components, Inc. are
corporations formed at the direction of The Carlyle Group (Carlyle).
Affiliates of Carlyle own 99.3% of UCI Acquisition Holdings, Inc.s common
stock, and the remainder is owned by certain members of senior management and a
member of the Companys Board of Directors. On June 20, 2003, United Components, Inc. (UCI) purchased, from UIS, Inc. and
UIS Industries, Inc. (together UIS), the vehicle parts business of UIS,
consisting of all of the issued and outstanding common stock or other equity
interests in Champion Laboratories, Inc., Wells Manufacturing Corporation,
Neapco Inc., Pioneer, Inc., Wells Manufacturing Canada Limited, UIS Industries
Ltd. (which is the owner of 100% of the capital stock of Flexible Lamps, Ltd.
and Airtex Products Ltd.), Mid-South Mfg., Inc., Airtex Products S.A., Airtex
Products, Inc. (currently, Airtex Mfg., Inc.), Talleres Mecanicos Montserrat
S.A. de C.V., Brummer Seal de Mexico, S.A. de C.V., Brummer Mexicana en Puebla,
S.A. de C.V., Automotive Accessory Co. Ltd. and Airtex Products, LLC, a limited
liability company that owns the assets of the Airtex Products business of UIS,
Inc. (See Note B.) The Company operates in one business segment through its subsidiaries. The
Company manufactures and distributes vehicle parts primarily servicing the
vehicle replacement parts market in North America and Europe. Basis of Presentation The accompanying consolidated financial statements include the accounts of UCI
and its subsidiaries. The accompanying combined financial statements include
the accounts of the vehicle parts businesses of UIS, consisting of the
aforementioned entities, which are collectively referred to in these financial
statements as the Predecessor Company or Predecessor. In these notes to
the financial statements, the term the Company refers to both UCI and the
Predecessor Company. The aforementioned June 20, 2003 acquisition is referred
to in these notes to the financial statements as the Acquisition. The accompanying unaudited condensed consolidated and combined financial
statements have been prepared in accordance with accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The December 31, 2003 consolidated balance sheet has been derived from the
audited financial statements included in the Companys annual report on Form
10-K for the year ended December 31, 2003. The financial statements at March
31, 2004 and for the three-month periods ended March 31, 2004 and 2003 are
unaudited. In the opinion of the Company, these financial statements include
all adjustments necessary for a fair presentation of the financial position and
results of operations for such periods. Such adjustments include normal
recurring adjustments and, in the case of the balance sheets and the income
statement for the 2004 period, include the effects of the preliminary
allocation of the Acquisition purchase price. The purchase price has been
allocated based on preliminary estimates of the fair value of the assets
acquired and the liabilities assumed. Purchase price allocations are subject
to change until all pertinent information regarding the Acquisition and the
assets and liabilities of the Company are obtained and fully evaluated. (See
Note B.) All significant intercompany accounts and transactions have been
eliminated. 7




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United Components, Inc. Notes to Condensed Financial Statements (unaudited) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions in determining the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. The
estimates and assumptions include estimates of the collectibility of accounts
receivable and the realizability of inventory, goodwill and other intangible
assets, cost accruals, insurance reserves, income taxes and other factors.
Management has exercised reasonableness in deriving these estimates; however,
actual results could differ from these estimates. In addition to estimates
that are typically reflected in financial statements, the balance sheets and
the income statement for the period include the effects of the preliminary
allocation of the Acquisition purchase price. The purchase price has been
allocated based on preliminary estimates of the fair value of the assets
acquired and liabilities assumed. Purchase price allocations are subject to
change until all pertinent information regarding the Acquisition and the assets
and liabilities of the Company are obtained and fully evaluated. (See Note B.) These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Companys annual report on Form
10-K for the year ended December 31, 2003. Operating results for the three-month period ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004. The income statement for the 2003 period has been reclassified to conform to
the 2004 presentation. NOTE B  ACQUISITION OVERVIEW On June 20, 2003, UCI purchased from UIS the vehicle parts businesses of UIS,
consisting of all of the issued and outstanding common stock or other equity
interests of the Predecessor Company. The acquisition purchase price was $808 million. In addition the Company
assumed $2 million of debt and capital lease obligations. Fees and expenses
associated with the acquisition (excluding financing fees) were approximately
$18 million and are accounted for as additional purchase price. Financing for
the acquisition was comprised of a $260 million equity contribution by Carlyle,
proceeds from $585 million of debt, and an $8 million accrued liability, which
was paid in January 2004. In addition to funding the purchase price, proceeds
from the borrowings were also used to pay for approximately $40 million of
acquisition-related transaction and financing fees. CHANGE IN INCOME TAX FILING STATUS As discussed in Note C, the Predecessor Company had elected for certain of its
subsidiaries to be taxed as S Corporations pursuant to the Internal Revenue
Code. In connection with the Acquisition, the Company terminated its S
corporation elections and became a C corporation and, consequently, became
subject to Federal and additional state and local income taxes. As part of the
preliminary allocation of the Acquisition purchase price, net deferred tax
assets have been increased in recognition of UCIs higher effective tax rate.
The pro forma information presented below includes adjustments for, among other
things, the change in the Companys income tax filing status. The pro forma
income tax amounts include income taxes as if the Company had been filing as a
C corporation for the entire period. 8




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United Components, Inc. Notes to Condensed Financial Statements (unaudited) PRELIMINARY ALLOCATION OF THE ACQUISITION PURCHASE PRICE
AND PRO FORMA INFORMATION The Acquisition is accounted for under the purchase method of accounting, and
accordingly, the results of operations of the acquired companies will be
included in the results of UCI beginning on the acquisition date. The
information included herein has been prepared based on a preliminary allocation
of the Acquisition purchase price, which was based on preliminary estimates of
the fair value of the assets acquired and liabilities assumed. The purchase
price allocations are subject to change until all pertinent information
regarding the Acquisition and the assets and liabilities of the Company are
obtained and fully evaluated. Additional pertinent information that the Company
is in the process of obtaining includes, but is not limited to, the tax basis
of certain assets and independent third party appraisals of property, plant
and equipment and intangible assets other than goodwill. Finalization of the
allocation of the Acquisition purchase price could result in material changes
to the balance sheet presented herein and the unaudited pro forma information
presented below. The following table summarizes the preliminary estimated fair value of the
assets acquired and liabilities assumed at the date of acquisition. (in millions)Current assets
    
    $
    487Property, plant and equipment
    
    
    220Goodwill
    
    
    164Other intangible assets
    
    
    80Deferred taxes
    
    
    18Other long term assets
    
    
    15Total assets acquired
    
    
    984Current liabilities
    
    
    100Long-term debt, excluding borrowings to fund the
Acquisition purchase price and related transaction
fees
    
    
    12Pension and other postretirement liabilities
    
    
    39Other long-term liabilities
    
    
    7Total liabilities assumed

    
    
    158Net assets acquired
    
    $
    826
 Of the $80 million of acquired intangible assets, approximately $40 million was
assigned to trademarks that are not subject to amortization. $32 million was
assigned to customer relationships and $8 was assigned to technologies. The
preliminary estimated useful lives of the customer relationships and
technologies are 5- 15 years. For the three months ended March 31, 2004,
amortization expense was $1.9 million. Accumulated amortization at March 31,
2004 was $5.1 million. The $164 million of goodwill resulting from the transaction and all the
written-up values of the other assets are expected to be deductible for income
tax purposes. Below are unaudited pro forma data for the three months ended March 31, 2003,
after giving effect to the Acquisition as if it had occurred on January 1,
2003. The pro forma adjustments give effect to (i) the preliminary allocation
of the June 20, 2003 Acquisition purchase price, (ii) the Companys capital
structure after the effect of the Acquisition, (iii) the new Carlyle management
fee (see Note I), and (iv) income tax expense based on a C corporation filing
status. As more fully explained above, the allocation of the Acquisition
purchase price is
preliminary. Finalization of the allocation of the Acquisition purchase price
could result in material changes to the pro forma information presented below.
The pro forma earnings data does not purport to represent what the results of
operations would have been if the Acquisition had occurred as of the dates
indicated above, or what the results will be in future periods. 9




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United Components, Inc. Notes to Condensed Financial Statements (unaudited) Pro Forma DataThree MonthsEnded,March 31, 2003Net sales
    
    $
    236,325Operating income
    
    
    (5,009
    )Net income (loss)
    
    
    (12,459
    )
 NOTE C  INCOME TAXES Prior to June 21, 2003, the subsidiaries comprising the Predecessor Company
were treated as disregarded entities for U.S. tax purposes (Qualified
Subchapter S subsidiaries, or Q subs). As Q subs of UIS, the subsidiaries were
included in the U.S. Federal and certain state S corporation income tax returns
of UIS. As such, the income taxes on the earnings of the Predecessor Company
were paid by the sole shareholder of UIS pursuant to an election for Federal
income tax purposes not to be taxed as a corporation. No tax sharing
arrangement existed for the subsidiaries comprising the Predecessor Company.
Accordingly, no provision has been made in the accompanying financial
statements for Federal income taxes on the net earnings of these companies for
the periods prior to June 21, 2003. A provision for certain state franchise
and income taxes has been made. The Q sub status and the S corporation status terminated immediately prior to
the Acquisition. (See Note B) The Company became a C corporation and will be
subject to both Federal and state income taxes and will begin to file a
consolidated Federal income tax return. UCIs effective tax will increase
accordingly. As part of the preliminary allocation of the Acquisition purchase
price, net deferred tax assets have been increased in recognition of UCIs
higher effective tax rate. NOTE D  INVENTORIES The components of inventory consist of the following (in thousands): March 31,
    
    Dec. 31,2004
    
    2003Raw Material
    
    $
    29,580
    
    
    $
    29,305Work in process
    
    
    50,348
    
    
    
    47,056Finished products
    
    
    116,953
    
    
    
    116,176Valuation reserves
    
    
    (23,678
    )
    
    
    (23,740
    )$
    173,203
    
    
    $
    168,797
 Inventories are stated at the lower of cost or market. Cost is principally
determined using the first-in, first-out method. Inventories are reduced by an
allowance for excess and obsolete inventories, based on the Companys review of
on-hand inventories. The expense of inventory write-downs is included in cost
of sales. 10




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE E  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following (in
thousands): March 31, 2004
    
    December 31, 2003Salaries and wages
    
    $
    4,020
    
    
    $
    2,464Bonuses
    
    
    2,213
    
    
    
    5,712Vacation pay
    
    
    5,922
    
    
    
    5,252Pension and other postretirement liabilities
    
    
    2,937
    
    
    
    3,174Profit sharing
    
    
    554
    
    
    
    1,546Product returns
    
    
    14,349
    
    
    
    13,999Customers rebates and discounts
    
    
    5,374
    
    
    
    4,902Other credits due customers
    
    
    2,461
    
    
    
    4,518Insurance
    
    
    6,720
    
    
    
    804Interest
    
    
    6,418
    
    
    
    1,882Final payment of Acquisition purchase price
    
    
    
    
    
    
    8,000Other
    
    
    18,919
    
    
    
    14,476$
    69,887
    
    
    $
    66,729
 NOTE F  GEOGRAPHIC INFORMATION The Company had the following sales by country (in thousands): UCI
    
    PredecessorConsolidated
    
    CombinedThree Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003United States
    
    $
    209,134
    
    
    $
    198,394Canada
    
    
    9,187
    
    
    
    7,614United Kingdom
    
    
    10,235
    
    
    
    9,407Mexico
    
    
    7,217
    
    
    
    5,154Germany
    
    
    3,690
    
    
    
    3,463Spain
    
    
    1,213
    
    
    
    179Belgium
    
    
    1,994
    
    
    
    1,662France
    
    
    3,024
    
    
    
    2,182Other
    
    
    11,117
    
    
    
    8,270$
    256,811
    
    
    $
    236,325
 11




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) Net long-lived assets by country are presented below (in thousands): March 31,
    
    December 31,2004
    
    2003United States
    
    $
    141,940
    
    
    $
    140,003United Kingdom
    
    
    33,094
    
    
    
    32,207Mexico
    
    
    9,700
    
    
    
    9,528Spain
    
    
    3,266
    
    
    
    3,362Canada
    
    
    553
    
    
    
    301Preliminary allocation of acquisition purchase
price, not yet allocated to operating entities
(see note B)
    
    
    303,666
    
    
    
    310,633$
    492,219
    
    
    $
    496,034
 NOTE G  STOCK OPTION The Company uses the disclosure only provision of SFAS 123. Accordingly,
stock options are accounted for by the intrinsic value method of APB Opinion
No. 25. Below is a reconciliation to the pro forma after tax effect of
compensation expense for the stock options had such expense been determined in
accordance with the fair value method prescribed by SFAS No. 123 (in
thousands): Three MonthsEndedMarch 31, 2004Net income as reported
    
    $
    7,535Stock option cost included in net income as reported, net of tax
    
    
    0Stock option cost that would have been reported using the
fair value method, net of tax
    
    
    (520
    )Pro forma net income had the fair value method been used
    
    $
    7,015
 NOTE H PENSION The following are the components of net periodic pension expense (in
thousands): UCI
    
    PredecessorConsolidated
    
    CombinedThree Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003Service cost
    
    $
    2,035
    
    
    $
    2,033Interest cost
    
    
    2,947
    
    
    
    2,684Expected return on plan assets
    
    
    (3,395
    )
    
    
    (3,537
    )Amortization of transition asset
    
    
    
    
    
    
    (47
    )Amortization of prior services cost
    
    
    
    
    
    
    143Amortization of unrecognized gain
    
    
    
    
    
    
    (49
    )$
    1,587
    
    
    $
    1,227
 12




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE I  RELATED PARTY TRANSACTIONS UIS maintained workerscompensation, general liability, product liability and
comprehensive automobile insurance for all of its subsidiaries, including the
Predecessor Company. UIS allocated premium expense to each subsidiary based on
rates charged by the insurance carrier and predicated and adjusted on estimated
losses. UIS is liable for the settlement of all claims on these policies. As
of the Acquisition date, the Company is no longer covered by UIS. UIS management fee expense charged to the Predecessor Company was $15,000 for
the three months ended March 31, 2003. Occasionally, UIS extended financing to
the Predecessor Company. Interest charges to the Predecessor Company on debt
to UIS were $74,000 for the three months ended March 31, 2003. These charges
are recorded as interest expense. In addition, the Predecessor Company
extended financing to UIS. Interest income from UIS was $754,000 for the three
months ended March 31, 2003. This income is recorded as interest income. The Company has employment agreements with certain of its executive officers
providing for annual compensation amounting to approximately $0.7 million per
annum plus bonuses (as defined in the employment agreements) and severance pay
under certain circumstances (as defined in the employment agreements). In connection with the Acquisition, the Company entered into a management
agreement with TC Group, L.L.C., an affiliate of Carlyle, for management and
financial advisory services and oversight to be provided to the Company and its
subsidiaries. Pursuant to this agreement, the Company will pay an annual
management fee to Carlyle of $2 million and out-of-pocket expenses, and the
Company may pay Carlyle additional fees associated with financial advisory and
other future transactions. Carlyle also received a one-time transaction fee of
$10 million upon consummation of the Acquisition. The agreement also provides
for indemnification of Carlyle against liabilities and expenses arising out of
Carlyles performance of services under the agreement. The agreement
terminates either when Carlyle or its affiliates own less than 10% of the
Companys equity interest or when the company and Carlyle mutually agree to
terminate the agreement. NOTE J  CONTINGENCIES Environmental The Company is subject to contingencies pursuant to environmental laws and
regulations that in the future may require the Company to take action to
correct the effects on the environment of prior disposal practices or releases
of chemical or petroleum substances by the Company or other parties. The
Company has been identified as a potential responsible party for contamination
at several sites. As a result, the Company has accrued liabilities for certain
environmental testing and remediation activities included in the accrued
expenses and other current liabilities line and the other liabilities line
on the balance sheet. While there is inherent uncertainty in such matters, in
managements opinion, the amounts accrued are appropriate based on the facts
and circumstances that are currently known. The Company believes that the
ultimate outcome of these matters will not have a material adverse effect on
the financial position of the Company. 13




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) Litigation The Company is subject to various other contingencies, including routine legal
proceedings and claims arising out of its business. These proceedings
primarily involve commercial claims, product liability claims, personal injury
claims and workers compensation claims. The outcome of these lawsuits, legal
proceedings and claims cannot be predicted with certainty. Nevertheless, the
Company believes that the outcome of any currently existing proceedings, even
if determined adversely, would not have a material adverse effect on its
business, financial condition and results of operations. NOTE K  PRODUCT RETURNS LIABILITY The product returns liability is included in accrued and other current
liabilities. It includes accruals for parts returned due to manufacturing
defect and for certain parts returned because of customer excess quantities.
The changes in the Companys product returns liability are as follows (in
thousands): UCI
    
    PredecessorConsolidated
    
    CombinedThree Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003Liability, beginning of period
    
    $
    13,999
    
    
    $
    2,356Loss on parts returned
    
    
    (9,541
    )
    
    
    (8,684
    )Additional loss provision
    
    
    9,891
    
    
    
    8,874Liability, end of period
    
    $
    14,349
    
    
    $
    2,546
 NOTE L  NEW ACCOUNTING PRONOUNCEMENTS In December 2003, SFAS No. 132R, Employers Disclosure about Pensions and
Other Postretirement Benefits was issued. SFAS No. 132R requires additional
disclosures about defined benefit pension plans and other postretirement
benefit plans. The standard requires, among other things, additional
disclosures about the assets held in employer sponsored pension plans,
disclosures relating to plan asset investment policy and practices, disclosure
of expected contributions to be made to the plans and expected benefit payments
to be made by the plans. Annual disclosures applicable to our U.S. pension and
postretirement plans were required to be made in our financial statements for
the year ended December 31, 2003. The Company has adopted this pronouncement as of
December 31, 2003 for all of its U.S. plans. Annual disclosures relating to
its non-U.S. plans will be adopted for the year ending December 31, 2004.
Interim disclosures relating to its non-U.S. plans will be adopted for the year
ending December 31, 2005. In March 2004, the FASBs Emerging Issues Task Force concluded its discussion
of Issue No. 03-01, The Meaning of Other-Than-Temporary Impairments and Its
Application to Certain Investments(EITF 03-01). EITF 03-01 provides
guidance regarding the determination of when an impairment of debt and
marketable equity securities and investments, which are accounted for under the
cost method, should be considered other-than-temporary and recognized in
earnings. EITF 03-01 also requires annual disclosures of certain quantitative
and qualitative factors of debt and marketable equity securities, which are
classified as available-for-sale or held-to-maturity, and which are in an
unrealized loss position at the balance sheet date, but for which an
other-than-temporary impairment has not been recognized. The disclosure
requirements of EITF 03-01 were effective December 31, 2003 and had no effect
on the Companys financial statements. The accounting guidance of EITF 03-01
will be effective in the third quarter of 2004 and is not expected to have a
material affect on the Companys financial statements. 14




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE M  OTHER INFORMATION Cash payments for interest and income taxes (net of refunds) (in thousands): UCI
    
    PredecessorConsolidated
    
    CombinedThree Months
    
    Three MonthsEnded
    
    EndedMarch 31, 2004
    
    March 31, 2003Interest
    
    $
    3,935
    
    
    $
    5Income taxes
    
    
    1,899
    
    
    
    72
 On March 1, 2004, the Company made a voluntary prepayment of $40 million of
outstanding senior credit facility term loan borrowings. At March 31, 2004, 1,000 shares of common stock were authorized, issued and
outstanding. The par value of each share of common stock is $0.01 per share. NOTE N  GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS The senior credit facilities are secured by substantially all the assets of the
Company. The senior subordinated notes (the Notes) are unsecured and rank
equally in right of payment with any of the Companys future senior
subordinated indebtedness. The Notes are subordinated to indebtedness and
other liabilities of UCIs subsidiaries that are not guarantors of the Notes.
The Notes and borrowings under the senior credit facilities are guaranteed on a
full and unconditional and joint and several basis by UCIs domestic
subsidiaries. The condensed financial information, which follows, includes the consolidated
results of UCI subsequent to the June 20, 2003 Acquisition date and the
combined results of the Predecessor Company prior to the Acquisition. This
information includes condensed financial statements for (a) UCI, which is the
issuer of the Notes and borrower under the senior credit facilities, (b) the
domestic subsidiaries, which guarantee the Notes and borrowings under the
senior credit facilities (the Guarantors), (c) the foreign subsidiaries (the
Non-Guarantors), and (d) a consolidated UCI or a combined Predecessor
Company, as applicable. Also included are consolidating entries, which
principally consist of eliminations of investments in consolidated subsidiaries
and intercompany balances and transactions. The step-up amounts resulting from the preliminary allocation of the
Acquisition purchase price are included with UCI and have not yet been
allocated to its subsidiaries. Consequently, the Guarantor and Non-Guarantor
are reported on the Predecessors historical basis. The purchase price
allocations are based on preliminary estimates of the fair value of assets
acquired and liabilities assumed. Purchase price allocations are subject to
change until all pertinent information regarding the Acquisition and the assets
and liabilities of the Company are obtained and fully evaluated. Separate financial statements of the Guarantor subsidiaries are not presented
because their guarantees are full and unconditional and joint and several, and
the Company believes separate financial statements and other disclosure
regarding the Guarantor subsidiaries are not material to investors. 15




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Balance Sheet
March 31, 2004(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorAssetsCurrent assetsCash and cash equivalents
    
    $
    31,248
    
    
    $
    
    
    
    $
    22,029
    
    
    $
    (1,575
    )
    
    $
    10,794Accounts receivable, net
    
    
    242,379
    
    
    
    
    
    
    
    
    
    
    
    218,665
    
    
    
    23,714Inventories
    
    
    173,203
    
    
    
    
    
    
    
    
    
    
    
    157,271
    
    
    
    15,932Deferred tax
    
    
    15,411
    
    
    
    
    
    
    
    42,254
    
    
    
    (27,827
    )
    
    
    984Other current assets
    
    
    9,415
    
    
    
    
    
    
    
    (1,290
    )
    
    
    4,730
    
    
    
    5,975Total current assets
    
    
    471,656
    
    
    
    
    
    
    
    62,993
    
    
    
    351,264
    
    
    
    57,399Property, plant and equipment, net
    
    
    220,869
    
    
    
    
    
    
    
    52,645
    
    
    
    126,968
    
    
    
    41,256Due from parent
    
    
    
    
    
    
    (175,585
    )
    
    
    
    
    
    
    172,611
    
    
    
    2,974Investment in subsidiaries
    
    
    
    
    
    
    (583,365
    )
    
    
    570,591
    
    
    
    12,774Goodwill
    
    
    163,823
    
    
    
    
    
    
    
    163,823Other intangible assets, net
    
    
    75,273
    
    
    
    
    
    
    
    74,723
    
    
    
    550Deferred financing costs
    
    
    9,148
    
    
    
    
    
    
    
    9,148Deferred tax
    
    
    12,790
    
    
    
    
    
    
    
    12,790Pension and other assets
    
    
    10,316
    
    
    
    
    
    
    
    (3,889
    )
    
    
    13,006
    
    
    
    1,199Total assets
    
    $
    963,875
    
    
    $
    (758,950
    )
    
    $
    942,824
    
    
    $
    677,173
    
    
    $
    102,828Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    95,466
    
    
    $
    
    
    
    $
    65
    
    
    $
    80,596
    
    
    $
    14,805Notes payable
    
    
    817
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    817Current maturities of long-term debt
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186Accrued expenses and other current liabilities
    
    
    69,887
    
    
    
    
    
    
    
    9,541
    
    
    
    53,042
    
    
    
    7,304Total current liabilities
    
    
    166,356
    
    
    
    
    
    
    
    9,606
    
    
    
    133,638
    
    
    
    23,112Long-term debt, less current maturities
    
    
    481,398
    
    
    
    
    
    
    
    481,167
    
    
    
    
    
    
    
    231Pension and other postretirement liabilities
    
    
    51,306
    
    
    
    
    
    
    
    31,853
    
    
    
    19,453Deferred tax
    
    
    
    
    
    
    
    
    
    
    (2,575
    )
    
    
    
    
    
    
    2,575Other liabilities
    
    

    2,772
    
    
    
    
    
    
    
    
    
    
    
    2,772Intercompany payables
    
    
    
    
    
    
    (175,585
    )
    
    
    160,730
    
    
    
    3,039
    
    
    
    11,816Shareholders equityCommon stock
    
    
    Additional paid-in capital
    
    
    261,357
    
    
    
    (529,661
    )
    
    
    261,357
    
    
    
    468,764
    
    
    
    60,897Retained (deficit) earnings
    
    
    (1,220
    )
    
    
    (51,605
    )
    
    
    (1,220
    )
    
    
    49,403
    
    
    
    2,202Accumulated comprehensive income (loss)
    
    
    1,906
    
    
    
    (2,099
    )
    
    
    1,906
    
    
    
    104
    
    
    
    1,995Total shareholders equity
    
    
    262,043
    
    
    
    (583,365
    )
    
    
    262,043
    
    
    
    518,271
    
    
    
    65,094Total liabilities and shareholders equity
    
    $
    963,875
    
    
    $
    (758,950
    )
    
    $
    942,824
    
    
    $
    677,173
    
    
    $
    102,828
 16




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Consolidating Condensed Balance Sheet
December 31, 2003(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorAssetsCurrent assetsCash and cash equivalents
    
    $
    46,130
    
    
    $
    
    
    
    $
    33,164
    
    
    $
    4,448
    
    
    $
    8,518Accounts receivable, net
    
    
    230,345
    
    
    
    
    
    
    
    
    
    
    
    208,762
    
    
    
    21,583Inventories
    
    
    168,797
    
    
    
    
    
    
    
    471
    
    
    
    152,506
    
    
    
    15,820Deferred tax
    
    
    17,756
    
    
    
    
    
    
    
    36,010
    
    
    
    (19,472
    )
    
    
    1,218Other current assets
    
    
    10,877
    
    
    
    
    
    
    
    (336
    )
    
    
    5,275
    
    
    
    5,938Total current assets
    
    
    473,905
    
    
    
    
    
    
    
    69,309
    
    
    
    351,519
    
    
    
    53,077Property, plant and equipment, net
    
    
    219,973
    
    
    
    
    
    
    
    54,055
    
    
    
    124,977
    
    
    
    40,941Intercompany receivables
    
    
    
    
    
    
    (124,033
    )
    
    
    
    
    
    
    124,033Investment in subsidiaries
    
    
    
    
    
    
    (566,026
    )
    
    
    553,055
    
    
    
    12,971Goodwill
    
    
    163,823
    
    
    
    
    
    
    
    163,823Other intangible assets, net
    
    
    77,124
    
    
    
    
    
    
    
    76,574
    
    
    
    550Deferred financing costs
    
    
    10,146
    
    
    
    
    
    
    
    10,146Deferred tax
    
    
    13,609
    
    
    
    
    
    
    
    13,609Pension and other assets
    
    
    11,359
    
    
    
    
    
    
    
    (4,301
    )
    
    
    14,380
    
    
    
    1,280Total assets
    
    $
    969,939
    
    
    $
    (690,059
    )
    
    $
    936,270
    
    
    $
    628,430
    
    
    $
    95,298Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    $
    74,652
    
    
    $
    
    
    
    $
    
    
    
    $
    63,456
    
    
    $
    11,196Notes payable
    
    
    752
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    752Current maturities of long-term debt
    
    
    1,034
    
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    284Accrued expenses and other current liabilities
    
    
    66,729
    
    
    
    
    
    
    
    19,072
    
    
    
    41,895
    
    
    
    5,762Total current liabilities
    
    
    143,167
    
    
    
    
    
    
    
    19,822
    
    
    
    105,351
    
    
    
    17,994Long-term debt, less current maturities
    
    
    520,472
    
    
    
    
    
    
    
    520,258
    
    
    
    
    
    
    
    214Pension and other post retirement liabilities
    
    
    50,038
    
    
    
    
    
    
    
    31,965
    
    
    
    18,073Deferred tax
    
    
    
    
    
    
    
    
    
    
    (4,050
    )
    
    
    699
    
    
    
    3,351Other liabilities
    
    
    2,172
    
    
    
    
    
    
    
    
    
    
    
    2,172Intercompany payables
    
    
    
    
    
    
    (124,033
    )
    
    
    114,185
    
    
    
    
    
    
    
    9,848Shareholders equityCommon stock
    
    
    Additional paid-in capital
    
    
    261,385
    
    
    
    (529,661
    )
    
    
    261,385
    
    
    
    468,764
    
    
    
    60,897Retained (deficit) earnings
    
    
    (8,755
    )
    
    
    (34,927
    )
    
    
    (8,755
    )
    
    
    33,507
    
    
    
    1,420Accumulated other comprehensive income (loss)
    
    
    1,460
    
    
    
    (1,438
    )
    
    
    1,460
    
    
    
    (136
    )
    
    
    1,574Total shareholders equity
    
    
    254,090
    
    
    
    (566,026
    )
    
    
    254,090
    
    
    
    502,135
    
    
    
    63,891Total liabilities and shareholders equity
    
    $
    969,939
    
    
    $
    (690,059
    )
    
    $
    936,270
    
    
    $
    628,430
    
    
    $
    95,298
 17




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Consolidating Condensed Income Statement
Three Months Ended March 31, 2004 (Unaudited)(in thousands) UCIConsolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    Non-GuarantorNet sales
    
    $
    256,811
    
    
    $
    (4,023
    )
    
    $
    
    
    
    $
    227,542
    
    
    $
    33,292Cost of sales
    
    
    201,264
    
    
    
    (4,023
    )
    
    
    1,971
    
    
    
    177,091
    
    
    
    26,225Gross profit
    
    
    55,547
    
    
    
    
    
    
    
    (1,971
    )
    
    
    50,451
    
    
    
    7,067Operating expensesSelling and warehousing
    
    
    19,045
    
    
    
    
    
    
    
    
    
    
    
    17,170
    
    
    
    1,875General and administrative
    
    
    12,072
    
    
    
    
    
    
    
    2,591
    
    
    
    6,603
    
    
    
    2,878Amortization of intangibles
    
    
    1,851
    
    
    
    
    
    
    
    1,851Operating income (loss)
    
    
    22,579
    
    
    
    
    
    
    
    (6,413
    )
    
    
    26,678
    
    
    
    2,314Other income (expense)Interest income
    
    

    65
    
    
    
    (78
    )
    
    
    5
    
    
    
    113
    
    
    
    25Interest expense
    
    
    (9,631
    )
    
    
    78
    
    
    
    (9,618
    )
    
    
    (17
    )
    
    
    (74
    )Management fee expense
    
    
    (500
    )
    
    
    
    
    
    
    (500
    )Miscellaneous, net
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    84Income (loss) before income taxes
    
    
    12,598
    
    
    
    
    
    
    
    (16,526
    )
    
    
    26,775
    
    
    
    2,349Income tax expense (benefit)
    
    
    5,063
    
    
    
    
    
    
    
    (6,293
    )
    
    
    10,442
    
    
    
    914Increase before equity in earnings of
subsidiaries
    
    
    7,535
    
    
    
    
    
    
    
    (10,233
    )
    
    
    16,333
    
    
    
    1,435Equity in earnings of subsidiaries
    
    
    
    
    
    
    (17,331
    )
    
    
    17,768
    
    
    
    (437
    )Net income (loss)
    
    $
    7,535
    
    
    $
    (17,331
    )
    
    $
    7,535
    
    
    $
    15,896
    
    
    $
    1,435
 18




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Income Statement
Three Months Ended March 31, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    236,325
    
    
    $
    (3,911
    )
    
    $
    
    
    
    $
    208,316
    
    
    $
    31,920Cost of sales
    
    
    187,274
    
    
    
    (3,911
    )
    
    
    
    
    
    
    167,426
    
    
    
    23,759Gross profit
    
    
    49,051
    
    
    
    
    
    
    
    
    
    
    
    40,890
    
    
    
    8,161Operating expensesSelling and warehousing
    
    
    18,110
    
    
    
    
    
    
    
    
    
    
    
    16,094
    
    
    
    2,016General and administrative
    
    
    8,263
    
    
    
    
    
    
    
    
    
    
    
    4,239
    
    
    
    4,024Amortization of intangible assets
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Operating income
    
    
    22,648
    
    
    
    
    
    
    
    
    
    
    
    20,527
    
    
    
    2,121Other income (expense)Interest income
    
    
    995
    
    
    
    
    
    
    
    
    
    
    
    824
    
    
    
    171Interest expense
    
    
    (237
    )
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (227
    )Management fee expense
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (18
    )Miscellaneous, net
    
    
    (153
    )
    
    
    
    
    
    
    
    
    
    
    (141
    )
    
    
    (12
    )Income before income taxes
    
    
    23,238
    
    
    
    
    
    
    
    
    
    
    
    21,203
    
    
    
    2,035Income tax expense
    
    
    965
    
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    732Net income
    
    $
    22,273
    
    
    $
    
    
    
    $
    
    
    
    $
    20,970
    
    
    $
    1,303
 19




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Consolidating Condensed Statement of Cash Flows
Three months ended March 31, 2004 (unaudited)(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    33,853
    
    
    $
    
    
    
    $
    28,893
    
    
    $
    1,655
    
    
    $
    3,305Cash flows from investing activities:Acquisition and related fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditures
    
    
    (8,931
    )
    
    
    
    
    
    
    
    
    
    
    (7,694
    )
    
    
    (1,237
    )Proceeds from sale of assets
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    113Net cash used in investing
activities
    
    
    (8,802
    )
    
    
    
    
    
    
    
    
    
    
    (7,678
    )
    
    
    (1,124
    )Cash flows from financing activities:Debt repayments
    
    
    (40,015
    )
    
    
    
    
    
    
    (40,000
    )
    
    
    
    
    
    
    (15
    )Other
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Net cash used in financing
activities
    
    
    (40,043
    )
    
    
    
    
    
    
    (40,028
    )
    
    
    
    
    
    
    (15
    )Effect of exchange rate changes on cash
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Net increase (decrease) in cash and
cash equivalents
    
    
    (14,882
    )
    
    
    
    
    
    
    (11,135
    )
    
    
    (6,023
    )
    
    
    2,276Cash and cash equivalents at beginning of period
    
    
    46,130
    
    
    
    
    
    
    
    33,164
    
    
    
    4,448
    
    
    
    8,518Cash and cash equivalents at end of period
    
    $
    31,248
    
    
    $
    
    
    
    $
    22,029
    
    
    $
    (1,575
    )
    
    $
    10,794
 20




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Statement of Cash Flows
Three months ended March 31, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    17,710
    
    
    $
    
    
    
    $
    
    
    
    $
    16,344
    
    
    $
    1,366Cash flows from investing activities:Capital expenditures
    
    
    (6,522
    )
    
    
    
    
    
    
    
    
    
    
    (5,443
    )
    
    
    (1,079
    )Proceeds from sale of assets
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    111Net cash used in investing
activities
    
    
    (6,397
    )
    
    
    
    
    
    
    
    
    
    
    (5,429
    )
    
    
    (968
    )Cash flows from financing activities:Debt borrowings
    
    
    587
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    586Dividends and transfers to UIS, Inc., net
    
    
    (9,195
    )
    
    
    
    
    
    
    
    
    
    
    (9,542
    )
    
    
    347Net cash (used in) provided by
financing activities
    
    
    (8,608
    )
    
    
    
    
    
    
    
    
    
    
    (9,541
    )
    
    
    933Effect of exchange rate changes on cash
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (149
    )Net increase in cash
and cash equivalents
    
    
    2,556
    
    
    
    
    
    
    
    
    
    
    
    1,374
    
    
    
    1,182Cash and cash equivalents at beginning of
period
    
    
    28,354
    
    
    
    
    
    
    
    
    
    
    
    7,237
    
    
    
    21,117Cash and cash equivalents at end of period
    
    $
    30,910
    
    
    $
    
    
    
    $
    
    
    
    $
    8,611
    
    
    $
    22,299
 21




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Sales. We are among North Americas largest and most diversified companies
servicing the vehicle replacement parts market, or the aftermarket. We supply a
broad range of filtration products, fuel and cooling systems, engine management
systems, driveline components and lighting systems to the automotive, trucking,
marine, mining, construction, agricultural and industrial vehicle markets. We
estimate that about 80% of our net sales in 2003 were made in the aftermarket,
to a customer base that includes some of the largest and fastest growing
companies servicing the aftermarket. The aftermarket has grown at an annual
rate of approximately 4.1% from 1997 to 2003. We believe it will continue to
grow, at least in the near term. We believe we are well positioned to
participate in that growth. We believe we have leading market positions in our primary product lines. We
continue to expand our product and service offerings to meet the needs of our
customers, and we believe that we offer one of the most comprehensive lines of
products in the vehicle replacement parts market consisting of approximately
60,000 part numbers. We believe our breadth of product offering is a key
competitive advantage. This product breadth along with our extensive
manufacturing and distribution capabilities, product innovation, and reputation
for quality and service makes us a leader in our industry. We have established
a network of manufacturing facilities, distribution centers and offices located
in the United States, Europe, Mexico and China, with a global work force of
approximately 6,700 employees as of March 31, 2004. Because most of our sales are to the aftermarket, we believe that our sales are
primarily driven by the number of vehicles on the road, the average number of
miles driven per year, the average age of the vehicle, the mix of light trucks
to passenger cars on the road and the relative strength of our sales channels.
Historically, our sales have not been materially adversely affected by market
cyclicality, as we believe that our aftermarket sales are less dependent on
economic conditions than our sales to OEMs, due to the non-discretionary nature
of vehicle maintenance and repair. However, it is also important to note that in 2003 and 2002, 23% of our
revenues were derived from our business with AutoZone, and our failure to
maintain a healthy relationship with AutoZone would result in a significant
decrease in our net sales. Even if we maintain our relationship, our net sales
concentration as a result of this relationship increases the potential impact
to our business that could result from any changes in the economic terms of
this relationship. Any change in the terms of sales to this customer could
have a material impact on our financial position and results of operations.
Any changes could, for example, result in an increase in the time it takes for
us to record net sales and collect on receivables. AutoZone has publicly
announced its intent to transition its suppliers to a program where suppliers
are paid when an AutoZone customer purchases the suppliers product. Cost of Sales. Cost of sales includes all costs of manufacturing required to
bring a product to a ready-for-sale condition. Such costs include direct and
indirect materials (net of vendor consideration), direct and indirect labor
including fringe benefits, supplies, utilities, freight, depreciation,
insurance, pension and postretirement benefits, information technology costs
and other costs. Cost of sales also includes all costs to procure, package and
ship products that we purchase and resell. The two largest components of our
cost of sales are steel and labor. In 2004, demand for steel is high and is resulting in supplier-imposed
surcharges for this raw material. While we believe that we will be able to
obtain sufficient quantities to satisfy our needs, we believe we will be
required to pay significantly higher prices for the material. Our intent is to
increase prices to reflect this increased cost. Our ability to do so is
uncertain at this time. 22




---



##### 



Selling and Warehousing Expenses. Selling and warehousing expenses primarily
include sales and marketing, warehousing and distribution costs. Our major
cost elements include salaries and wages, pension and fringe benefits,
depreciation, advertising and information technology costs. Management intends to increase promotional spending to selectively expand the
Companys customer base and products. Management also intends to leverage the
fixed portion of sales and warehousing as sales increase. In the long run,
management thinks that sales and warehousing expense as a percentage of sales
is a key measure and is working to reduce this percentage. General and Administrative Expenses. General and administrative expenses
primarily include executive, accounting and legal personnel salaries and fringe
benefits, professional fees, pension benefits, insurance, provision for
doubtful accounts and rent. Preliminary allocation of Acquisition purchase price. As explained in Note B
to the financial statements presented elsewhere in this Form 10-Q, the
allocation of the Acquisition purchase price is preliminary and is subject to
change until all pertinent information regarding the Acquisition and the assets
and liabilities of the Company are obtained and fully evaluated. Finalization
of the allocation of the Acquisition purchase price could result in material
changes to the balance sheet presented elsewhere in this report. Cash Generation. Net cash from operating activities was $33.9 million.
Capital expenditures were $8.9 million. The net cash generated from these
operating activities was $25 million. Critical Accounting Policies The methods, estimates and judgments we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. We evaluate our estimates and judgments on an on-going
basis. We base our estimates on historical experience and on assumptions that
we believe to be reasonable under the circumstances. Our experience and
assumptions form the basis for our judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual
results may vary from what we anticipate, and different assumptions or
estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us,
because they are important to our financial statements, and they require our
most complex judgments in the preparation of the financial statements. Accounts receivable. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. These allowances are based on a combination of an aging analysis and
our analyses of our history of write-offs. In addition, we evaluate allowance
requirements if the financial condition of a particular customer were to
deteriorate. Inventory. We record inventory at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Estimated market value
is based on assumptions for future demand and related pricing. If actual
market conditions are less favorable than those projected by management,
reductions in the value of inventory may be required. Revenue recognition. We record sales upon transfer of title of product, which
occurs upon shipment to the customer. Because we enter into sales rebate
programs with some of our customers that require us to make rebate payments to
them from time to time, we estimate amounts due under these sales rebate
programs at the time of shipment. Net sales relating to any particular
shipment are based upon the amount invoiced for the shipped goods less
estimated future rebate payments. These estimates are based upon our
historical experience. Revisions to these estimates are recorded in the period
in which the facts that give rise to the revision become known. 23




---



##### 



Additionally, we enter into formal and informal agreements with our customers
that provide for sales discounts, marketing allowances, provided return
allowances and performance incentives. The discounts, allowances and
incentives are expensed as a reduction to sales, based on estimates of the
criteria that give rise to the discount or allowance, such as sales volume and
marketing spending. We routinely review these criteria and our estimating
process and make adjustments as facts and circumstances change. Historically
we have not found material differences between our estimates and actual
results. Impairment of intangible assets and tangible fixed assets. Our intangible
assets and tangible fixed assets are held at historical cost, net of
depreciation and amortization, less any provision for impairment. We
periodically evaluate the realizability of our intangible or tangible fixed
assets. We also perform a review of these assets if an indicator of
impairment, such as an operating loss or cash outflow from operating activities
or a significant adverse change in the business or market place, exists.
Estimates of future cash flows used to test the asset for impairment are based
on current operating projections extended to the useful life of the asset group
and are, by their nature, subjective. We adopted SFAS 142 in 2002. In accordance with SFAS 142, we stopped
amortizing goodwill on January 1, 2002. In lieu of amortization, we perform
impairment analysis of our goodwill. Based on this analysis in the fourth
quarters of 2003 and 2002, we have concluded that there has not been an
impairment. If we determine that goodwill has been impaired, we will record
the impairment as a charge against income. Estimates of future discounted cash
flows used in the impairment test are based on current operating projections,
which are by their nature subjective. Retirement benefits. Pension obligations are actuarially determined and are
affected by assumptions including discount rate, life expectancy, annual
compensation increases and the expected rate of return on plan assets. Changes
in the discount rate, and differences from actual results for each assumption,
will affect the amount of pension expense we recognize in future periods. Postretirement health obligations are actuarially determined and are based on
assumptions including discount rate, life expectancy and health care cost
trends. Changes in the discount rate, and differences from actual results for
each assumption, will affect the amount of expense we recognize in future
periods. A one percent increase or decrease in the assumed health care cost
trends would result in an approximate $40,000 annual increase or decrease in
annual postretirement health costs. Insurance Reserves. Prior to the Acquisition, the Company had insurance under
UISs master policies for group, workers compensation, automobile, product and
general liability. These policies were subject to retrospective rating
adjustments for which we were responsible. These adjustments were predicated
upon paid losses, reserves and expenses. The projections involved in this
estimate were subject to substantial uncertainty because of several
unpredictable factors, including actual claims experience, regulatory changes,
litigation trends and changes in inflation. As of the June 20, 2003 Acquisition, the Company is no longer covered by the
UIS master insurance policies. As of that date, the Company has purchased
insurance, which does not include retrospective rating adjustments but does
include high deductibles for which the Company is responsible. Consequently,
the Company is subject to the same substantial uncertainties as those described
in the preceding paragraph. Unpaid estimated losses, for which the Company is
responsible, are recorded in accrued expenses in the March 31, 2004 and
December 31, 2003 balance sheets. 24




---



##### 



Environmental Expenditures. Our aggregate expenditures (both capital and
operating) for compliance with laws and regulations related to the protection
of the environment were approximately $1.0 million in 2003, $0.8 million in
2002 and $0.7 million in 2001. The majority of our environmental expenditures
relate to the proper disposal of environmentally sensitive waste. Management
does not expect this disposal cost to change significantly in the near term,
other than for volume fluctuations. Also, management does not expect capital
spending on environmental matters to increase materially over the near term;
however, changes in environmental regulations, or the outcome of litigation,
could result in additional requirements that could necessitate increased
spending. Results of Operations The following table was derived from the United Components, Inc. consolidated
and the Predecessor Company combined income statements for the three months
ended March 31, 2004 and 2003. The amounts are presented in millions of
dollars. Three MonthsEndedMarch 31,2004
    
    2003Net sales
    
    $
    256.8
    
    
    $
    236.3Cost of Sales
    
    
    201.3
    
    
    
    187.3Gross profit
    
    
    55.5
    
    
    
    49.0Operating expensesSelling and warehousing
    
    
    19.0
    
    
    
    18.1General and administrative
    
    
    12.0
    
    
    
    8.3Amortization of intangible assets
    
    
    1.9
    
    
    
    Operating income
    
    
    22.6
    
    
    
    22.6Interest, net
    
    
    (9.6
    )
    
    
    .7Management fee expense
    
    
    (.5
    )
    
    
    Miscellaneous, net
    
    
    .1
    
    
    
    (.1
    )Income before income taxes
    
    
    12.6
    
    
    
    23.2Income taxes
    
    
    5.1
    
    
    
    .9Net income
    
    $
    7.5
    
    
    $
    22.3Pro forma net income, adjusted only for change in tax filing status (1)
    
    $
    7.5
    
    
    $
    14.5
   (1)
    
    Prior to the Acquisition, the subsidiaries of UIS that we acquired
operated as S corporations for Federal and state income tax purposes.
The historical combined financial statements do not include a provision
for Federal and certain state income taxes for such periods. A
provision for state income taxes has been made for those states not
recognizing S corporation status. Pro forma net income has been
computed as if we had been fully subject to Federal and state income
taxes based on the tax laws in effect during the respective periods.
See Notes B and C to the financial statements. 25




---



##### 



Three Months Ended March 31, 2004 Compared with the Three Months Ended March
31, 2003 Net sales. Net sales increased $20.5 million, or 8.7%, from $236.3 million in
the 2003 quarter to $256.8 million in the 2004 quarter. The increase was
volume driven, primarily by sales to the traditional, OEM, OES and heavy duty channels. Cost of sales. Cost of sales increased $14 million, or 7.5%, from $187.3
million in the 2003 quarter to $201.3 million in the 2004 quarter. The
increase was primarily due to higher volume. The 2004 and 2003 quarters were both adversely effected by one-time charges of
$0.5 million and $1.5 million, respectively. The 2004 quarter also includes
$1.5 million of additional non-cash depreciation expense resulting from the
step-up of property, plant and equipment, which was part of the preliminary
allocation of June 20, 2003 Acquisition purchase price. The aforementioned $0.5 million one-time charge in 2004 is due to the sale of
inventory that was written-up as part of the preliminary allocation of the
Acquisition purchase price. The total preliminary write-up of the June 20,
2003 inventory was $28 million. Including the $0.5 million first quarter
charge, all $28 million has now been expensed. Therefore, the effect of this
inventory write-up will not adversely affect our reported results in the
future. The aforementioned $1.5 million one-time charges in 2003 include provisions for
product line relocations, costs relating to the upgrade of the Albion, Illinois
manufacturing facility, costs associated with the consolidation of our European
filtration manufacturing operations, and inventory reserves. Gross margin, as reported, increased from 20.7% in 2003 to 21.6% in 2004.
Excluding the one-time charges from both periods, the increase is from 21.4% in
2003 to 21.8% in 2004. The aforementioned higher 2004 depreciation expense,
caused by the Acquisition related step-up, will be a continuing non-cash
charge. However, if that non-cash charge were excluded from 2004 results for
the sake of better quarter-to-quarter comparability, the improvement would be
from 21.4% in 2003 to 22.4% in the 2004 quarter. Selling and warehousing expenses. Selling and warehousing expenses of $19
million for the 2004 quarter are $0.9 million higher than the 2003 quarter. In
the 2004 quarter, this cost is 7.4% of sales compared to 7.7% in the 2003
quarter. General and administrative expenses. General and administrative expense
increased by $3.7 million, or 44.6%, to $12 million in the 2004 quarter. This
increase is due to (i) the higher cost of operating as a stand-alone company
after the Acquisition; (ii) the Companys investment in processes and
management talent necessary to drive improvements in future operational
efficiency; (iii) higher performance-based incentive compensation; and (iv) the
timing of the recognition of external audit costs. Interest, net. Net interest changed from $0.7 million of net interest income
in the 2003 quarter to $9.6 million of net interest expense in the 2004
quarter. The $10.3 million adverse shift includes (i) $0.6 million of
accelerated write-off of debt issuance costs because of voluntary prepayments
of debt; (ii) $8.8 million of interest expense on Acquisition-related debt; and
(iii) $0.9 million lower interest income on loans to the Predecessor Companys
previous owner. Income taxes. The change in income taxes is driven by changes in pre-tax
income plus the use of a 40.2% incremental effective rate after the Acquisition
in 2003. The higher rate is the result of the Companys transition from S
corporation filing status before the Acquisition to C corporation filing status
after the Acquisition. Net Income. Due to the factors described above, net income declined $14.8
million from $22.3 million in the 2003 quarter to $7.5 million in the 2004
quarter. 26




---



##### 



Liquidity and Capital Resources At December 31, 2003, the Company had $46.1 million of cash and $528.3 million
of debt outstanding. (The difference between this debt amount and the amount
on the balance sheet is $6 million of unamortized debt issuance cost.) The
Companys December 31, 2003 debt included $297 million of senior credit
facility term loans and its $230 million senior subordinated notes. On March
1, 2004, the Company made a voluntary prepayment of $40 million of term loan
borrowings. The Company funded this $40 million prepayment with cash generated
from operations. At March 31, 2004, the Company had $31.2 million of cash and
$488.2 million of debt outstanding. At the $488.2 million debt level, annual interest expense, including
amortization of deferred financing costs and debt issuance cost, is
approximately $35.2 million at March 31, 2004 borrowing rates. An increase in
the interest rate of 0.25% in the variable interest rate would have increased
the annual interest cost by $0.3 million. The Companys significant debt
service obligations could, under certain circumstances, have material
consequences. The Companys primary source of liquidity is cash flow from operations and
borrowings under its $75 million revolving credit facility. Borrowings under
the revolving credit facility are available to fund the Companys working
capital requirements, capital expenditures and other general corporate
purposes. $3.4 million of revolving credit borrowing capacity has been used to
support outstanding letters of credit. Because of voluntary pre-payments, the Company does not have any required
repayments of its senior credit facility term loans until December 2005. The
$230 million senior subordinated notes are due in 2013. The Companys
ability to make scheduled payments of principal on, or to pay interest on, or
to refinance, its indebtedness or to fund planned capital expenditures will
depend on its ability to generate cash in the future. Such cash generation is
subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond its control. Based on the current level of operations, the Company believes that cash flow
from operations and available cash, together with available borrowings under
its revolving credit facility, will be adequate to meet liquidity needs and
fund planned capital expenditures for the next two years. The Company may,
however, need to refinance all or a portion of the principal amount of the
senior subordinated notes and/or senior credit facility borrowings, on or prior
to maturity, to meet liquidity needs in later years. If it is determined that
refinancing is necessary, and the Company is unable to secure such financing on
acceptable terms, then the Company may have insufficient liquidity to carry on
its operations and meet its obligations at such time. The Company can give no assurance that its business will generate sufficient
cash flow from operations, that any revenue growth or operating improvements
will be realized, or that future borrowings will be available under its
revolving credit facilities in an amount sufficient to enable it to service its
indebtedness or to fund other liquidity needs. In addition, the Company can
give no assurance that it will be able to refinance any of its indebtedness,
including its senior credit facilities and the senior subordinated notes, on
commercially reasonable terms or at all. Net cash provided by operating activities Net cash provided by operating activities for the three months ended March 31,
2004 and 2003 was $33.9 million and $17.7 million, respectively. The $16.2
million increase in net cash provided by operating activities in the 2004
quarter as compared to the 2003 quarter was attributable to reductions in
working capital, partially offset by lower net income. 27




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Net cash used in investing activities Historically, net cash used in investing activities has been for capital
expenditures, offset by proceeds from the disposition of property, plant and
equipment. Capital expenditures for the three months ended March 31, 2004 and
2003 were $8.9 million and $6.5 million, respectively. Approximately $4.4 and
$2.2 million of the 2004 and 2003 quarters capital expenditures was related to
the long-term capital investment plan to increase capacity and reduce cost at
our filtration facilities. Capital expenditures for the 2003 full year were
$43.4 million. For the full year 2004, capital expenditure are expected to be
approximately $43 to $48 million. Impact of the Acquisition and Related Financing Transactions The Company incurred significant indebtedness in connection with the
Acquisition. Accordingly, our interest expense is higher than it was prior to
the Acquisition. As a result of the Acquisition, our assets and liabilities
were adjusted to their preliminary estimated fair value as of the closing of
the Acquisition. The excess of the total purchase price over the value of our
net assets at closing of the Acquisition was allocated to goodwill and other
intangible assets. These long-lived assets are subject to annual impairment
review. Purchase price allocations are subject to adjustment until all
pertinent information regarding the Acquisition is obtained and fully
evaluated. See Note B to the Condensed Financial Statements for information
regarding the preliminary status of the allocation of the Acquisition purchase
price and the impact of the Acquisition and the financing thereof. Recent Accounting Pronouncements In December 2003, SFAS No. 132R, Employers Disclosure about Pensions and
Other Postretirement Benefits was issued. SFAS No. 132R requires additional
disclosures about defined benefit pension plans and other postretirement
benefit plans. The standard requires, among other things, additional
disclosures about the assets held in employer sponsored pension plans,
disclosures relating to plan asset investment policy and practices, disclosure
of expected contributions to be made to the plans and expected benefit payments
to be made by the plans. Annual disclosures applicable to our U.S. pension and
postretirement plans were required to be made in our financial statements for
the year ended December 31, 2003. We have adopted this pronouncement as of
December 31, 2003 for all of our U.S. plans. Annual disclosures relating to
our non-U.S. plans will be adopted for the year ending December 31, 2004.
Interim disclosures relating to our non-U.S. plans will be adopted for the year
ending December 31, 2005. In March 2004, the FASBs Emerging Issues Task Force concluded its discussion
of Issue No. 03-01, The Meaning of Other-Than-Temporary Impairments and Its
Application to Certain Investments(EITF 03-01). EITF 03-01 provides
guidance regarding the determination of when an impairment of debt and
marketable equity securities and investments, which are accounted for under the
cost method, should be considered other-than-temporary and recognized in
earnings. EITF 03-01 also requires annual disclosures of certain quantitative
and qualitative factors of debt and marketable equity securities, which are
classified as available-for-sale or held-to-maturity, and which are in an
unrealized loss position at the balance sheet date, but for which an
other-than-temporary impairment has not been recognized. The disclosure
requirements of EITF 03-01 were effective December 31, 2003 and had no effect
on the Companys financial statements. The accounting guidance of EITF 03-01
will be effective in the third quarter of 2004 and is not expected to have a
material affect on the Companys financial statements. 28




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Item 3. Quantitative And Qualitative Disclosures About Market Risk Our exposure to market risk consists of foreign currency exchange rate
fluctuations and changes in interest rates. Foreign Currency Exposure Currency translation. As a result of international operating activities, we
are exposed to risks associated with changes in foreign exchange rates,
principally exchange rates between the U.S. dollar and the Mexican peso,
Spanish peseta, Canadian dollar and British pound. The results of operations
of our foreign subsidiaries are translated into U.S. Dollars at the average
exchange rates for each relevant period. This translation has no impact on our
cash flow. However, as foreign exchange rates change, there are changes to the
U.S. dollar equivalent of sales and expenses denominated in foreign currencies.
During 2003, approximately 12% of our business was transacted in local
currencies of foreign countries. While our international results of operations
as measured in dollars are subject to foreign exchange fluctuations, we do not
consider the related risk to be material to our financial condition or results
of operation. If the exchange rate between the foreign currencies and the U.S.
dollar were to decrease by 10%, our annual net income would have been lower by
$0.3 million in 2003 due to the reduction in reported results form our foreign
operations. The balance sheets of foreign subsidiaries are translated into U.S. dollars at
the closing exchange rates as of the relevant balance sheet date. Any
adjustments resulting from the translation are recorded as other comprehensive
income on our statement of shareholders equity. In the past the vehicle parts
businesses of UIS have attempted to manage, and in the future we expect to
continue to manage, this exposure primarily by balancing monetary assets and
liabilities and maintaining cash positions only at levels necessary for
operating purposes in those countries. Currency transaction exposure.Currency transaction exposure arises where
actual sales and purchases are made by a business in a currency other than its
own functional currency. The majority of our businesses source raw materials
and sell their products within their local markets currencies and, therefore,
have limited transaction exposure. In the future, we expect to continue to monitor our transaction exposure to
currency rate changes and enter into currency forward and option contracts to
limit the exposure, as appropriate. Gains and losses on contracts are deferred
until the transaction being hedged is finalized. As of March 31, 2004, we had
no outstanding foreign currency contracts. We do not engage in any speculative
activities. Interest rate risk Borrowings under our senior credit facilities bear variable rates of interest.
Under our senior credit facilities, we are required to provide interest rate
protection on approximately $118 million of our senior term loan facilities
borrowings. In August 2003, we entered into an interest rate swap for $118
million. This swap effectively converts $118 million of variable rate debt to
fixed rate debt for the two years ended August 2005. The variable component of
the interest rate on borrowings under the senior credit facilities is based on
LIBOR. Under the swap we will pay 1.94% and will receive the then current
LIBOR on $118 million. We utilize, and we will continue to utilize, sensitivity analyses to assess the
potential effect of our variable rate debt. If the variable interest rate were
to increase by 0.25% per annum, the net impact would be a decrease of
approximately $0.2 million on our annual net income and cash flow. 29




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Treasury Policy Our treasury policy seeks to ensure that adequate financial resources are
available for the development of our businesses while managing our currency and
interest rate risks. Our policy is not to engage in speculative transactions.
Our policies with respect to the major areas of our treasury activity are set
forth above. Item 4. Controls And Procedures The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Companys Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions rules and forms and that
such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under
the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and the Companys Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, the Companys Chief Executive
Officer and Chief Financial Officer concluded that, as of the end of the
quarter covered by this report, the Companys disclosure controls and
procedures were effective at the reasonable assurance level. There has been no change in the Companys internal controls over financial
reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
controls over financial reporting. 30




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PART II
OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1
    
    Certification of Periodic Report by the Chief Executive
Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.Exhibit 31.2
    
    Certification of Periodic Report by the Chief Financial
Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.Exhibit 32
    
    Certification of Periodic Report by the Chief Executive
Officer and Chief Financial Officer pursuant to 18 U.S.C.
1350, as created by Section 906 of the Sarbanes-Oxley Act
of 2002.*
 * This certificate is being furnished solely to accompany the report pursuant
to 18 U.S.C. 1350 and is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing. (b) Reports on Form 8-K filed during the quarter ended March 31, 2004. The Company filed a current report on Form 8-K (under Items 5, 7 and 12) dated
March 11, 2004 with respect to announcing financial results for the year ended
December 31, 2003. 31




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. UNITED COMPONENTS, INC.Date: May
            13, 2004
    
    By:
    
        /s/ CHARLES T. DICKSONName:
    
    Charles T. DicksonTitle:
    
    Chief Financial Officer
 32