##### 



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 1934
 For the quarterly period ended June 30, 2004 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from________ to________ Commission File Number: 333-107219 UNITED COMPONENTS, INC.  Delaware(State or Other Jurisdiction of
    
    04-3759857Incorporation or Organization)
    
    (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 August 11, 2004.




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##### 



Index United Components, Inc. Part I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed balance sheetsJune 30, 2004 and December 31, 2003Condensed income statementsThree and six months ended June 30, 2004 and 2003Condensed statements of cash flowsSix months ended June 30, 2004 and 2003Statement of changes in shareholders equityJune 20, 2003, December 31, 2003 and June 30, 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. 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
        
        ConsolidatedJune 30, 2004
        
        December 31, 2003(unaudited)AssetsCurrent assetsCash and cash equivalents
        
        $
        31,077
        
        
        $
        46,130Accounts receivable,
            net
        
        
        269,422
        
        
        
        230,345Inventories
        
        
        175,307
        
        
        
        168,797Deferred tax
        
        
        14,405
        
        
        
        17,756Other current assets
        
        
        9,347
        
        
        
        10,877Total current assets
        
        
        499,558
        
        
        
        473,905Property, plant and
            equipment, net
        
        
        214,018
        
        
        
        219,973Goodwill
        
        
        166,559
        
        
        
        163,823Other intangible
            assets, net
        
        
        89,722
        
        
        
        77,124Deferred financing
            costs
        
        
        8,792
        
        
        
        10,146Deferred tax
        
        
        
        
        
        
        13,609Pension and other
            assets
        
        
        9,752
        
        
        
        11,359Total assets
        
        $
        988,401
        
        
        $
        969,939Liabilities and
            shareholders equityCurrent liabilitiesAccounts payable
        
        $
        102,148
        
        
        $
        74,652Notes payable
        
        
        1,219
        
        
        
        752Current maturities
            of long-term debt
        
        
        139
        
        
        
        1,034Accrued expenses
            and other current liabilities
        
        
        76,898
        
        
        
        66,729Total current liabilities
        
        
        180,404
        
        
        
        143,167Long-term debt, less
            current maturities
        
        
        481,549
        
        
        
        520,472Pension and other
            postretirement liabilities
        
        
        50,201
        
        
        
        50,038Deferred tax
        
        
        1,567
        
        
        
        Other liabilities
        
        
        2,772
        
        
        
        2,172Contingencies 
            Note JTotal liabilities
        
        
        716,493
        
        
        
        715,849Shareholders
            equityCommon stock
        
        
        
        
        
        
        Additional paid in
            capital
        
        
        261,357
        
        
        
        261,385Retained earnings
            (deficit)
        
        
        8,997
        
        
        
        (8,755
        )Accumulated other
            comprehensive income
        
        
        1,554
        
        
        
        1,460Total shareholders
            equity
        
        
        271,908
        
        
        
        254,090Total liabilities
            and shareholders equity
        
        $
        988,401
        
        
        $
        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
    
    UCI
    
    PredecessorConsolidated
    
    Consolidated
    
    CombinedThree Months
    
    June 21, 2003
    
    April 1, 2003Ended
    
    Through
    
    ThroughJune 30, 2004
    
    June 30, 2003
    
    June 20, 2003Net sales
    
    $
    273,952
    
    
    $
    26,179
    
    
    $
    216,142Cost of sales
    
    
    214,156
    
    
    
    23,402
    
    
    
    190,937Gross profit
    
    
    59,796
    
    
    
    2,777
    
    
    
    25,205Operating expensesSelling and warehousing
    
    
    19,342
    
    
    
    2,213
    
    
    
    15,475General and administrative
    
    
    12,127
    
    
    
    1,440
    
    
    
    10,665Amortization of intangible assets
    
    
    1,851
    
    
    
    164
    
    
    
    30Operating income (loss)
    
    
    26,476
    
    
    
    (1,040
    )
    
    
    (965
    )Other income (expense)Interest income
    
    
    48
    
    
    
    
    
    
    
    830Interest expense
    
    
    (9,070
    )
    
    
    (3,860
    )
    
    
    (121
    )Management fee expense
    
    
    (500
    )
    
    
    (55
    )
    
    
    (3
    )Miscellaneous, net
    
    
    41
    
    
    
    111
    
    
    
    (255
    )Income (loss) before income
            taxes
    
    
    16,995
    
    
    
    (4,844
    )
    
    
    (514
    )Income tax expense (benefit)
    
    
    6,778
    
    
    
    (1,841
    )
    
    
    (23
    )Net income (loss)
    
    $
    10,217
    
    
    $
    (3,003
    )
    
    $
    (491
    )Pro forma (unaudited), adjusted solely for change
in income tax filing status (Note C):Historical income (loss)
            before provision for income taxes
    
    $
    16,995
    
    
    $
    (4,844
    )
    
    $
    (514
    )Income tax expense (benefit)
    
    
    6,778
    
    
    
    (1,841
    )
    
    
    (193
    )Pro forma net income (loss)
    
    $
    10,217
    
    
    $
    (3,003
    )
    
    $
    (321
    )
 The accompanying notes are an integral part of these statements. 4




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##### 



United Components, Inc. Condensed Income Statements (unaudited)(in thousands) UCI
    
    UCI
    
    PredecessorConsolidated
    
    Consolidated
    
    CombinedSix Months
    
    June 21, 2003
    
    January 1, 2003Ended
    
    through
    
    throughJune 30, 2004
    
    June 30, 2003
    
    June 20, 2003Net sales
    
    $
    530,763
    
    
    $
    26,179
    
    
    $
    452,467Cost of sales
    
    
    415,420
    
    
    
    23,402
    
    
    
    378,211Gross profit
    
    
    115,343
    
    
    
    2,777
    
    
    
    74,256Operating expensesSelling and warehousing
    
    
    38,387
    
    
    
    2,213
    
    
    
    33,585General and administrative
    
    
    24,199
    
    
    
    1,440
    
    
    
    18,928Amortization of intangible assets
    
    
    3,702
    
    
    
    164
    
    
    
    60Operating income (loss)
    
    
    49,055
    
    
    
    (1,040
    )
    
    
    21,683Other income (expense)Interest income
    
    
    113
    
    
    
    
    
    
    
    1,712Interest expense
    
    
    (18,701
    )
    
    
    (3,860
    )
    
    
    (245
    )Management fee expense
    
    
    (1,000
    )
    
    
    (55
    )
    
    
    (18
    )Miscellaneous, net
    
    
    126
    
    
    
    111
    
    
    
    (408
    )Income (loss) before
            income taxes
    
    
    29,593
    
    
    
    (4,844
    )
    
    
    22,724Income tax expense (benefit)
    
    
    11,841
    
    
    
    (1,841
    )
    
    
    942Net income (loss)
    
    $
    17,752
    
    
    $
    (3,003
    )
    
    $
    21,782Pro forma (unaudited), adjusted solely for change
in income tax filing status (Note C):Historical income (loss) before provision
for income taxes
    
    $
    29,593
    
    
    $
    (4,844
    )
    
    $
    22,724Income tax expense (benefit)
    
    
    11,841
    
    
    
    (1,841
    )
    
    
    8,544Pro forma net income (loss)
    
    $
    17,752
    
    
    $
    (3,003
    )
    
    $
    14,180
 The accompanying notes are an integral part of these statements. 5




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##### 



United Components, Inc. Condensed Statements of Cash Flow (unaudited)(in thousands) UCI
    
    UCI
    
    PredecessorConsolidated
    
    Consolidated
    
    CombinedSix Months
    
    June 21,2003
    
    January 1, 2003Ended
    
    through
    
    throughJune 30, 2004
    
    June 30, 2003
    
    June 20, 2003Cash flows from operating activities:Net income (loss)
    
    $
    17,752
    
    
    $
    (3,003
    )
    
    $
    21,782Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation
    
    
    17,779
    
    
    
    1,049
    
    
    
    12,928Amortization of intangible assets
    
    
    3,702
    
    
    
    164
    
    
    
    60Amortization of deferred financing fees and debt
issuance costs
    
    
    1,670
    
    
    
    (99
    )
    
    
    242Loss on sale of assets, net
    
    
    43Changes in operating assets and liabilitiesAccounts receivable
    
    
    (39,077
    )
    
    
    (2,682
    )
    
    
    (18,146
    )Inventories
    
    
    (6,510
    )
    
    
    3,297
    
    
    
    18,806Other current assets
    
    
    (121
    )
    
    
    (6,337
    )
    
    
    (3,035
    )Accounts payable
    
    
    27,496
    
    
    
    4,192
    
    
    
    (9,425
    )Accrued expenses and other current liabilities
    
    
    16,464
    
    
    
    8,190
    
    
    
    (2,438
    )Other assets
    
    
    6,808
    
    
    
    2,244
    
    
    
    715Other liabilities
    
    
    3,644
    
    
    
    (52
    )
    
    
    2,404Net cash provided by operating activities
    
    
    49,650
    
    
    
    6,963
    
    
    
    23,893Cash flows from investing activities:Acquisition and related fees
    
    
    (8,000
    )
    
    
    (818,180
    )
    
    
    Capital expenditures
    
    
    (17,165
    )
    
    
    (78
    )
    
    
    (21,388
    )Proceeds from sale of assets
    
    
    184
    
    
    
    
    
    
    
    215Net cash used in investing activities
    
    
    (24,981
    )
    
    
    (818,258
    )
    
    
    (21,173
    )Cash flows from financing activities:Issuances of debt
    
    
    467
    
    
    
    585,110
    
    
    
    Financing fees and debt issuance cost
    
    
    
    
    
    
    (21,340
    )
    
    
    Debt repayments
    
    
    (40,134
    )
    
    
    
    
    
    
    (98
    )Stockholders equity contribution
    
    
    
    
    
    
    260,000
    
    
    
    Dividends and transfers to UIS, Inc., net
    
    
    
    
    
    
    
    
    
    
    (28,033
    )Other
    
    
    (28
    )Net cash provided by (used in) financing
activities
    
    
    (39,695
    )
    
    
    823,770
    
    
    
    (28,131
    )Effect of exchange rate changes on cash
    
    
    (27
    )
    
    
    (236
    )
    
    
    1,509Net increase (decrease) in cash and equivalents
    
    
    (15,053
    )
    
    
    12,239
    
    
    
    (23,902
    )Cash and cash equivalents at beginning of period
    
    
    46,130
    
    
    
    4,452
    
    
    
    28,354Cash and cash equivalents at end of period
    
    $
    31,077
    
    
    $
    16,691
    
    
    $
    4,452
 The accompanying notes are an integral part of these statements 6




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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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,752
    
    
    
    
    
    
    
    
    
    
    
    17,752
    
    
    $
    17,752Other comprehensive income (loss)Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (405
    )
    
    
    (405
    )
    
    
    (405
    )Foreign currency adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    499
    
    
    
    499
    
    
    
    499Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17,846UCI consolidated balance at June 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    261,357
    
    
    $
    8,997
    
    
    $
    
    
    
    $
    1,554
    
    
    $
    271,908
 The accompanying notes are an integral part of these statements. 7




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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 99.2% 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 December 31, 2003 consolidated
balance sheet reflects the preliminary allocation of the June 20, 2003
Acquisition purchase price. The June 30, 2004 consolidated balance sheet has
been reclassified to reflect the impact of the final allocation of the June 20,
2003 Acquisition purchase price. Such changes had no impact on previously
reported results of operations. The financial statements at June 30, 2004 and for the three and six month
periods ended June 30, 2004 and 2003 are unaudited. In the opinion of
management, these financial statements include all adjustments necessary for a
fair presentation of the financial position and results of operations for such
periods. All significant intercompany transactions and balances have been
eliminated. 8




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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. 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 and six month periods ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. Reclassifications The December 31, 2003 consolidated balance sheet reflects the preliminary
allocation of the June 20, 2003 Acquisition purchase price. The June 30, 2004
consolidated balance sheet has been reclassified to reflect the impact of the
final allocation of the June 20, 2003 Acquisition purchase price. Such changes
had no impact on previously reported results of operations. 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 $18.2 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 the aforementioned $18.2 million
of acquisition-related fees and expenses and $21.6 million of 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
allocation of the Acquisition purchase price, net deferred tax assets have been
calculated based on 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. 9




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) Allocation of the Acquisition Purchase Priceand Pro Forma Information The Acquisition is accounted for under the purchase method of accounting, and
accordingly, the results of operations of the acquired companies are included
in the results of UCI beginning on the June 20, 2003 acquisition date. The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of acquisition. (in millions)Current assets
    
    $
    474Property, plant and equipment
    
    
    214Goodwill
    
    
    167Other intangible assets
    
    
    97Deferred taxes
    
    
    7Other long term assets
    
    
    3Total assets acquired
    
    
    962Current liabilities
    
    
    93Long-term debt, excluding borrowings to fund the
Acquisition purchase price and related
transaction fees
    
    
    2Pension and other postretirement liabilities
    
    
    37Other long-term liabilities
    
    
    4Total liabilities assumedNet assets acquired
    
    $
    826
 Of the $97 million of acquired intangible assets, approximately $40 million was
assigned to trademarks that are not subject to amortization, $50 million was
assigned to customer relationships and $7 million was assigned to technologies.
The estimated useful lives of the customer relationships and technologies are
5  15 years. For the three and six months ended June 30, 2004, amortization
expense was $1.9 and $3.8 million. Accumulated amortization at June 30, 2004
was $7 million. The $167 million of goodwill resulting from the transaction and all but
approximately $10 million of the written-up values of the other assets are
deductible for income tax purposes. Below is unaudited pro forma data for the three and six months ended June 30,
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 allocation of the
June 20, 2003 Acquisition purchase price, (ii) the Companys capital structure
immediately after the Acquisition, (iii) the new Carlyle management fee (see
Note I), and (iv) income tax expense based on a C corporation filing status.
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. Pro Forma DataThree Months Ended
    
    Six Months EndedJune 30, 2003
    
    June 30, 2003(in thousands)Net sales
    
        $
    242,321
    
    
        $
    478,646Operating loss
    
    
    (6,705
    )
    
    
    (11,714
    )Net loss
    
    
        (11,833
    )
    
    
    (24,292
    )
 10




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) 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 effective with the
Acquisition. (See Note B) On the Acquisition date, the Company became a C
corporation and became subject to both Federal and state income taxes. UCIs
effective tax rate has increased accordingly. As part of the allocation of the
Acquisition purchase price, net deferred tax assets have been established and
calculated based on UCIs higher effective tax rate. NOTE D  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consist of the following (in
thousands): June 30,
    
    December 31,2004
    
    2003Salaries and wages
    
    $
    3,777
    
    
    $
    2,464Bonuses
    
    
    3,504
    
    
    
    5,712Vacation pay
    
    
    6,238
    
    
    
    5,252Pension and other postretirement liabilities
    
    
    2,988
    
    
    
    3,174Profit sharing
    
    
    597
    
    
    
    1,546Product returns
    
    
    14,787
    
    
    
    13,999Rebates and discounts due customers
    
    
    6,603
    
    
    
    4,902Other credits due customers
    
    
    2,433
    
    
    
    4,518Insurance
    
    
    7,413
    
    
    
    804Taxes payable
    
    
    6,146
    
    
    
    Interest
    
    
    1,951
    
    
    
    1,882Final payment of Acquisition purchase price
    
    
    
    
    
    
    8,000Other
    
    
    20,461
    
    
    
    14,476$
    76,898
    
    
    $
    66,729
 11




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE E  INVENTORIES The components of inventory consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Raw material
    
    $
    31,906
    
    
    $
    29,305Work in process
    
    
    49,199
    
    
    
    47,056Finished products
    
    
    116,450
    
    
    
    116,176Valuation reserves
    
    
    (22,248
    )
    
    
    (23,740
    )$
    175,307
    
    
    $
    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
assessment of on-hand inventories. The expense of inventory write-downs is
included in cost of sales. NOTE F  GEOGRAPHIC INFORMATION The Company had the following sales by country (in thousands): UCI
    
    Predecessor
    
    UCI
    
    PredecessorConsolidated
    
    Combined
    
    Consolidated
    
    CombinedThree Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003United States
    
    $
    229,048
    
    
    $
    201,008
    
    
    $
    438,182
    
    
    $
    399,401Canada
    
    
    8,313
    
    
    
    7,536
    
    
    
    17,500
    
    
    
    15,150United Kingdom
    
    
    10,684
    
    
    
    9,131
    
    
    
    20,919
    
    
    
    18,538Mexico
    
    
    5,701
    
    
    
    6,649
    
    
    
    12,918
    
    
    
    11,803Germany
    
    
    3,155
    
    
    
    2,566
    
    
    
    6,845
    
    
    
    6,029Spain
    
    
    749
    
    
    
    1,416
    
    
    
    1,962
    
    
    
    1,595Belgium
    
    
    1,660
    
    
    
    1,521
    
    
    
    3,654
    
    
    
    3,183France
    
    
    1,019
    
    
    
    1,887
    
    
    
    4,043
    
    
    
    4,070Other
    
    
    13,623
    
    
    
    10,607
    
    
    
    24,740
    
    
    
    18,877$
    273,952
    
    
    $
    242,321
    
    
    $
    530,763
    
    
    $
    478,646
 12




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) The above sales include combined sales of the Predecessor Company through the
June 20, 2003 Acquisition date. Approximately 90% of the six months ended June
30, 2003 amounts are combined sales of the Predecessor Company. Net long-lived assets by country are presented below (in thousands): June 30,
        
        December 31,2004
        
        2003United States
        
        $
        269,051
        
        
        $
        140,003United Kingdom
        
        
        36,010
        
        
        
        32,207Mexico
        
        
        12,987
        
        
        
        9,528Spain
        
        
        3,955
        
        
        
        3,362Canada
        
        
        281
        
        
        
        301Goodwill only for
            June 30, 2004
        
        
        166,559
        
        
        
        Preliminary allocation
            of the June 20, 2003 acquisition purchase price, not yet allocated
            to operating entities as of December 31, 2003
        
        
        
        
        
        
        310,633$
        488,843
        
        
        $
        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 Months
    
    Six MonthsEnded
    
    EndedJune 30, 2004
    
    June 30, 2004Net income as reported
    
    $
    10,217
    
    
    $
    17,752Stock option cost included in net income as reported, net of tax
    
    
    
    
    
    
    Stock option cost that would have been reported using the
fair value method, net of tax
    
    
    (520
    )
    
    
    (1,040
    )Pro forma net income had the fair value method been used
    
    $
    9,697
    
    
    $
    16,712
 13




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE H PENSION The following are the components of net periodic pension expense (in
thousands): UCI
    
    Predecessor
    
    UCI
    
    PredecessorConsolidated
    
    Combined
    
    Consolidated
    
    CombinedThree Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003Service cost
    
    $
    2,034
    
    
    $
    1,678
    
    
    $
    4,069
    
    
    $
    3,483Interest cost
    
    
    2,947
    
    
    
    2,387
    
    
    
    5,894
    
    
    
    5,071Expected return on plan assets
    
    
    (3,358
    )
    
    
    (3,147
    )
    
    
    (6,753
    )
    
    
    (6,684
    )Amortization of transition asset
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (88
    )Amortization of prior services
cost
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    270Amortization of unrecognized
gain
    
    
    
    
    
    
    (44
    )
    
    
    
    
    
    
    (93
    )$
    1,623
    
    
    $
    960
    
    
    $
    3,210
    
    
    $
    1,959
 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 $18,000 for
the six months ended June 30, 2003. Occasionally, UIS extended financing to
the Predecessor Company. Interest charges to the Predecessor Company on debt
to UIS were $96,000 and $180,000 for the three and six months ended June 30,
2003. These charges are recorded as interest expense. In addition, the
Predecessor Company extended financing to UIS. Interest income from UIS was
$698,000 and $1.4 million for the three and six months ended June 30, 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. 14




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) 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 or results of operations for a full year.
However, adjustment to the ultimate outcome of the matters could have a
material adverse effect on the results for a single quarter. 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 expenses 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
    
    CombinedSix Months
    
    Six MonthsEnded
    
    EndedJune 30, 2004
    
    June 30, 2003Liability, beginning of period
    
    $
    13,999
    
    
    $
    4,252Returned parts expense
    
    
    (13,874
    )
    
    
    (17,368
    )Additional loss provision
    
    
    14,662
    
    
    
    16,941Allocation of acquisition
purchase price adjustments
    
    
    
    
    
    
    9,600Liability, end of period
    
    $
    14,787
    
    
    $
    13,425
 15




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) 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 the Companys U.S. pension and
postretirement plans were required to be made in its 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 that are
classified as available-for-sale or held-to-maturity and 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 effect on the
Companys financial statements. NOTE M  OTHER INFORMATION Cash payments for interest and income taxes (net of refunds) (in thousands): UCI
    
    Predecessor
    
    UCI
    
    PredecessorConsolidated
    
    Combined
    
    Consolidated
    
    CombinedThree Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2004
    
    June 30, 2003
    
    June 30, 2004
    
    June 30, 2003Interest
    
    $
    11,902
    
    
    $
    234
    
    
    $
    15,837
    
    
    $
    323Income taxes
    
    
    656
    
    
    
    1,901
    
    
    
    2,555
    
    
    
    1,973
 On March 1, 2004, the Company made a voluntary prepayment of $40 million of
outstanding senior credit facility term loan borrowings. At June 30, 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. 16




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) 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. All goodwill is included in UCIs
balance sheet. The June 30, 2004 UCI Consolidated, UCI, Guarantor and Non-Guarantor balance
sheets that follow in this Note N include the final allocation of the June 20,
2003 Acquisition purchase price. For all other financial statements that
follow in this Note N, step-up amounts resulting from the preliminary
allocation of the Acquisition purchase price are included with UCI and were not
allocated to its subsidiaries. Consequently, for those financial statements,
the Guarantor and Non-Guarantor are reported on the Predecessors historical
basis. For all financial statements in Note N, except the June 30, 2004
balance sheet, purchase price allocations were based on preliminary estimates
of the fair value of assets acquired and liabilities assumed. 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 disclosures
regarding the Guarantor subsidiaries are not material to investors. 17




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##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Balance Sheet
June 30, 2004 (unaudited)(in thousands) UCI
        
        
        
        
        
        
        
        
        
        
        
        
        
        Non-Consolidated
        
        Eliminations
        
        UCI
        
        Guarantor
        
        GuarantorAssetsCurrent assetsCash and cash equivalents
        
        $
        31,077
        
        
        $
        
        
        
        
        $
        23,969
        
        $
        
        (50
        )
        
        $
        7,158Accounts receivable,
            net
        
        
        269,422
        
        
        
        
        
        
        
        
        
        
        
        
        246,829
        
        
        
        22,593Inventories
        
        
        175,307
        
        
        
        
        
        
        
        
        
        
        
        
        159,357
        
        
        
        15,950Deferred tax
        
        
        14,405
        
        
        
        
        
        
        
        
        144
        
        
        
        13,557
        
        
        
        704Other current assets
        
        
        9,347
        
        
        
        
        
        
        
        
        71
        
        
        
        2,515
        
        
        
        6,761Total current assets
        
        
        499,558
        
        
        
        
        
        
        
        
        24,184
        
        
        
        422,208
        
        
        
        53,166Property, plant and
            equipment, net
        
        
        214,018
        
        
        
        
        
        
        
        
        384
        
        
        
        165,887
        
        
        
        47,747Intercompany receivables
        
        
        
        
        
        
        
        (149,153)
        
        
        
        
        
        
        
        146,981
        
        
        
        2,172Investment in subsidiaries
        
        
        
        
        
        
        
        (707,556)
        
        
        
        698,759
        
        
        
        8,797Goodwill
        
        
        166,559
        
        
        
        
        
        
        
        
        166,559Other intangible
            assets, net
        
        
        89,722
        
        
        
        
        
        
        
        
        
        
        
        
        87,322
        
        
        
        2,400Deferred financing
            costs
        
        
        8,792
        
        
        
        
        
        
        
        
        8,792Pension and other
            assets
        
        
        9,752
        
        
        
        
        
        
        
        
        195
        
        
        
        9,274
        
        
        
        283Total assets
        
        $
        988,401
        
        
        $
        
        (856,709)
        
        
        $
        898,873
        
        $
        
        840,469
        
        
        $
        105,768Liabilities and
            shareholders equityCurrent liabilitiesAccounts payable
        
        $
        102,148
        
        
        $
        
        
        
        
        $
        
        
        $
        
        87,503
        
        
        $
        14,645Notes payable
        
        
        1,219
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,219Current maturities
            of long-term debt
        
        
        139
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        139Accrued expenses
            and other current liabilities
        
        
        76,898
        
        
        
        
        
        
        
        
        3,428
        
        
        
        65,679
        
        
        
        7,791Total current liabilities
        
        
        180,404
        
        
        
        
        
        
        
        
        3,428
        
        
        
        153,182
        
        
        
        23,794Long-term debt, less
            current maturities
        
        
        481,549
        
        
        
        
        
        
        
        
        481,324
        
        
        
        
        
        
        
        225Pension and other
            postretirement liabilities
        
        
        50,201
        
        
        
        
        
        
        
        
        
        
        
        
        35,664
        
        
        
        14,537Deferred tax
        
        
        1,567
        
        
        
        
        
        
        
        
        5,860
        
        
        
        (2,983
        )
        
        
        (1,310
        )Other liabilities
        
        
        2,772
        
        
        
        
        
        
        
        
        
        
        
        
        2,772Intercompany payables
        
        
        
        
        
        
        
        (149,153)
        
        
        
        136,353
        
        
        
        2,303
        
        
        
        10,497Total shareholders
            equity
        
        
        271,908
        
        
        
        
        (707,556)
        
        
        
        271,908
        
        
        
        649,531
        
        
        
        58,025Total liabilities
            and shareholders equity
        
        $
        988,401
        
        
        $
        
        (856,709)
        
        $
        
        898,873
        
        $
        
        840,469
        
        
        $
        105,768
 18




---



##### 



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
            postretirement liabilities
        
        
        50,038
        
        
        
        
        
        
        
        31,965
        
        
        
        18,073Deferred tax
        
        
        
        
        
        
        
        
        
        
        (4,050
        )
        
        
        699
        
        
        
        3,351Other liabilities
        
        
        2,172
        
        
        
        
        
        
        
        
        
        
        
        2,172Intercompany payables
        
        
        
        
        
        
        (124,033
        )
        
        
        114,185
        
        
        
        
        
        
        
        9,848Total 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
 19




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Consolidating Condensed Income Statement
Three Months Ended June 30, 2004 (Unaudited)(in thousands) UCI Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    Non-GuarantorNet sales
    
    $
    273,952
    
    
    $
    (3,718
    )
    
    $
    
    
    
    $
    245,791
    
    
    $
    31,879Cost of sales
    
    
    214,156
    
    
    
    (3,718
    )
    
    
    1,050
    
    
    
    190,899
    
    
    
    25,925Gross profit (loss)
    
    
    59,796
    
    
    
    
    
    
    
    (1,050
    )
    
    
    54,892
    
    
    
    5,954Operating expensesSelling and warehousing
    
    
    19,342
    
    
    
    
    
    
    
    (26
    )
    
    
    17,552
    
    
    
    1,816General and administrative
    
    
    12,127
    
    
    
    
    
    
    
    2,563
    
    
    
    6,719
    
    
    
    2,845Amortization of intangibles
    
    
    1,851
    
    
    
    
    
    
    
    1,851
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    26,476
    
    
    
    
    
    
    
    (5,438
    )
    
    
    30,621
    
    
    
    1,293Other income (expense)Interest income
    
    
    48
    
    
    
    (153
    )
    
    
    4
    
    
    
    109
    
    
    
    88Interest expense
    
    
    (9,070
    )
    
    
    153
    
    
    
    (9,054
    )
    
    
    (23
    )
    
    
    (146
    )Management fee expense
    
    
    (500
    )
    
    
    
    
    
    
    (500
    )
    
    
    
    
    
    
    Miscellaneous, net
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    68
    
    
    
    (27
    )Income (loss) before income taxes
    
    
    16,995
    
    
    
    
    
    
    
    (14,988
    )
    
    
    30,775
    
    
    
    1,208Income tax expense (benefit)
    
    
    6,778
    
    
    
    
    
    
    
    (6,186
    )
    
    
    12,035
    
    
    
    929Increase (decrease) before equity in earnings of
subsidiaries
    
    
    10,217
    
    
    
    
    
    
    
    (8,802
    )
    
    
    18,740
    
    
    
    279Equity in earnings of subsidiaries
    
    
    
    
    
    
    (18,004
    )
    
    
    19,019
    
    
    
    (1,015
    )
    
    
    Net income (loss)
    
    $
    10,217
    
    
    $
    (18,004
    )
    
    $
    10,217
    
    
    $
    17,725
    
    
    $
    279
 20




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Income Statement
June 21 to June 30, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    26,179
    
    
    $
    (358
    )
    
    $
    
    
    
    $
    23,299
    
    
    $
    3,238Cost of sales
    
    
    23,402
    
    
    
    (358
    )
    
    
    3,073
    
    
    
    18,637
    
    
    
    2,050Gross profit (loss)
    
    
    2,777
    
    
    
    
    
    
    
    (3,073
    )
    
    
    4,662
    
    
    
    1,188Operating expensesSelling and warehousing
    
    
    2,213
    
    
    
    
    
    
    
    
    
    
    
    2,071
    
    
    
    142General and administrative
    
    
    1,440
    
    
    
    
    
    
    
    425
    
    
    
    373
    
    
    
    642Amortization of intangible assets
    
    
    164
    
    
    
    
    
    
    
    164Operating income (loss)
    
    
    (1,040
    )
    
    
    
    
    
    
    (3,662
    )
    
    
    2,218
    
    
    
    404Other income (expense)Interest income
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    6
    
    
    
    (7
    )Interest expense
    
    
    (3,860
    )
    
    
    
    
    
    
    (3,859
    )
    
    
    15
    
    
    
    (16
    )Management fee expense
    
    
    (55
    )
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    1Miscellaneous, net
    
    
    111
    
    
    
    
    
    
    
    (110
    )
    
    
    204
    
    
    
    17Income (loss) before
            income taxes
    
    
    (4,844
    )
    
    
    
    
    
    
    (7,630
    )
    
    
    2,387
    
    
    
    399Income tax expense (benefit)
    
    
    (1,841
    )
    
    
    
    
    
    
    (1,849
    )
    
    
    2
    
    
    
    6Increase (decrease) before
            equity in earnings of subsidiaries
    
    
    (3,003
    )
    
    
    
    
    
    
    (5,781
    )
    
    
    2,385
    
    
    
    393Equity in earnings of subsidiaries
    
    
    
    
    
    
    (2,778
    )
    
    
    2,778Net income (loss)
    
    $
    (3,003
    )
    
    $
    (2,778
    )
    
    $
    (3,003
    )
    
    $
    2,385
    
    
    $
    393
 21




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Income Statement
April 1 to June 20, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    216,142
    
    
    $
    (3,001
    )
    
    $
    
    
    
    $
    194,278
    
    
    $
    24,865Cost of sales
    
    
    190,937
    
    
    
    (3,001
    )
    
    
    
    
    
    
    174,359
    
    
    
    19,579Gross profit
    
    
    25,205
    
    
    
    
    
    
    
    
    
    
    
    19,919
    
    
    
    5,286Operating expensesSelling and warehousing
    
    
    15,475
    
    
    
    
    
    
    
    
    
    
    
    13,814
    
    
    
    1,661General and administrative
    
    
    10,665
    
    
    
    
    
    
    
    
    
    
    
    6,628
    
    
    
    4,037Amortization of intangible assets
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Operating loss
    
    
    (965
    )
    
    
    
    
    
    
    
    
    
    
    (553
    )
    
    
    (412
    )Other income (expense)Interest income
    
    
    830
    
    
    
    
    
    
    
    
    
    
    
    777
    
    
    
    53Interest expense
    
    
    (121
    )
    
    
    
    
    
    
    
    
    
    
    (73
    )
    
    
    (48
    )Management fee expense
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    (14
    )Miscellaneous, net
    
    
    (255
    )
    
    
    
    
    
    
    
    
    
    
    184
    
    
    
    (439
    )Income (loss) before
            income taxes
    
    
    (514
    )
    
    
    
    
    
    
    
    
    
    
    346
    
    
    
    (860
    )Income tax expense (benefit)
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    (301
    )Net income (loss)
    
    $
    (491
    )
    
    $
    
    
    
    $
    
    
    
    $
    68
    
    
    $
    (559
    )
 22




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Income Statement
Six Months Ended June 30, 2004 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    530,763
    
    
    $
    (7,741
    )
    
    $
    
    
    
    $
    473,333
    
    
    $
    65,171Cost of sales
    
    
    415,420
    
    
    
    (7,741
    )
    
    
    3,021
    
    
    
    367,990
    
    
    
    52,150Gross profit (loss)
    
    
    115,343
    
    
    
    
    
    
    
    (3,021
    )
    
    
    105,343
    
    
    
    13,021Operating expensesSelling and warehousing
    
    
    38,387
    
    
    
    
    
    
    
    (26
    )
    
    
    34,722
    
    
    
    3,691General and administrative
    
    
    24,199
    
    
    
    
    
    
    
    5,154
    
    
    
    13,322
    
    
    
    5,723Amortization of intangible assets
    
    
    3,702
    
    
    
    
    
    
    
    3,702
    
    
    
    Operating income (loss)
    
    
    49,055
    
    
    
    
    
    
    
    (11,851
    )
    
    
    57,299
    
    
    
    3,607Other income (expense)Interest income
    
    
    113
    
    
    
    (231
    )
    
    
    9
    
    
    
    222
    
    
    
    113Interest expense
    
    
    (18,701
    )
    
    
    231
    
    
    
    (18,672
    )
    
    
    (40
    )
    
    
    (220
    )Management fee expense
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    Miscellaneous, net
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    57Income (loss) before
            income taxes
    
    
    29,593
    
    
    
    
    
    
    
    (31,514
    )
    
    
    57,550
    
    
    
    3,557Income tax expense (benefit)
    
    
    11,841
    
    
    
    
    
    
    
    (12,479
    )
    
    
    22,477
    
    
    
    1,843Increase (decrease) before
            equity in earnings of subsidiaries
    
    
    17,752
    
    
    
    
    
    
    
    (19,035
    )
    
    
    35,073
    
    
    
    1,714Equity in earnings of subsidiaries
    
    
    
    
    
    
    (35,335
    )
    
    
    36,787
    
    
    
    (1,452
    )
    
    
    Net income (loss)
    
    $
    17,752
    
    
    $
    (35,335
    )
    
    $
    17,752
    
    
    $
    33,621
    
    
    $
    1,714
 23




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Income Statement
January 1 to June 20, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet sales
    
    $
    452,467
    
    
    $
    (6,912
    )
    
    $
    
    
    
    $
    405,003
    
    
    $
    54,376Cost of sales
    
    
    378,211
    
    
    
    (6,912
    )
    
    
    
    
    
    
    344,218
    
    
    
    40,905Gross profit
    
    
    74,256
    
    
    
    
    
    
    
    
    
    
    
    60,785
    
    
    
    13,471Operating expensesSelling and warehousing
    
    
    33,585
    
    
    
    
    
    
    
    
    
    
    
    30,216
    
    
    
    3,369General and administrative
    
    
    18,928
    
    
    
    
    
    
    
    
    
    
    
    10,526
    
    
    
    8,402Amortization of intangible assets
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    60Operating income
    
    
    21,683
    
    
    
    
    
    
    
    
    
    
    
    19,983
    
    
    
    1,700Other income (expense)Interest income
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    1,449
    
    
    
    263Interest expense
    
    
    (245
    )
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    (318
    )Management fee expense
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    (27
    )Miscellaneous, net
    
    
    (408
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (401
    )Income before income taxes
    
    
    22,724
    
    
    
    
    
    
    
    
    
    
    
    21,507
    
    
    
    1,217Income tax expense
    
    
    942
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    449Net income
    
    $
    21,782
    
    
    $
    
    
    
    $
    
    
    
    $
    21,014
    
    
    $
    768
 24




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Consolidating Condensed Statement of Cash Flows
Six months ended June 30, 2004 (unaudited)(in thousands) UCI
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Consolidated
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    49,650
    
    
    $
    
    
    
    $
    38,943
    
    
    $
    9,194
    
    
    $
    1,513Cash flows from investing activities:Acquisition and related fees
    
    
    (8,000
    )
    
    
    
    
    
    
    (8,000
    )Capital expenditures
    
    
    (17,165
    )
    
    
    
    
    
    
    (110
    )
    
    
    (13,772
    )
    
    
    (3,283
    )Proceeds from sale of assets
    
    
    184
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    104Net cash used in investing
activities
    
    
    (24,981
    )
    
    
    
    
    
    
    (8,110
    )
    
    
    (13,692
    )
    
    
    (3,179
    )Cash flows from financing activities:Debt repayments
    
    
    (40,134
    )
    
    
    
    
    
    
    (40,000
    )
    
    
    
    
    
    
    (134
    )Issuance of debt
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    467Other
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Net cash used in financing
activities
    
    
    (39,695
    )
    
    
    
    
    
    
    (40,028
    )
    
    
    
    
    
    
    333Effect of exchange rate changes on cash
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27
    )Net decrease in cash and equivalents
    
    
    (15,053
    )
    
    
    
    
    
    
    (9,195
    )
    
    
    (4,498
    )
    
    
    (1,360
    )Cash and cash equivalents at beginning of
period
    
    
    46,130
    
    
    
    
    
    
    
    33,164
    
    
    
    4,448
    
    
    
    8,518Cash and cash equivalents at end of period
    
    $
    31,077
    
    
    $
    
    
    
    $
    23,969
    
    
    $
    (50
    )
    
    $
    7,158
 25




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Statement of Cash Flows
June 21 to June 30, 2003 (unaudited)(in thousands) Predecessor
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Combined
    
    Eliminations
    
    UCI
    
    Guarantor
    
    GuarantorNet cash provided by operating activities
    
    $
    6,963
    
    
    $
    
    
    
    $
    1,477
    
    
    $
    3,806
    
    
    $
    1,680Cash flows from investing activities:Acquisition and related fees
    
    
    (818,180
    )
    
    
    
    
    
    
    (818,180
    )Capital expenditures
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (30
    )Proceeds from sale of assetsNet cash used in investing
activities
    
    
    (818,258
    )
    
    
    
    
    
    
    (818,180
    )
    
    
    (48
    )
    
    
    (30
    )Cash flows from financing activities:Debt borrowings
    
    
    585,110
    
    
    
    
    
    
    
    585,000
    
    
    
    
    
    
    
    110Financing fees and debt issuance cost
    
    
    (21,340
    )
    
    
    
    
    
    
    (21,340
    )Stockholders equity contribution
    
    
    260,000
    
    
    
    
    
    
    
    260,000Dividends and transfers to UIS, Inc., netNet cash  provided by
financing activities
    
    
    823,770
    
    
    
    
    
    
    
    823,660
    
    
    
    
    
    
    
    110Effect of exchange rate changes on cash
    
    
    (236
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (236
    )Net increase in cash and equivalents
    
    
    12,239
    
    
    
    
    
    
    
    6,957
    
    
    
    3,758
    
    
    
    1,524Cash and cash equivalents at beginning of
period
    
    
    4,452
    
    
    
    
    
    
    
    
    
    
    
    2,368
    
    
    
    2,084Cash and cash equivalents at end of period
    
    $
    16,691
    
    
    $
    
    
    
    $
    6,957
    
    
    $
    6,126
    
    
    $
    3,608
 26




---



##### 



United Components, Inc. Notes to Condensed Financial Statements (unaudited) NOTE N (continued) Combining Condensed Statement of Cash Flows
January 1 to June 20, 2003 (unaudited)(in thousands) Predecessor
        
        
        
        
        
        
        
        
        
        
        
        
        
        Non-Combined
        
        Eliminations
        
        UCI
        
        Guarantor
        
        GuarantorNet cash provided
            by operating activities
        
        $
        23,893
        
        
        $
        
        
        
        $
        
        
        
        $
        21,650
        
        
        $
        2,243Cash flows from investing
            activities:Capital expenditures
        
        
        (21,388
        )
        
        
        
        
        
        
        
        
        
        
        (16,026
        )
        
        
        (5,362
        )Proceeds from sale
            of assets
        
        
        215
        
        
        
        
        
        
        
        
        
        
        
        34
        
        
        
        181Net cash used in
            investing activities
        
        
        (21,173
        )
        
        
        
        
        
        
        
        
        
        
        (15,992
        )
        
        
        (5,181
        )Cash flows from financing
            activities:Debt borrowings
        
        
        (98
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (98
        )Dividends and transfers
            to UIS, Inc., net
        
        
        (28,033
        )
        
        
        
        
        
        
        
        
        
        
        (10,527
        )
        
        
        (17,506
        )Net cash used in
            financing activities
        
        
        (28,131
        )
        
        
        
        
        
        
        
        
        
        
        (10,527
        )
        
        
        (17,604
        )Effect of exchange
            rate changes on cash
        
        
        1,509
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        1,509Net decrease in cash
            and equivalents
        
        
        (23,902
        )
        
        
        
        
        
        
        
        
        
        
        (4,869
        )
        
        
        (19,033
        )Cash and cash equivalents
            at beginning of period
        
        
        28,354
        
        
        
        
        
        
        
        
        
        
        
        7,237
        
        
        
        21,117Cash and cash equivalents
            at end of period
        
        $
        4,452
        
        
        $
        
        
        
        $
        
        
        
        $
        2,368
        
        
        $
        2,084
 27




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview Sales.United Components, which we also refer to as the Company, is
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 6,900 employees as of June 30, 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, warranty costs, 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, global demand for steel is high and is resulting in supplier-imposed
surcharges for this raw material. While we have been and expect to continue to
be able to obtain sufficient quantities to satisfy our needs, we have been
required to pay significantly higher prices for the material. As a result, the
Company is in the process of implementing price increases on its products with
high steel content in order to reflect this cost increase. 28




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##### 



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. Cash Generation.Net cash from operating activities was $49.7 million.
Capital expenditures were $17.2 million. The net cash generated from these
activities was $32.5 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.
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. 29




---



##### 



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
exists, such as an operating loss or cash outflow from operating activities or
a significant adverse change in the business or market place. 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. 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 June 30, 2004 and December
31, 2003 balance sheets. 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. 30




---



##### 



Results of Operations The following table was derived from the United Components, Inc. consolidated
income statements for the 2004 periods presented and from the United
Components, Inc. consolidated and the Predecessor Company combined income
statements for the 2003 periods. To enable meaningful comparisons, the
consolidated results of United Components, Inc., after the June 20, 2003
Acquisition, and the combined results of the Predecessor Company, before the
June 20, 2003 Acquisition, have been combined. The amounts are presented in
millions of dollars. Three Months
        
        Six MonthsEnded
        
        EndedJune 30,
        
        June 30,2004
        
        2003
        
        2004
        
        2003Net sales
        
        $
        274.0
        
        
        $
        242.3
        
        
        $
        530.8
        
        
        $
        478.6Cost of Sales
        
        
        214.2
        
        
        
        214.3
        
        
        
        415.4
        
        
        
        401.6Gross profit
        
        
        59.8
        
        
        
        28.0
        
        
        
        115.4
        
        
        
        77.0Operating expensesSelling and warehousing
        
        
        19.3
        
        
        
        17.7
        
        
        
        38.4
        
        
        
        35.8General and administrative
        
        
        12.1
        
        
        
        12.1
        
        
        
        24.2
        
        
        
        20.4Amortization of intangible
            assets
        
        
        1.9
        
        
        
        0.2
        
        
        
        3.7
        
        
        
        0.2Operating income
        
        
        26.5
        
        
        
        (2.0
        )
        
        
        49.1
        
        
        
        20.6Interest, net
        
        
        (9.0
        )
        
        
        (3.2
        )
        
        
        (18.6
        )
        
        
        (2.4
        )Management fee expense
        
        
        (0.5
        )
        
        
        (0.1
        )
        
        
        (1.0
        )
        
        
        (0.1
        )Miscellaneous, net
        
        
        
        
        
        
        (0.1
        )
        
        
        0.1
        
        
        
        (0.3
        )Income before income
            taxes
        
        
        17.0
        
        
        
        (5.4
        )
        
        
        29.6
        
        
        
        17.8Income taxes
        
        
        6.8
        
        
        
        (1.9
        )
        
        
        11.8
        
        
        
        (0.9
        )Net income
        
        $
        10.2
        
        
        $
        (3.5
        )
        
        $
        17.8
        
        
        $
        18.7Pro forma net income,
            adjusted only for change in tax filing status (1)
        
        $
        10.2
        
        
        $
        (3.3
        )
        
        $
        17.8
        
        
        $
        11.2
   (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. 31




---



##### 



Three Months Ended June 30, 2004 Compared with the Three Months Ended June 30,
2003 Net sales. Net sales increased $31.7 million, or 13.1%, from $242.3
million in the 2003 quarter to $274 million in the 2004 quarter. The increase
was volume driven, with increases in all market channels. Cost of sales.Cost of sales was $214.2 million in the 2004 quarter
compared to $214.3 million in the 2003 quarter. The 2004 amount includes the
cost associated with the higher 2004 volume. The 2003 amount includes $19.8
million of one-time cost adjustments. Both quarters were adversely affected
by non-cash Acquisition-related charges, which totaled $1 million in the 2004
quarter and $2.9 million in the 2003 quarter. The aforementioned $19.8 million of one-time adjustments in 2003 include:
inventory valuation adjustments  ($12.3 million); provisions for
environmental issues  ($4.6 million), and provisions for patent disputes,
product line relocations, and costs relating to the upgrade of the Albion,
Illinois manufacturing facility  ($2.9 million). The aforementioned non-cash Acquisition-related charges include: (i) $2.6
million of cost in the 2003 quarter, due to the sale of inventory that was
written-up above cost to market, as part of the allocation of the Acquisition
purchase price; and (ii) higher depreciation expense of $1 million in the 2004
quarter and $0.3 million in the 2003 quarter resulting from the
Acquisition-related step-up of property, plant and equipment. The higher
depreciation will continue in the long-term. The additional cost of selling
the stepped-up inventory on-hand at the Acquisition date stopped adversely
affecting results in the first quarter of 2004 when the last of such inventory
was sold. Excluding the $19.8 million of one-time adjustments and the $2.6 million of
Acquisition-related expense resulting from the sale of the written-up
inventory, gross profit in the 2003 quarter would have been $50.4 million, or
20.8% of sales. This compares to $59.8 million, or 21.8%, in the 2004
quarter. The one percentage point increase in gross margin percent in 2004 is
due to gains in manufacturing efficiency, procurement savings, and increased
sales volume. The improvement over the second quarter of 2003 would have been
larger if not for the adverse effect on 2004 of $0.7 million more depreciation
that resulted from the Acquisition-related step-up of property, plant and
equipment. The additional $0.7 million of Acquisition-related depreciation
expense reduced the second quarter 2004 gross margin percentage by 0.3%. Selling and warehousing expenses. Selling and warehousing expenses of
$19.3 million for the 2004 quarter were $1.6 million higher than the 2003
quarter. In the 2004 quarter, this cost was 7.0% of sales compared to 7.3% in
the 2003 quarter. General and administrative expenses. General and administrative
expenses for the 2004 quarter were $12.1 million compared to $12.1 million in
the 2003 quarter. Expense for the second quarter of 2003 includes a $1.9
million higher provision for bad debt expense. Excluding this expense from the
2003 quarter, general and administrative expense was $1.9 million, or 18.6%,
higher in the second quarter of 2004 than in the 2003 second quarter. This
increase is due to (i) the higher cost of operating as a stand-alone company
after the Acquisition; and (ii) the Companys investment in processes and
management talent necessary to drive improvements in future operational
efficiency. Interest, net. Net interest expense increased from $3.2 million in the
2003 quarter to $9 million in the 2004 quarter. The $5.8 million increase
includes $5 million more of interest expense on Acquisition-related debt, and
$0.8 million lower interest income on loans to the Predecessor Companys
previous owner, which were canceled in connection with the Acquisition. Income taxes. The change in income taxes is driven by changes in
pre-tax income plus the use of a 40.7% 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. 32




---



##### 



Net Income. Due to the factors described above, net income increased
$13.7 million from a $3.5 million net loss in the 2003 quarter to $10.2 million
of net income in the 2004 quarter. Six Months Ended June 30, 2004 Compared with the Six Months Ended June 30, 2003 Net sales. Net sales increased $52.2 million, or 10.9%, from $478.6
million in the first half of 2003 to $530.8 million in the first half of 2004.
The increase was volume driven, with increases in all market channels. Cost of sales.Cost of sales was $415.4 million in the first half of
2004 compared to $401.6 million in the 2003 first half. The 2004 amount
includes the cost associated with the higher 2004 sales volume. The 2003
amount includes $21.3 million of one-time cost adjustments. Both periods were
adversely affected by non-cash Acquisition-related charges, which totaled $3
million in the first half of 2004 and $2.9 million in the first half of 2003. The aforementioned $21.3 million one-time adjustments in 2003 include:
inventory valuation adjustments  ($12.6 million); provisions for
environmental issues  ($4.6 million), and provisions for patent disputes,
product line relocations, costs relating to the upgrade of the Albion, Illinois
manufacturing facility, and cost associated with the consolidation of our
European filtration manufacturing operations  ($4.1 million). The aforementioned non-cash Acquisition-related charges include; (i) cost of
$0.5 million in the first half of 2004 and $2.6 million in the first half of
2003, due to the sale of inventory that was written-up above cost to market
value, as part of the allocation of the Acquisition purchase price: and (ii)
higher depreciation expense of $2.5 million in the first half of 2004 and
$0.3 million in the first half of 2003 resulting from the Acquisition-related
step-up of property, plant and equipment. The higher depreciation expense will
continue in the long-term. All of the additional cost of selling the
stepped-up inventory on-hand at the Acquisition date was realized in full by
the end of first quarter of 2004. Excluding the $0.5 million of non-cash Acquisition-related costs resulting from
the sale of the written-up inventory, gross profit for the first half of 2004
would have been $115.9 million, or 21.8% of sales. Excluding the $21.3 of
million one-time adjustments and the $2.6 million of non-cash
Acquisition-related costs resulting from the sale of the written-up inventory,
gross profit in the first half of 2003 would have been $100.9 million, or 21.1%
of sales. The 0.7% improvement in gross margin percentage in 2004 is due to
gains in manufacturing efficiency, procurement savings, and increased sales
volume. The 0.7% improvement in 2004 would have been larger if not for the
adverse effect on 2004 of $2.2 million more depreciation that resulted from the
Acquisition-related step-up of property, plant and equipment. The additional
$2.2 million of Acquisition-related depreciation expense reduced the 2004 gross
margin percentage by 0.4%. Selling and warehousing expenses. Selling and warehousing expenses of
$38.4 million for the first half of 2004 are $2.6 million higher than the first
half of 2003. In the 2004 six month period, this cost was 7.2% of sales
compared to 7.5% in the first half of 2003. General and administrative expenses. General and administrative
expenses for the first half of 2004 were $24.2 million compared to $20.4
million in the first half of 2003. The 2003 six month period includes a $1.6
million higher provision for bad debt expense. Excluding this expense, general
and administrative expense is $5.4 million higher in the first half of 2004
than in the first half of 2003. This increase was due to (i) the higher cost
of operating as a stand-alone company after the Acquisition; and (ii) the
Companys investment in processes and management talent necessary to drive
improvements in future operational efficiency. Interest, net. Net interest expense increased from $2.4 million in the
first half of 2003 to $18.6 million in the first half of 2004. The $16.2
million increase included: (i) $0.6 million of accelerated write-off of debt
issuance costs due to voluntary prepayments of debt; (ii) $13.9 million of
interest expense on Acquisition-related debt; and
(iii) $1.7 million lower interest income on loans to the Predecessor Companys
previous owner, which were canceled in connection with the Acquisition. 33




---



##### 



Income taxes. The change in income taxes is driven by changes in
pre-tax income plus the use of a 40.7% 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 decreased
$0.9 million from $18.7 million in the 2003 quarter to $17.8 million of net
income in the 2004 quarter. 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 June 30, 2004, the Company had $31.1 million of cash and
$488.6 million of debt outstanding (before netting unamortized debt issuance
cost). At the $488.6 million debt level, annual interest expense, including
amortization of deferred financing costs and debt issuance cost, is
approximately $35.4 million at June 30, 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 $0.4 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. At June 30, 2004 there were no outstanding revolving credit
borrowings; however, $3.4 million of revolving credit borrowing capacity has
been used to support outstanding letters of credit. On May 27, 2004, the Company amended its credit agreement to permit sales of
and liens on receivables which are being sold pursuant to factoring
arrangements, subject to certain limitations. The Company intends to factor
its receivables when it is economically beneficial to do so. The Company is in
the process of establishing a factoring relationship with one of its customers,
which will result in the sale of approximately $6 million of receivables. Because of voluntary prepayments, 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. 34




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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 six months ended June 30,
2004 and 2003 was $49.7 million and $30.9 million, respectively. The $18.8
million increase in net cash provided by operating activities in the first half
of 2004 as compared to the first half of 2003 was attributable primarily to
higher profit before depreciation and amortization, lower uses to fund working
capital, and reductions in long-term deferred tax assets. Significant 2004
sales increases resulted in the need to fund $39.1 million of accounts
receivable. 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 six months ended June 30, 2004 and
2003 were $17.2 million and $21.5 million, respectively. Approximately $7.8
and $6.6 million of the 2004 and 2003 six month capital expenditures were
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 expenditures 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 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. See Note B to the Condensed Financial Statements for information
regarding 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 the Companys U.S. pension and
postretirement plans were required to be made in its 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. 35




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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, that 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 that are
classified as available-for-sale or held-to-maturity and 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 effect on the
Companys financial statements. 36




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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 exposure. 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 operations. 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 from 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 June 30, 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 of debt. 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. 37




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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. 38




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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 June 30, 2004. The Company filed a current report on Form 8-K dated May 11, 2004 with respect
to announcing financial results for the quarter ended March 31, 2004 (Items 7
and 12). The Company filed a current report on Form 8-K dated June 8, 2004 with respect
to an amendment to its credit facility on May 27, 2004 (Items 5 and 7). 39




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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: August 13, 2004
    
    By:
    
    /s/ Charles T. DicksonName:
    
    Charles T. DicksonTitle:
    
    Chief Financial Officer
 40