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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 333-26729
KEY PLASTICS L.L.C.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 35-1997449
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
21333 HAGGERTY ROAD SUITE 200
NOVI, MICHIGAN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
48375
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 449-6100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether 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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
non-affiliates: Not Applicable. The Company is privately held.
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ITEM 1. BUSINESS
THE COMPANY - BACKGROUND
Key Plastics L.L.C., together with its subsidiaries (collectively, the
"Company" or "Key"), provides the global automotive industry with comprehensive
plastics manufacturing capabilities, including design and engineering,
high-precision injection molding, automated manufacturing and assembly, class A
surface plastic painting and material and product testing. The Company operates
from its world headquarters and technical center, 16 manufacturing and three
paint facilities in North America and 13 facilities in Europe with painting
and manufacturing capabilities. The Company supplies highly engineered plastic
components and assemblies to automotive original equipment manufacturers and
Tier I suppliers around the world. The Company believes it is the largest
independent automotive supplier of plastic door handle assemblies, decorative
bezels and pressurized bottles in North America. After the acquisition of
Foggini, discussed below, the Company presently makes or is capable of
making every interior trim component in the under 700 ton press range.
Key Plastics, Inc. was formed in January 1986 to acquire the plastics
manufacturing operations of Key International Manufacturing, Inc., which had
been involved in plastics manufacturing for over 20 years. On February 9, 1998
Key Plastics, Inc. contributed substantially all of its assets and liabilities
to Key Plastics Technology, L.L.C. ("Technology"), a wholly owned subsidiary
(the "Restructuring"). Subsequently, Technology changed its name to Key Plastics
L.L.C. and Key Plastics, Inc. changed its name to Key Plastics Holdings, Inc.
("Holdings"). Pursuant to the Restructuring, the Company became the primary
obligor under the Credit Agreement dated March 24, 1997 by and among the Company
(as defined therein), the lenders party thereto from time to time and NBD Bank,
as agent for such lenders, as amended (the "Senior Credit Agreement"); the 14%
Senior Notes due 1999 (the "Senior Notes") issued under the Indenture, dated
November 17, 1992, by and between the Company and Society National Bank (now
Mellon Bank), as amended; and the 10 1/4% Senior Subordinated Notes due 2007
(the "Senior Subordinated Notes") issued under the Indenture dated March 24,
1997 by and between the Company and Marine Midland Bank, as Trustee (the
"Indenture"). Also, on February 9, 1998, a third party investor purchased a 25%
equity interest in the Company (the "Investment").
The Company is privately owned by Holdings and a third party investor.
The Company has elected to be taxed as a limited liability company. The Company
has made, and intends to continue to make, distributions to its members to pay
their income tax obligations as a result of the Company's pass through status.
RECENT DEVELOPMENTS
On March 29, 1999 the Company, through its subsidiary, Foggini-Key
Europe, S.a.r.l., ("Foggini-Key") acquired the Foggini group of companies
("Foggini"), headquartered in Turin, Italy. Foggini is a manufacturer and
assembler of plastic injection molded components for automotive OEMs and Tier 1
suppliers in Western Europe. The acquisition of Foggini adds nine manufacturing
facilities spread throughout Italy, France, Switzerland and the Czech Republic.
Foggini has a product offering of interior trim components and exterior parts
that compliments the existing Key business. For 1998 Foggini expects to report
sales of approximately $130 million.
On March 26, 1999, the Company refinanced a portion of its existing
term loans and all of its revolving debt under the Senior Credit Agreement dated
March 24, 1997 and incurred new debt through amendment to, and restatement of
the Senior Credit Agreement (the "New Senior Credit Facility"). The new debt was
principally used to fund the Foggini acquisition consummated on March 29, 1999.
The New Senior Credit Facility includes two amortizing term loans totaling $180
million and a $120 million revolving credit facility. Final maturity for the
amortizing term loans occurs in 2005 and 2006. The maturity for the revolving
credit facility occurs in 2006.
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PRODUCTS
The Company is a global designer and manufacturer of highly engineered,
value-added plastics components and assemblies for automobiles, sport utility
vehicles, light trucks and minivans. The Company considers itself to be the
largest independent supplier of plastic door handle assemblies, radio bezels and
pressurized bottles. The Company is also a major supplier of speaker grilles,
air louvers, electrical connector covers and interior trim components. These
components are typically more difficult for a customer to produce in-house or
for a competitor to replicate due to the substantial investment required in
specialized engineering, design and manufacturing capabilities. Management
believes such products have strong worldwide growth potential and high margin
opportunity.
The Company offers comprehensive manufacturing capabilities, including
design and engineering, high-precision injection molding, automated
manufacturing and assembly, plastics painting and material and product testing.
The Company also has extensive tool making capabilities and designs and builds
approximately one-third of the tooling used in the manufacture of its products.
INTERNATIONAL OPERATIONS
The Company has acquired strategic positions in Europe in order to
serve its customers on a global basis. In 1998 the UK, Portugal and France
accounted for approximately 25% of the Company's net sales. This expansion
resulted in the addition of new customers such as Rover, Renault and Sommer
Allibert. On March 29, 1999 the Company, through Foggini-Key acquired Foggini, a
manufacturer and assembler of plastic injection molded components for automotive
OEMs and Tier 1 suppliers in Western Europe. The acquisition of Foggini adds
nine manufacturing facilities spread throughout Italy, France, Switzerland and
the Czech Republic. Foggini has a product offering of interior trim components
and exterior parts that compliments Key's existing business. Foggini expands the
Company's customer base to include Fiat, Volkswagen and several other important
Western OEMs and Tier 1 suppliers. The Foggini acquisition adds significantly to
the base of sales to Renault and the PSA Group. For 1998 Foggini expects to
report sales of approximately $130 million.
The Company prices its products sold throughout Europe and Canada in
the currency of the country shipping the products and, in the United States and
Mexico, in United States dollars. To the extent that prices are in the currency
of the country in which the products are sold, the prices of such products in
dollars will vary as the value of the dollar fluctuates against such currencies.
There can be no assurance that there will not be increases in the value of the
dollar against such currencies that will reduce the dollar return to the Company
on the sale of its products in such countries.
The Company is presently engaged in limited currency hedging of specific foreign
currency transactions, primarily in France and the UK.
MANUFACTURING OPERATIONS
Product Manufacturing. The Company's core manufacturing technologies
are small press injection molding, automated assembly, pad printing, painting,
laser etching, sonic welding and hot plate welding. As part of its strategy to
supply highly engineered value-added components, the Company has substantially
expanded the use of automation and robotics in its assembly operations. These
capabilities enhance quality, reliability and reduce labor costs.
Product Processes. The Company has organized its production processes
to minimize the number of manufacturing functions and the frequency of material
handling. In addition, the Company utilizes, where practical, a flexible
manufacturing process which uses cellular manufacturing to allow a continuous
flow of parts with minimal set-up time. Such cellular manufacturing utilizes
machine vision, robotics and a palletized approach and can be easily converted
from one product application to the other with re-programming and new pallets at
a cost lower than traditional work cell approach.
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Paint Operations. The Company believes its broad base of Class A paint
application capabilities positions it well for supplying the domestic and
foreign exterior trim market. The Company is able to provide both high-bake,
high solids painting, which is traditionally preferred by domestic OEMs, and
low-bake, two component painting, which is preferred by foreign OEMs. The
Company has also developed paint application technology utilizing innovative
robotic applications, which has enabled the Company to reduce costs by improving
paint transfer efficiency.
Quality. The Company has a strong quality assurance program and has
made substantial investments in technology to monitor and improve quality.
Included among these investments are CAD/CAM equipment, statistical process
control systems, failure mode and effect systems, process-controlled molding
machines and automated assembly equipment. In addition, the Company has material
and product test laboratories that monitor product reliability and are
accredited by its major OEM customers. The Company's engineering functions are
ISO 9001 certified. All of the Company's eligible manufacturing facilities are
QS 9000 registered. One new facility is working through the required six month
start up period.
THE OEM SUPPLIER INDUSTRY
The Company competes in the global automotive original equipment
manufacturer supplier industry. The OEM supplier industry is cyclical and, in
large part, dependent upon the overall strength of consumer demand for light
trucks and passenger cars. The automotive industry is currently characterized by
a number of factors which affect the Company. These factors include (i) OEMs'
demand for suppliers with efficient, comprehensive research and development,
design and manufacturing capabilities, (ii) consolidation of suppliers as a
result of increasing OEM demands, and (iii) the globalization of the OEM
supplier base. As a result of these factors, suppliers must (i) continually
demonstrate the ability to satisfy, in cost efficient ways, the OEMs' design and
manufacturing demands and (ii) establish international positions which can
effectively supply and service the OEMs.
Management believes the Company has achieved a leadership position and
is well positioned to benefit from emerging trends in global automotive markets
as a result of several key competitive strengths. These competitive strengths
include: (i) demonstrated technological expertise and innovation in developing
highly engineered systems and components; (ii) strong relationships with major
OEMs; (iii) an emphasis on quality management; (iv) the ability to supply its
customers globally; and (v) state of the art equipment and facilities.
RAW MATERIALS
The principal raw materials used by the Company are engineered plastic
resins such as nylon, polypropylene and ABS, all of which are available from
several suppliers. The Company has no reason to believe that there will not be
an ample supply of its raw materials for the reasonably foreseeable future, but
the Company cannot make any prediction as to the future price of such raw
materials. The Company is generally not able to pass on to its customers any
increase in raw material costs. As the Company has grown, its increased
purchasing volume, in many cases, has enabled it to hold or reduce raw material
costs. As a result, the Company has not experienced a significant increase in
the prices of its raw materials in recent years.
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CUSTOMERS
The Company's direct sales to its principal customers, Ford Automotive
Operations, including its subsidiary Visteon ("Ford"), General Motors
Corporation ("GM"), and DaimlerChrysler Corporation ("Chrysler") accounted for
approximately 37%, 14% and 9%, respectively, of the Company's consolidated net
sales in fiscal year 1998. If sales to those OEMs' Tier I suppliers are
included, the Company's sales to Ford, GM and Chrysler accounted for
approximately 52%, 16% and 14%, respectively, of the Company's consolidated net
sales in fiscal year 1998. The Company's business is dependent upon consumer
demand for the specific models and product lines that incorporate the Company's
parts. The Company's arrangements with its OEMs are typically in the form of
purchase orders that may be canceled by the OEMs. However, the Company believes
cancellation of purchase orders is rare, due, in part, to the OEM production
interruption likely to be caused by changing suppliers. The loss of any of these
customers could adversely affect the Company's future revenues.
COMPETITION
The Company's business is highly competitive. A large number of actual
and potential competitors exist, including the internal component operations of
the OEMs as well as independent suppliers. Some of the Company's competitors
include Donnelly Corporation, ADAC Corporation, Summit Plastics, LDM
Technologies, Inc., Fawn Industries, Inc., Lacks Industries, Inc., Geiger
Technik., Seigal Roberts, Ventura Group, MGI Coutier, Mecaplast and
Manducher. None of these competitors competes with the Company along all
product lines. The Company competes on the basis of quality, cost, timely
delivery, customer service and, increasingly, on the basis of design and
engineering capability, painting capability, new product innovation and product
testing capability.
The Company's business is increasingly competitive due to the
consolidation of the supply base resulting from changing OEM policies. The
Company principally competes for new business both at the beginning of
development of new models and upon the redesign of existing models by its major
customers. New model development generally begins two to four years prior to the
marketing of such models to the public. Due to the large investment by OEMs in
tooling and the long lead time required to commence production, customers
generally do not change suppliers once a part is put into production.
EMPLOYEES
At December 31, 1998, the Company employed approximately 5,000 persons
in North America and Europe. The Company believes that relations with its
employees are good. Hourly employees at the Company's Plymouth, Michigan
facility (approximately 9% of all employees) and its two U.K. plants
(approximately 13% of all employees) are the only employees represented by
collective bargaining units. Workers at the plant in Belleme, France are
represented by the Federation of the Plastics Industry. The Plymouth employees
are represented by Local 7639 International Union of United Paper Workers
pursuant to a collective bargaining agreement, which expires on December 7,
2000. The workforce at Key's facilities in the United Kingdom are represented by
two unions: Amalgamated Electrical and Engineering Union ("AEEU") and
Manufacturing, Scientific and Finance Union ("MSF"). Both AEEU and MSF follow
the traditional negotiation patterns seen in Great Britain by renegotiating
terms and conditions on an annual basis. Wage negotiations in France occur
annually on a nationwide basis, with little local control.
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ENVIRONMENTAL MATTERS
The Company and its operations are subject to comprehensive and
frequently changing federal, state and local environmental and occupational
health and safety laws and regulations, including laws and regulations governing
emissions of air pollutants, discharges of waste and storm water, and the
disposal of hazardous wastes. The Company is also subject to liability for the
investigation and remediation of environmental contamination (including
contamination caused by other parties) at the properties it owns or operates and
at other properties where the Company or predecessors have arranged for the
disposal of hazardous substances. As a result, the Company is involved, from
time to time, in administrative and judicial proceedings and inquiries relating
to environmental matters. The Ohio Environmental Protection Agency has raised
questions about the air permit status of the Company's facility in Montpelier,
Ohio. The Company expects to resolve these questions without making significant
financial expenditures. The Company does not believe there are any other pending
investigations at the Company's plants or sites relating to environmental
matters.
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ITEM 2. PROPERTIES
Most of the Company's facilities are owned by the Company, with the
exception of the Company's world headquarters in Novi, Michigan and
manufacturing facilities in Grand Rapids, Michigan, Knoxville, Tennessee,
Coventry, U.K., Chihuahua, Mexico (Plant 1 only), all facilities in Italy,
Switzerland and the Czech Republic, which are leased. Management believes that
its facilities are adequate for its present needs. The Company conducts molding,
painting and assembly operations in approximately 2.0 million square feet of
manufacturing floor space in 32 operating locations in the following
communities.
Approximate
Location Square Footage Description of Use
-------- -------------- ------------------
Novi, Michigan................................... 33,000 World Headquarters and Technical Center
Plymouth, Michigan............................... 168,000 Manufacturing
Felton, Pennsylvania (Plant 1)................... 53,000 Manufacturing
Felton, Pennsylvania (Plant 2)................... 39,000 Manufacturing
Hamilton, Indiana................................ 54,000 Manufacturing
York, Pennsylvania (Plant 1)..................... 22,000 Manufacturing
York, Pennsylvania (Plant 2)..................... 40,000 Manufacturing
Montpelier, Ohio................................. 79,000 Painting
Hartford City, Indiana........................... 50,000 Painting and Assembly
Chihuahua, Mexico (Plant 1)...................... 65,000 Manufacturing
Grand Rapids, Michigan........................... 56,000 Manufacturing
South Bend, Indiana.............................. 80,000 Manufacturing
Coventry, UK..................................... 100,000 Manufacturing and Painting
Leiria, Portugal................................. 84,000 Manufacturing and Painting
Port Huron, Michigan............................. 52,000 Manufacturing
Chesterfield, Michigan........................... 44,000 Assembly and limited painting
Chihuahua, Mexico (Plant 2)...................... 55,000 Manufacturing
Ashley, Indiana.................................. 21,000 Manufacturing
Belleme, France.................................. 90,000 Manufacturing
Howell, Michigan................................. 116,000 Painting and Assembly
Markham, Canada.................................. 41,000 Manufacturing
Knoxville, Tennessee............................. 42,000 Manufacturing
Tamworth, UK..................................... 70,000 Manufacturing
Monterrey, Mexico................................ 50,000 Manufacturing
Rome, Italy...................................... 66,000 Manufacturing
Turin, Italy (Plant 1)........................... 120,000 Manufacturing
Turin, Italy (Plant 2)........................... 36,000 Manufacturing
Turin, Italy (Plant 3)........................... 10,000 Manufacturing
Novazzano, Switzerland (Plant 1)................. 22,000 Manufacturing
Novazzano, Switzerland (Plant 2)................. 22,000 Manufacturing
Bohema, Czech Republic........................... 16,000 Manufacturing
Rochefort, France................................ 105,000 Manufacturing
Voujeaucourt, France............................. 101,000 Manufacturing
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, involved in routine litigation
arising out of the ordinary course of its business. The Company believes
currently pending or threatened litigation will not have a material adverse
effect on the consolidated financial condition or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company is owned by Holdings and Paribas Principal Partners
("Paribas"). Holdings is a privately owned holding company whose members are
primarily employees or directors of the Company. Holdings owns a 75% interest in
the Company and Paribas owns the remaining 25% interest. There is no established
public trading market for the equity of the Company.
Key is organized as a limited liability company. The Company is not subject to
federal income taxes. The Company's policy is to make distributions to its
equity holders for income taxes due on their share of the Company's taxable
income. In addition, certain covenants of the Senior Note Indenture, New Senior
Credit Facility and Restated Operating Agreement restrict the Company's ability
to pay cash dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated
financial data of Key for the five year period ended December 31, 1998. The
selected consolidated financial data for such fiscal years were derived from the
audited consolidated financial statements of the Company. The audited
consolidated financial statements of the Company for each of the three years in
the period ended December 31, 1998 are included elsewhere in this Annual Report
on Form 10-K together with the report thereon of PricewaterhouseCoopers LLP,
independent accountants. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical consolidated financial statements of the Company
presented elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
($ in thousands)
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INCOME STATEMENT DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Sales $371,533 $306,001 $217,087 $179,251 $194,112
Gross Profit 67,647 66,319 41,785 37,544 36,060
Selling, general and 35,613 33,664 18,866 15,531 13,955
administrative expenses
Amortization of goodwill 2,596 1,576 114 -- --
Interest expense 29,148 22,112 15,754 14,861 12,752
Net income/(loss) before (457) 8,845 7,051 7,079 8,569
extraordinary item, minority
interest and foreign income tax
Extraordinary item-loss on early (522) (5,192) -- -- --
retirement of debt
Net income/(loss) ($3,172) $1,679 $7,051 $7,080 $8,569
BALANCE SHEET DATA:
Total assets $388,489 $282,904 $193,204 $126,090 $121,853
Total debt 301,038 219,288 144,283 119,640 111,060
Long-term debt 280,372 216,575 82,521 102,467 103,522
Total members' equity (deficit) (8,459) (12,261) (15,563) (20,875) (23,427)
OTHER FINANCIAL DATA:
EBITDA (a) $ 54,299 $ 47,497 $ 32,094 $ 28,984 $ 27,588
(a) EBITDA is defined as income (loss) from continuing operation before
the effect of extraordinary items, minority interest and non-operating
income or expense, plus the following: interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to incur
and service debt. EBITDA is not and should not be used as an
indicator or alternative to net income (loss) or cash flow as
reflected in the Consolidated Financial Statements of the Company, is
not intended to represent funds available for debt service, dividends,
reinvestment or other discretionary uses, is not a measure of
financial performance under generally accepted accounting principles,
should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted
accounting principles and may not be comparable to other
similarly-titled measures of other companies. A reconciliation of net
income (loss) to EBITDA is as follows:
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Reconciliation of Net Income (loss) to EBITDA
Year Ended December 31,
($ in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net Income (loss) $(3,172) $ 1,679 $ 7,051 $ 7,080 $ 8,569
Add (Deduct) the following:
Extraordinary item 522 5,192 -- -- --
Minority interest & other 1,322 1,722 -- -- --
Foreign income taxes 1,618 374
Interest expense 28,175 21,679 15,211 14,292 12,752
Depreciation & amortization 25,834 16,851 9,832 7,612 6,267
------- ------- ------- ------- -------
EBITDA $54,299 $47,497 $32,094 $28,984 $27,588
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations should be read in conjunction with the
Company's Consolidated Financial Statements (including the notes thereto)
appearing elsewhere in this Annual Report on Form 10-K
RESULTS OF OPERATIONS: 1998 FISCAL YEAR COMPARED TO 1997 FISCAL YEAR
Net sales of the fiscal year ended December 31, 1998 (the "1998 Fiscal
Year") increased by $65.5 million, or 21.4%, over net sales for the fiscal year
ended December 31, 1997 (the "1997 Fiscal Year"). Of the increase, approximately
$51 million resulted from acquisitions completed during the last 24 months. The
remainder of the increase, approximately $14.5 million, resulted primarily from
additional programs and higher tool sales. The Company estimates $6.5 million of
sales were lost due to the labor related strike at General Motors North American
operations during portions of the second and third quarters of the 1998 Fiscal
Year. Sales in the 1998 Fiscal Year were also adversely impacted by a price
concession granted to a major customer.
Gross profit for the 1998 Fiscal Year increased by $1.3 million to
$67.6 million. Gross profit as a percentage of sales decreased year over year to
18.2% of sales from 21.7% in the 1997 Fiscal Year. The decrease in the
percentage of gross profit as a percent of sales is attributable to several
factors, including the performance of certain of the Company's recent
acquisitions (1.5%), the price concession discussed above (1.1%) and higher
tooling sales (.5%).
Selling, general and administrative expenses ("SG&A") for the 1998
Fiscal Year increased by $1.9 million from the 1997 Fiscal Year. As a percentage
of sales, SG&A decreased to 9.6% of sales from 11.0% of sales in the 1997 Fiscal
Year. The year over year change in the percentage of SG&A as a percentage of
sales is attributable to lower SG&A requirements for the Company's 1998
acquisitions.
The minority interest for 1998 and 1997 relates to the portion net
income of a partially owned subsidiary in Portugal (Materias Plasticas, S.A.,
see further discussion in Note 9 of the Notes to Financial Statements )
attributable to the minority members. The minority interest for 1998 represents
the period from January 1 through March 31, 1998. The minority members' interest
was acquired by the Company on March 31, 1998.
As discussed under the heading of "Liquidity and Capital Resources",
the Company refinanced its debt during the first quarter of 1997. As part of
that refinancing, $40.1 million of the Company's Senior Notes were tendered and
retired. The premium related to the repurchase of the Senior Notes, the related
fees and the pro rata portion of the unamortized debt issuance costs for the
Senior Notes were recorded as an extraordinary item of approximately $5.2
million in the 1997 income statement. A further $10 million of the Senior Notes
were purchased and retired during 1998. The premium paid to acquire the $10
million of Senior Notes, approximately $0.5 million, was recorded as an
extraordinary item in 1998.
Interest expense (which excludes amortization of debt issue costs)
increased from $21.7 million in the 1997 Fiscal Year to $28.2 million in the
1998 Fiscal Year. The increase is the result of higher average debt, offset in
part by lower average interest rates. Average debt was higher primarily as a
result of borrowings related to acquisitions and capital asset purchases.
Interest rates are lower as a result of the Company's refinancing in March 1997
and the amendment to the Senior Credit Agreement in March 1998. The refinancing
resulted in the retirement of $40.1 million of Senior Notes using debt at
current market rates. The amendment to the Senior Credit Agreement provided for
local currency borrowings in France and the United Kingdom which replaced US
dollar debt at lower interest rates.
Net income for the 1998 Fiscal Year decreased from the 1997 Fiscal Year
as a result of the foregoing.
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RESULTS OF OPERATIONS: 1997 FISCAL YEAR COMPARED TO 1996 FISCAL YEAR
Net sales of the 1997 Fiscal Year increased by $88.9 million, or 40.9%,
over net sales for the fiscal year ended December 31, 1996 (the "1996 Fiscal
Year"). Of the increase, approximately $34 million resulted from acquisitions
completed during 1997. Sales increased a further $31 million over the 1996
Fiscal Year as a result of the acquisitions completed in 1996. The remainder of
the increase, approximately $24 million, resulted primarily from additional
programs.
Gross profit for the 1997 Fiscal Year increased by $24.5 million,
primarily as a result of the increased sales discussed above. The gross profit
margin increased by 2.5%, from 19.2% in the 1996 Fiscal Year to 21.7% in the
1997 Fiscal Year. The increase was primarily attributable to operating
efficiencies within the Company's existing businesses and to slightly higher
overall margins experienced in the businesses acquired during 1996 and 1997.
SG&A for the 1997 Fiscal Year increased by $14.8 million from $18.9 in
the 1996 Fiscal Year. Approximately $6 million of the increase represents the
full year effect of 1996 acquisitions. The Company's European operations incur
SG&A costs at several times that of the North American operations. This was
primarily attributable to two factors. First, the businesses acquired in Europe
tend to be separate, self sustained enterprises with individual administrative
and engineering staffs. Second, the Company believes that SG&A costs in the
areas of Europe where it has operations are generally increased by the economic
and regulatory environments of those countries, and will tend to be higher than
the Company's historical base of North American operations.
The minority interest for 1997 relates to the portion of net income of
a partially owned subsidiary in Portugal attributable to the minority members.
As discussed more fully under the heading of Liquidity and Capital
Resources, the Company refinanced its debt during the first quarter of 1997. As
part of that refinancing, $40.1 million of the Company's Senior Notes were
tendered and retired. The premium related to the repurchase of the Senior Notes,
the related fees and the pro rata portion of the unamortized debt issuance costs
for the Senior Notes were recorded as an extraordinary item of approximately
$5.2 million in the 1997 income statement.
Interest expense (excluding amortization of debt issue costs) increased
from $15.2 million in the 1996 Fiscal Year to $21.7 million in the 1997 Fiscal
Year as a result of higher average debt, offset in part by lower average
interest rates, resulting primarily from borrowings related to acquisitions and
capital asset purchases.
Net income for the 1997 Fiscal Year decreased from the 1996 Fiscal Year
as a result of the foregoing.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are to meet its debt
payments, fund its capital plan (including, where necessary, acquisitions) and
meet its working capital needs. The Company anticipates its operating cash flow,
together with additional available borrowings under the New Senior Credit
Facility, will be sufficient to meet the aforementioned requirements.
Net cash provided from operations was approximately $15.7 million in
the 1998 Fiscal Year compared to $7.8 million in the 1997 Fiscal Year. The
increase in cash from operations primarily relates to working capital
improvements and increased business volume.
Net cash used in investing activities in the 1998 Fiscal Year of $105.4
million consisted of $63.8 million of capital spending, $30.3 million of which
related to acquisitions. Fiscal 1998 capital expenditures include injection
molding machines, assembly equipment and automation. The Company believes 1999
capital spending will be approximately $37 million, excluding the Foggini
acquisition. Actual capital expenditures may be greater as a result of
acquisitions or new business opportunities. The $26.3 million increase in
tooling assets includes tooling, engineering and design costs for the launch of
several significant production programs in 1998. The Company believes these
costs will be recovered over the life of the production part.
As of March 9, 1998, the Senior Credit Agreement was amended to allow
the Company to obtain additional five-and-one-half year amortizing term loans as
follows: Key Plastics L.L.C. $20 million US dollars, Key Plastics International,
S.N.C. to obtain a French franc 93.9 million and Key Plastics, U.K. to obtain a
pound sterling 6.3 million. This action provided additional borrowing capacity
which was used primarily for acquisitions. This action also provided a natural
hedge for the Company's net assets in France and the U.K. It also provided for
lower local currency borrowings than the United States dollar debt replaced by
this action.
On March 26, 1999, the Company refinanced a portion of its existing
term loans and all of its revolving debt under the Senior Credit Agreement and
incurred new debt through the New Senior Credit Facility. The new debt was
principally used to fund the cash portion of the Foggini acquisition,
consummated on March 29, 1999. The New Senior Credit Facility includes two
amortizing term loans totaling $180 million and a $120 million revolving
facility. Final maturity for the amortizing term loans occurs in 2005 and 2006.
The maturity for the revolving facility occurs in 2006.
Net cash provided by financing activities in 1998 was $86.6 million. On
February 10, 1998, a portion of the proceeds from the Investment, $7.2 million,
was accounted for as additional paid in capital and used to pay down debt. Loans
under the new Senior Credit Facility are secured by substantially all of the
assets of the Company and constitute senior debt of the Company.
At December 31, 1998, the Company had total indebtedness of $301
million, of which $125.0 million was incurred pursuant to the notes issued under
the Indenture, $154.3 million was incurred pursuant to the Company's Senior
Credit Agreement and $14 million was incurred pursuant to the notes issued under
the indenture related to the Senior Notes dated November 17, 1992, by and
between the Company and Society Bank (now known as Mellon Bank), as amended. Pro
forma availability under the revolving portion of the New Senior Credit Facility
was approximately $24 million as of December 31, 1998.
13
14
YEAR 2000 COSTS
The Year 2000 problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19",
but may not properly recognize the Year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
because of the inability of the system or application to properly read the Year
2000, the result could have a material adverse effect on the Company.
READINESS/CONTINGENCY PLANS
For its information technology, the Company currently utilizes an IBM
AS400-based computing environment which is complimented by a series of
local-area networks (LAN) and stand alone personal computers. Substantially all
operating systems related to the AS400 and LANs have been updated to comply with
Year 2000 requirements. In addition, upgraded versions of the Company's
financial, manufacturing and other software applications, which are Year 2000
ready, are available and are now in the process of being integrated into the
Company's systems. The Company expects this integration to be complete by the
end of the second quarter of 1999. Plans are in place to replace non-compliant
personal computers during the first half of 1999. Contingency plans are also
presently under development for these systems.
The Company also has a program to determine the Year 2000 compliance
efforts of its equipment and material suppliers. The Company has sent
comprehensive questionnaires to all of its significant suppliers regarding their
Year 2000 compliance and is attempting to identify any problem areas with
respect to those suppliers. Most suppliers responding state they plan to be Year
2000 compliant by 2000. This is an ongoing program and the Company's response to
specific problems will depend upon its assessment of the risk that such problems
may cause. The Company cannot guarantee that Year 2000 problems originating with
suppliers will not occur. The Company will develop contingency plans to address
specific problems as they are identified.
The Company is also reviewing its building and utility systems for the
impact of Year 2000. Many of the systems in this area are Year 2000 ready. While
there is no reason to expect utility suppliers will not be Year 2000 compliant,
there can be no assurance that these suppliers will in fact meet the Company's
requirements. The failure of any supplier to achieve Year 2000 compliance could
cause a shutdown of one or more of the Company's plants, which could adversely
impact the Company's ability to supply products to its customers. At this time
the Company has draft contingency plans developed for these systems and final
version expected by May 1, 1999. In the case of utilities, alternative suppliers
may not be available.
The Company uses non-mainframe computers and software in production
processes throughout the world. The Company is presently evaluating the
readiness of the computer systems used in those processes. Findings to date
indicate minimal changes will be required to achieve Year 2000 readiness. There
can be no assurance that the Company will identify and correct every Year 2000
problem in the computer applications used in its production processes. The
Company does not believe contingency plans for these systems will be necessary.
RISKS
As a critical supplier to automotive OEM and tier 1 suppliers, the
Company's major exposure for Year 2000 problems is that of shutting down
production at one of its customer's factories. The costs associated with such an
occurrence could have a material adverse impact on the Company's results of
operations.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company estimates the total cost of completing any required
modifications, upgrades or replacements will not have a material adverse effect
on the Company's results of operations. This estimate is being monitored and
will be revised as additional information becomes available.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks, including foreign
currency exchange rate fluctuations and interest rate fluctuations on its
variable borrowings.
FOREIGN CURRENCY RISK
A portion of the Company's operations consists of manufacturing and
sales activities outside of the United States. The Company manufactures and
sells products in Canada, Mexico, England, France, Portugal and, after the
acquisition of Foggini in March 1999, Italy, Switzerland and the Czech Republic.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The functional currency for all of the Company's operations, with the exception
of Mexico, is the currency of the country selling the products. The US dollar is
the functional currency of the Company's Mexican operations. As such, the
Company's operating results are exposed to exchange rate fluctuations at its
foreign locations.
At December 31, 1998, the Company's net assets subject to foreign
currency translation risk are $7.9 million. The potential loss from a
hypothetical 10% adverse change in quoted foreign currency exchange rates would
be approximately $0.8 million. This model assumes a parallel adverse shift in
currency exchange rates. This assumption may overstate the impact of exchange
rate changes on individual assets and liabilities denominated in a foreign
currency.
At December 31, 1998, the Company held foreign exchange forward
contracts with a notional value of $28 million. The contracts are hedges for
specific foreign currency transactions as follows. Approximately $19 million is
to purchase French francs and $9 million is to purchase British pounds sterling.
The French franc hedge relates to an acquisition completed in March 1999 and the
pound sterling hedge relates to an anticipated cash flow pursuant to the
refinancing of debt under the Company's Senior Credit Agreement. Both hedges
were settled prior to March 31, 1999.
INTEREST RATE RISK
Approximately half the Company's borrowings carry variable interest
rates tied to the US prime rate or LIBOR rates, which are subject to
fluctuations beyond the control of the Company. The Company also has fixed
long-term borrowings which mitigate the impact of potential interest rate
fluctuations.
14
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information
included in this Annual Report on Form 10-K are set forth on the Index to
Consolidated Financial Statements appearing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
15
16
ITEM 10. DIRECTORS AND OFFICERS
The following are the directors and executive officers of the Company.
Name Age Position with Company Current position since
- - ---- --- --------------------- ----------------------
Joel D. Tauber 63 Director 1986
George Mars 61 Director 1986
David C. Benoit 50 Chief Executive Officer and Director 1995 (Director since 1986)
Leonard R. Griffin 47 President and Chief Operating Officer and Director 1995
Jean-Michel Coulot 45 Director 1998
Stephen Eisenstein 37 Director 1997
Christian Coumans 60 President, International Operations 1997
Douglas C. Chapple 47 Vice President, Eastern Group Operations 1996
Darrel Hampton 59 Senior Vice President, Strategic Planning 1998
Calvin A. Saur 47 Vice President, Global Technology & Product 1995
Development
Joseph A. White 45 Vice President, Chief Financial Officer 1998
Henry J. Wojtaszek 55 Vice President, Western Group Operations 1996
Joel D. Tauber formed the Company with Messrs. Mars and Benoit in 1986
and has been a director and Chairman of the Board since that time. Mr. Tauber
is a manufacturing executive, business consultant and investor. Mr. Tauber is
President of Keyco Bond Fund, Inc. and serves as Chairman of the Board of
Complex Tooling & Molding, Inc., Keywell Corporation and KMGI, Inc.
George Mars formed the Company with Messrs. Tauber and Benoit in 1986.
He has been a director since that time and Co-Chairman of the Board since 1995.
Prior to his retirement, Mr. Mars served as President of the Company from 1986
to 1995.
David C. Benoit formed the Company with Messrs. Tauber and Mars and has
been a director since the Company's formation in 1986. Mr. Benoit was Executive
Vice President of the Company from 1986 to 1995, when he was appointed to his
current position of Chief Executive Officer. Mr. Benoit has 17 years experience
in the automotive industry. Mr. Benoit is also a member of the Board of
Directors for Complex Tooling & Molding, Inc.
Leonard R. Griffin, President and Chief Operating Officer and a
Director of the Company, joined Key in April 1995 and joined the Board of
Directors in February 1998. Prior to joining the Company, Mr. Griffin served for
five years as President of Woodbridge Inoac, Inc., a joint venture partnership
formed by Woodbridge Group, a Canadian plastics company and Inoac, Ltd., a
Japanese automotive parts supplier. Prior to serving as President of Woodbridge,
Mr. Griffin was General Manager of Rockwell International's Automotive Plastics
Products Operations. Mr. Griffin's business experience consists of nearly 30
years in the automotive industry.
Jean-Michel Coulot is a managing director of Paribas Principal
Investments (Paris office) specializing in leveraged buyouts and other private
equity transactions in the engineering and capital goods sector. Prior to
joining Paribas Principal Investments, Mr. Coulot was the head of European
Equity Sales for Paribas Capital Markets' London office and was a representative
at the Paribas office in Indonesia.
Stephen Eisenstein is a founding partner of Paribas Principal Partners.
Prior to founding Paribas Principal Partners, Mr. Eisentein was a Managing
Director in Banque Paribas' U.S. Merchant Banking Group.
Christian Coumans joined the Company in May of 1997 as Vice President
of International Operations. Prior to joining Key, Mr. Coumans worked for Sommer
Allibert, S.A. where he held several positions in marketing, international
development and operations.
Douglas C. Chapple has been Vice President, Eastern Group of the
Company since November 1996. Prior to joining the Company, Mr. Chapple was, from
1994 to 1996, Vice President, Manufacturing of Dott Industries, Inc., a
privately owned finisher and decorator of plastic products. Before joining Dott
Industries, Inc., Mr. Chapple was employed, for over 17 years, by General Motors
Corporation in a variety of manufacturing and engineering capacities.
Darrel Hampton joined the Company in September of 1998 as Senior Vice
President, Strategic Planning. Prior to joining Key, Mr. Hampton was Vice
President, Customer Relations and Program Management at UT Automotive, Interior
Systems, a Tier 1 supplier of automotive electrical, electronics and integrated
trim systems. Mr. Hampton has 38 years of experience in the automotive industry.
16
17
Calvin A. Saur has been employed by the Company since 1986 and was
promoted to his current position, Vice President, Global Technology & Product
Development, in May of 1995. Mr. Saur has held various other positions at the
Company, including Vice President, Research & Development. He has 27 years of
experience within the automotive industry.
Joseph White joined the Company as Vice President and Chief Financial
Officer in September of 1998. Prior to joining the Company, Mr. White spent one
year with the Becker Group as Vice President of Finance and 16 years with
Aeroquip-Vickers Inc. in various positions, most recently Finance Director of
Vickers Asia-Pacific.
Henry J. Wojtaszek has been employed at the Company for 12 years in
various manufacturing capacities and has been the Vice President, Western Group
since 1996. Mr. Wojtaszek has 35 years of automotive industry experience and
is a past president of the Society of Plastics Engineers.
17
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information as to the cash
compensation earned by each of the Company's chief executive officer and four
other most highly paid current executive officers who earned more than $100,000
for services rendered to the Company during the three years ended December 31,
1998.
SUMMARY COMPENSATION TABLE
ALL OTHER
NAME AND TITLE YEAR SALARY BONUS COMPENSATION
David C. Benoit 1998 $320,000 $162,000 3,600(a)
Chief Executive Officer 1997 290,000 145,000 2,700(a)
1996 275,000 125,000 1,300(a)
Leonard R. Griffin 1998 270,000 132,000 4,800(a)
President 1997 250,000 120,900 4,600(a)
1996 240,000 106,000 700(a)
Douglas Chapple 1998 165,000 33,800 4,798(a)
Vice President, Eastern Group(b) 1997 157,500 34,800 1,900(a)
1996 25,000 -- --
Christian Coumans 1998 162,000 63,900 10,247(a)
President, International 1997 89,000 39,289 --
Operations (c)
Calvin A. Saur 1998 130,000 30,000 3,346(a)
Vice President, Product Development 1997 124,000 27,000 2,900(a)
1996 117,000 24,250 1,300(a)
(a) Represents 401K match amounts for the account of the named executive. Prior
to 1997 represents profit sharing amounts paid to the named executive
officers.
(b) Joined the Company in 1996.
(c) Joined the Company in 1997.
18
19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 27,1998, Holding's and Paribas beneficially owned 75
percent and 25 percent, respectively, of the Company. The address for Holdings
is the Company's address. The address for Paribas is 787 Seventh Avenue, New
York, NY 10019.
The following table sets forth the beneficial ownership of Holding's
common stock ("Common Stock") as of March 29, 1999 owned by the directors of the
Key, the named executive officers, and all directors and officers as a group,
and by other holders known to the Company as having beneficial ownership of more
than five percent of the Common Stock.
Each person exercises sole investment and voting rights with respect to the
shares of Common Stock shown in the table below unless otherwise stated. The
address of each of the following persons is Suite 200, 21333 Haggerty Road,
Novi, Michigan 48375.
NUMBER OF SHARES PERCENTAGE OF
OF COMMON STOCK OUTSTANDING
DIRECTORS, OFFICERS AND FIVE PERCENT HOLDERS OWNED BENEFICIALLY SHARES(a)
Joel D. Tauber Trust............................ 32,000 7.1
Joel D. Tauber ................................. 58,828 12.9%
David C. Benoit ................................ 79,833(a) 17.6%
George Mars .................................... 62,065 13.6%
Calvin A. Saur ................................. 9,228 2.0%
A.E. Stull ..................................... 6,000 1.3%
Leonard R. Griffin ............................. 6,101 1.3%
Douglas Chapple................................. 1,000 0.2%
All directors and officers as a
group (13 persons).............................. 272,803 79.7%
(a) 79,833 shares are held by various David C. Benoit trusts, of which
Mr. Benoit either controls or is the Trustee and beneficiary.
Messrs. Tauber, Mars and Benoit, if they vote their shares in a
combination which exceeds 50% of the outstanding Common Stock, have the ability
to elect a majority of the Board of Directors of Holdings determine the outcome
of any other matter submitted to members for approval. There are no
arrangements, however, among any of the members of Holdings, including such
persons, with respect to the voting or disposition of the Common Stock and there
are no arrangements between the members and Holdings, except that (i) members
may not make any dispositions which could result in the termination of the
Company's S Corporation status and (ii) certain members are parties to an
Equityholders Agreement as described in Item 13.
CHANGE OF CONTROL ARRANGEMENTS - LONG TERM INCENTIVE PLAN
The Company's Long Term Incentive Plan (the "LTIP") is intended to
provide additional incentive to officers, including the executive officers named
in the Summary Compensation Table, and other eligible key employees of the
Company. The LTIP provides compensation to the employees who are included in the
LTIP and who remain employees as of the date of the occurrence of a Third Party
Transaction (as defined) of the Company. A Third Party Transaction is defined as
an initial public offering of the Company's Member Interest, a sale of all or
substantially all of the Company's Member Interest or a sale of all or
substantially all of the Company's assets. In the event that a Third Party
Transaction occurs, each eligible employee will be entitled to payment based on
a formula equal to the Total Incentive Pool (as defined) multiplied by the
result obtained by multiplying a factor assigned to each employee at the time
such employee is included in the LTIP times the employee's Cumulative Base
Compensation. Cumulative Base Compensation means the total base compensation
earned by such employee from the date of inclusion in the LTIP to the date of
occurrence of a Third Party Transaction. The factor assigned to each employee is
based upon the level of management in which the employee is included. Total
Incentive Pool means the total of all Cumulative Base Compensation of every
eligible employee. The LTIP will fund upon the occurrence of a Third Party
Transaction and terminates as of the date of such occurrence.
19
20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting Arrangements. The Company has consulting arrangements with
each of Messrs. Tauber and Mars. Mr. Tauber and Mr. Mars are each paid $10,000
per month for services provided to the Company. In addition, Mr. Mars receives
compensation at a rate of $1,000 per diem, plus out-of-pocket expenses, for each
day of services provided, which services are not compensated for by the $10,000.
In 1998, Mr. Tauber and Mr. Mars earned $120,000 and $120,000, respectively.
Non-Competition and Non-Disclosure Agreements. On February 9, 1998 each
of Messrs. Tauber and Benoit entered into Non-Competition and Non-Disclosure
Agreements with the Company, pursuant to which they have agreed, during the term
of the agreements and for 6 months after termination of their affiliation with
the Company, to not compete with the Company within a 50 mile radius of any
company facility or disclose or use confidential information without the consent
of the Company, except as required in executing their duties to the Company.
Equityholders Agreement. As of February 9, 1998, the Company, Holdings,
Paribas, and each of Messrs. Tauber, Mars and Benoit entered into an
Equityholders Agreement (the "Equityholders Agreement"). Pursuant to the terms
of the Equityholders Agreement, the parties agreed to certain restrictions on
the transfer of equity interests in the Company and Holdings and granted certain
parties tag-along rights, bring-along rights, rights of first refusal and
preemtive rights related to transfers of equity interest in the Company and
Holdings and sales or transfer of all assets or equity interests in the Company.
The parties also agreed to certain matters of corporate governance of the
Company and Holdings and other matters.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The Consolidated Financial Statements filed with this report
are listed on page F-1.
2. Financial Statement Schedules:
No financial statement schedules, for which provision is made
in the applicable accounting regulations of the Securities and
Exchange Commission, are required under the related
instructions or are immaterial and, therefore, have been
omitted.
3. Exhibits:
The exhibits filed with this Report are listed on the "Exhibit
Index" on page E-1 and are incorporated herein by reference.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth
quarter of 1998.
20
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: international, national and local general economic and market
conditions; demographic changes; the size and growth of the automobile market or
the plastic automobile component market; consumer demand for the particular
models or lines that use the Company's parts; the ability of the Company to
sustain, manage or forecast its growth; the size, timing and mix of purchases of
the Company's products; new product development and introduction; existing
government regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; dependence upon OEMs (as defined); liability and
other claims asserted against the Company; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; product recalls; warranty costs; the ability to attract and retain
qualified personnel; the ability to protect technology; the ability to realize
planned cost savings in its acquisitions; retention of earnings; and other
factors referenced in this Annual Report on Form 10-K. Certain of these factors
are discussed in more detail elsewhere in this Annual Report on Form 10-K,
including, without limitation, under the captions "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business." Given these uncertainties, users of
this Annual Report on Form 10-K are cautioned not to place undue reliance on
such forward-looking statements. The Company disclaims any obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained or incorporated by reference herein to
reflect future events or developments.
21
22
KEY PLASTICS L.L.C. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Accountants.........................................F-2
Consolidated Balance Sheets -- December 31, 1998 and 1997.................F-3
Consolidated Statements of Operations --
Years Ended December 31, 1998, 1997, and 1996............................F-4
Consolidated Statements of Members' Deficit --
Years Ended December 31, 1998, 1997, and 1996.............................F-5
Consolidated Statements of Cash Flows --
Years Ended December 31, 1998, 1997 and 1996............................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Key Plastics L.L.C.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, members' deficit, and cash flows
present fairly, in all material respects, the financial position of Key Plastics
L.L.C. and Subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
March 29, 1999
F-2
24
KEY PLASTICS L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in thousands)
1998 1997
-------- --------
ASSETS
Current assets:
Cash $ 3,798 $ 6,918
Accounts receivable, net 77,795 58,186
Inventories 53,006 54,867
Prepaid expenses 6,659 3,529
-------- --------
Total current assets 141,258 123,500
Property, plant and equipment, net 171,533 122,285
Tooling assets, net 24,800 5,904
Intangibles, net 42,292 29,482
Other assets 8,606 1,733
-------- --------
Total assets $388,489 $282,904
======== ========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Current maturities of long-term debt $ 20,666 $ 2,653
Accounts payable 61,043 46,389
Accrued interest 6,093 5,236
Accrued payroll 6,217 3,942
Other accrued liabilities 9,785 12,746
-------- --------
Total current liabilities 103,804 70,966
Capital lease obligation 3,692 1,514
Long-term debt 280,372 216,575
Other long-term obligations 9,080 6,110
Members' equity (deficit):
Members' contributions 19,355 12,317
Accumulated deficit (27,960) (24,740)
Accumulated other comprehensive income 146 162
-------- --------
Total members' deficit (8,459) (12,261)
-------- --------
Total liabilities and members' deficit $388,489 $282,904
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
25
KEY PLASTICS L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in thousands)
1998 1997 1996
---- ---- ----
Net sales.............................................................. $371,533 $306,001 $217,086
Cost of sales.......................................................... 303,886 239,682 175,301
Selling, general and administrative expenses........................... 35,613 33,664 18,866
-------- -------- --------
32,034 32,665 22,919
Amortization of Goodwill............................................... 2,596 1,576 114
Interest expense and amortization of debt
issuance costs...................................................... 29,148 22,112 15,754
Other non-operating expense............................................ 747 122 --
-------- -------- --------
Income/(loss) before foreign income taxes,
minority interest and extraordinary item.......................... (457) 8,845 7,051
Foreign income taxes................................................... 1,618 374 --
Minority interest...................................................... 575 1,600 --
-------- -------- --------
Income/(loss) before extraordinary item............................ (2,650) 6,871 7,051
Extraordinary item - early retirement of debt.......................... (522) (5,192) --
-------- -------- --------
Net income/(loss).................................................. $ (3,172) $ 1,679 $ 7,051
========= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
26
KEY PLASTICS L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
Additional Shareholder
Common Stock Paid-In Notes Members'
Shares Amount Capital Receivable Contribution
------ ------ ----------- ----------- ------------
Balances December 31, 1995 $ 316,834 95 $10,002
Dividend distributions, $5.63/ share
Purchase and constructive retirement of common stock (926) (216)
Net Income
Currency Translation
Comprehensive Income
------- ----- ------
Balances, December 31, 1996 315,908 95 9,786
Dividend distributions, $2.27/ share
Purchase and constructive retirement of common stock (38)
Issuance of common stock 6,000 2 353 $(355)
Shareholder contribution 2,396
Payment on shareholder notes 78
Net Income
Currency translation
Comprehensive Income
------- ---- -------- ------
Balances, December 31, 1997 321,908 97 12,497 (277)
February 9,1998 Contribution from Key Plastics Holdings, (321,908) (97) (12,497) 277 $12,317
Inc. to Key Plastics L.L.C.
Members' Contribution 7,038
Dividend Distribution
Net Loss
Currency translation
Comprehensive Income
------- ----- ------- ------- -------
Balances, December 31, 1998 $ -- -- $ -- $ -- $19,355
======= ===== ======= ======= =======
Accumulated Other
Accumulated Comprehensive
Deficit Income (Loss) Total
----------- ---------------- -----
Balances December 31, 1995 $(30,972) $(20,875)
Dividend distributions, $5.63/ share (1,782) (1,782)
Purchase and constructive retirement of common stock (216)
Net Income 7,051 7,051
Currency Translation $ 259 259
-------
Comprehensive Income 7,310
------- ------- -------
Balances, December 31, 1996 (25,703) 259 (15,563)
Dividend distributions, $2.27/ share (716) (716)
Purchase and constructive retirement of common stock (38)
Issuance of common stock --
Shareholder contribution 2,396
Payment on shareholder notes 78
Net Income 1,679 1,679
Currency translation (97) (97)
--------
Comprehensive Income 1,582
------- ------ -------
Balances, December 31, 1997 (24,740) 162 (12,261)
February 9,1998 Contribution from Key Plastics Holdings, --
Inc. to Key Plastics L.L.C.
Members' Contribution 7,038
Dividend Distribution (48) (48)
Net Loss (3,172) (3,172)
Currency translation (16) (16)
--------
Comprehensive Income (3,188)
-------- ------ --------
Balances, December 31, 1998 $(27,960) $ 146 $(8,459)
======== ====== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
27
KEY PLASTICS L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 1998, 1997, AND 1996
(Dollars in thousands)
1998 1997 1996
--------- -------- --------
Cash flows from operating activities:
Net income/(loss) $ (3,172) $ 1,679 $ 7,051
--------- -------- --------
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Extraordinary item--early retirement of debt 522 5,192 --
Minority interest 575 1,600 --
Depreciation 22,265 14,842 9,175
Amortization 3,569 2,009 657
Decrease (increase) in assets:
Accounts receivable (12,148) (4,499) (13,725)
Inventories 6,691 (13,793) (13,571)
Prepaid expenses (3,130) 601 (906)
Increase (decrease) in liabilities:
Accounts payable 5,916 3,026 16,517
Other accrued liabilities (5,395) (2,812) 9,296
--------- -------- --------
Total adjustments 18,865 6,166 7,443
--------- -------- --------
Net cash provided by operating activities 15,693 7,845 14,494
--------- -------- --------
Cash flows from investing activities:
Acquisitions of property, plant and equipment, net (33,477) (23,621) (16,738)
Property, plant and equipment from acquired businesses (30,372) (14,598) (23,109)
Increase in intangible assets (16,379) (18,153) (6,093)
Tooling assets, net (26,329) (2,699) (2,009)
Decrease/(increase) in other assets 4,087 (5,369) --
Deposits for pending acquisitions (2,897) -- --
--------- -------- --------
Net cash used in investing activities (105,367) (64,440) (47,949)
Cash flows from financing activities:
Net borrowings under debt agreements 92,588 323,944 45,464
Principal payments under debt
agreements and capital leases (10,925) (246,746) (16,042)
Long-term agreements to finance acquisitions (1,677) -- 1,677
Costs to secure new financing (522) (5,865) --
Cash portion of extraordinary item -- (4,460)
Purchase of common stock -- (38) (216)
Dividend distributions (48) (716) (1,782)
Member capital contributions, net 7,038 2,396 --
Change in outstanding checks -- (5,372) 4,354
--------- -------- --------
Net cash provided by financing activities 86,554 63,513 33,455
--------- -------- --------
Net increase/(decrease) in cash (3,120) 6,918 --
Cash, beginning of year 6,918 -- --
--------- -------- --------
Cash, end of year $ 3,798 $ 6,918 $ --
========= ======== ========
Supplemental disclosure of cash flow information -
Cash paid during the year for:
Interest $ 27,321 $21,674 $13,889
Foreign income taxes $ 1,291 $ -- $ --
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
28
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 8, 1998, Key Plastics, Inc. contributed significantly all of its
assets and liabilities to Key Plastics L.L.C., a Michigan limited liability
company, wholly owned by Key Plastics, Inc. This reorganization of entities
under common control was accounted for at historical cost in a manner similar
to a pooling of interest. Also, Key Plastics, Inc. changed its name to Key
Plastics Holdings, Inc.
1. SIGNIFICANT ACCOUNTING POLICIES
At December 31, 1998, Key Plastics L.L.C. (the "Company") is owned by Key
Plastics Holdings, Inc. ("Holdings") and Paribas Principal Partners ("Paribas"),
collectively "Members". Holdings is a privately owned holding company whose
members are primarily employees or directors of the Company. Holdings owns a 75%
interest in the Company and Paribas owns the remaining 25% interest.
CONSOLIDATION -- The consolidated financial statements include the accounts of
Key Plastics L.L.C. and its majority-owned or controlled subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
INVENTORIES -- Inventories are stated at the lower of cost or market with cost
determined using the FIFO (first-in, first-out) method.
REVENUE RECOGNITION:
Manufactured Parts -- Sales are recognized on manufactured parts when
the parts are shipped to the customer. Returns and allowances are recorded as a
reduction of sales in the period they occur.
TOOLING AND ENGINEERING COSTS:
Tooling -- Costs of tooling purchased or produced and engineering and
design related to tools or production parts for future product programs are
included in work-in-progress inventory. Income from contracts for the
manufacture of customer tooling, and related engineering and design is accounted
for under the completed-contract method of accounting, which recognizes revenue
upon completion of contracts or identifiable segments.
Costs for tools, and tooling related engineering and design in excess of
customer reimbursement are capitalized and depreciated over the related part's
production period. Generally, such tooling is owned by the customer and used by
the Company for the production of parts for the respective customer. Such
capitalized costs, net of depreciation, are included in Tooling Assets.
Engineering and design costs related to part development, in excess of customer
reimbursement, are capitalized and depreciated over the related part's
production period. Such capitalized costs, net of depreciation and are included
in other assets.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation is
determined using the straight-line method over the estimated useful lives of the
assets.
The general ranges of lives are as follows:
Building and improvements................................. 25 to 30 years
Machinery and equipment.................................... 3 to 15 years
Furniture and fixtures..................................... 3 to 10 years
Maintenance and repairs are expensed; renewals and betterments are
capitalized. Upon retirement, replacement, or sale, gains or losses are included
in income.
F-7
29
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLES:
Goodwill -- Goodwill represents the excess of amounts paid and
liabilities assumed over the fair value of identifiable tangible and intangible
assets acquired. This amount is amortized using the straight-line method over a
period of 15 years. The company evaluates the carrying value of goodwill for
potential impairment on an ongoing basis. Such evaluations compare operating
income before amortization of goodwill to the amortization recorded for the
operations to which the goodwill relates. The company also considers projected
future operating results, trends and other circumstances in making such
estimates and evaluations.
Deferred Financing Costs -- Deferred financing costs represent costs
incurred in connection with obtaining financing. These costs are amortized over
the period the loans are outstanding.
Other Intangibles -- Other intangibles are amortized using the
straight-line method over five to 10 years.
Preproduction Costs -- Preproduction costs associated with the start-up
of manufacturing activities related to new parts are included in the cost of
sales in the period incurred.
INCOME TAXES -- The Company is organized as a limited liability company. Under
the provisions of this election, the Company is not subject to federal income
taxes. The Company's policy is to pay dividends to Members for income taxes due
on their share of the Company's taxable income. Under the terms of a tax
allocation agreement, the Members are required to make additional capital
contributions to the Company equivalent to the income tax benefit resulting from
their share of the Company's taxable losses to the extent of previous
distributions. The additional capital contributions are recorded when received.
MAJOR CUSTOMERS -- The Company manufactures injection molded plastic parts for
sale primarily to domestic automobile manufacturers and their suppliers.
Substantially all of the Company's net sales and accounts receivable are with
three domestic automobile manufacturers and their suppliers. Net sales to one of
these customers accounted for approximately 37 percent of net sales in 1998,
approximately 46 percent of net sales in 1997 and approximately 58 percent of
1996 net sales. Net sales to a second one of these customers accounted for
approximately 14 percent of 1998 sales, approximately 11 percent of sales in
1997 and approximately 10 percent of 1996 net sales. The change in these
percentages reflects the increased diversity of the Company's automotive
customer base.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of international
subsidiaries are translated at the exchange rates as of the balance sheet date.
Related translation adjustments are reported as a component of stockholders'
equity. Revenues and expenses are translated at the average rates in effect for
the period.
DERIVATIVE FINANCIAL INSTRUMENTS -- The company limits use of derivative
financial instruments to forward exchange contracts to hedge significant
foreign currency transactions. As of December 31, 1998, the notional value of
all contracts was $28 million, including approximately $19 million to purchase
French francs and $9 million to purchase British pounds sterling. The French
franc hedge relates to an acquisition completed in March 1999 (see Note 12,
Subsequent Event). The pound sterling hedge relates to an anticipated cash
flow for a refinancing of debt under the Company's Senior Credit Facility in
March 1999 (see Note 5, Long-Term Debt). As of December 31, 1997, the Company
held a Portuguese escudo forward with a notional amount of $8 million to hedge
a transaction which closed in the first quarter of 1998.
FINANCIAL INSTRUMENTS -- The Company's financial instruments recorded on the
balance sheet include cash and cash equivalents, accounts receivable, accounts
payable and debt. Because of their short maturity cash and cash equivalents,
accounts receivable and payable approximates fair value. Fair value of
long-term debt is based on rates available to the Company for debt with similar
terms and maturities.
F-8
30
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS - The Company has adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires all items recognized under the standard as components
of Comprehensive Income be reported in the financial statements. The only
component of the Company's Comprehensive Income not already included in Net
Income consists of currency translation adjustments that result from
consolidating foreign subsidiaries in United States dollars at current exchange
rates. The Company has elected to report total Comprehensive Income in the
Statement of Members' Deficit.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," which is
effective beginning January 1, 1999 for the Company. This statement requires
start up activities, to be expensed as incurred. Start-Up Activities are broadly
defined in the Statement of Position as one-time activities related to opening a
new facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer, initiating a new
process in an existing facility or commencing some new operation. At its March
24, 1999 meeting, the Emerging Issues Task Force (EITF) added to its agenda, an
issue addressing whether pre-production engineering costs are capitalizable
fixed asset costs, start-up costs within the scope of SOP 98-5, or research and
development costs within the scope of FASB Statement No. 2, "Accounting for
Research and Development Costs". The adoption of SOP 98-5 is not expected to
materially affect the results of operations or financial position of the
Company, pending resolution of the EITF issue.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is effective for all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). The statement requires all
derivative instruments be recorded at fair value on the balance sheet with
changes in fair value recorded each period in current earnings or comprehensive
income depending upon the underlying purpose for the derivative. Management of
the Company has not yet determined the impact that adoption of this statement
will have on its earnings or financial position.
RECLASSIFICATIONS -- Certain reclassifications have been made in the prior year
financial statements to conform with the presentation used in 1998.
F-9
31
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES
The components of inventories consist of the following:
DECEMBER 31,
----------------------
(Dollars in Thousands)
1998 1997
------- -------
Raw materials...................................... $15,709 $9,071
Work in process.................................... 3,203 2,438
Finished goods..................................... 10,009 9,005
Customer tooling in process........................ 24,085 34,353
------- -------
Total......................................... $53,006 $54,867
======= =======
F-10
32
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
----------------------
(Dollars in Thousands)
1998 1997
-------- -------
Land................................................ $6,743 $2,591
Building and improvements........................... 43,282 35,038
Machinery and equipment............................. 198,805 127,304
Furniture and fixtures.............................. 9,728 7,281
Construction-in-progress............................ 9,410 8,916
-------- -------
Total.......................................... 258,558 181,130
Less accumulated depreciation.................. 87,025 58,845
-------- -------
Total.......................................... $171,533 $122,285
======== =======
4. INTANGIBLES
Intangible assets consist of the following:
DECEMBER 31,
----------------------
(Dollars in Thousands)
1998 1997
-------- -------
Goodwill............................................ $40,577 $24,746
Deferred financing costs............................ 8,122 7,582
Other intangibles................................... 844 836
------- -------
Total......................................... 49,543 33,164
Less accumulated amortization................. 7,251 3,682
------- -------
Total......................................... $42,292 $29,482
======= =======
F-11
33
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
---------------------------
1998 1997
-------- -------
Senior Subordinated Notes, due March 2007, requiring semiannual interest
payments at the rate of 10.25%......................................... $125,000 $125,000
Term loans, bank, due September 2004, requiring quarterly interest payments
at LIBOR plus 2.5% (7.6% at December 31, 1998):
Payable in US dollars.............................. 33,475 15,000
Payable in British pounds sterling................. 9,935 9,246
Payable in Portuguese escudos...................... 11,413 --
Payable in French francs........................... 12,165 --
Revolving credit loan, bank, due December 2003, requiring monthly interest
payments at prime plus 0.5% and LIBOR plus 2.25%. A portion totaling $11.6
million US dollars is denominated in Canadian dollars. (Interest rates
vary from 7.35% to 8.25% at December 31, 1998)......................... 87,301 33,837
Senior Notes, due November 1999, requiring semiannual interest payments at
the rate of 14%........................................................ 14,015 24,365
Other.................................................................. 7,734 11,780
-------- --------
Total including current maturities..................................... 301,038 219,228
Less: Current maturities.............................................. 20,666 2,653
-------- --------
Total.................................................................. $280,372 $216,575
======== ========
Principal payments of long-term debt for each of the next five years is as
follows:
Current maturities.................................................. $20,666
2000................................................................ 13,023
2001................................................................ 25,023
2002................................................................ 40,989
2003 and thereafter................................................. 201,337
F-12
34
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT -- (CONTINUED)
The Company's financing agreements contain many restrictive loan
covenants, some of which require the Company to maintain minimum levels of
working capital, require the maintenance of specified financial ratios, and
restrict specified payments, including dividends. Under the most restrictive
covenant, the Company must maintain a specified minimum fixed charge ratio,
which could limit the Company's capital expenditures for any 12 month period.
Substantially all of the Company's assets are pledged as collateral for
long-term debt.
In March 1997 the Company simultaneously issued $125 million of 10.25%
Senior Subordinated Notes, due March 2007, entered into a new $140,000 Senior
Credit Facility and made a tender offer for all of its 14% Senior Notes then
outstanding. The $125 million Senior Subordinated notes were sold in a private
placement and subsequently registered in July 1997. As a result of the March
1997 tender offer, $40.6 million of the Senior Notes due 1999 were retired. On
November 15, 1999 the Company retired an additional $10.4 million of Senior
Notes due 1999. The premiums paid to the noteholders, the related transaction
fees and unamortized debt issue costs were recorded in the respective years'
consolidated statements of operations as an extraordinary item.
During March 1999 the Company refinanced a portion of the existing
term and all of the revolving debt under the Senior Credit Facility
and incurred new debt ("the New Senior Credit Facility"). The new debt
was principally used to fund an acquisition consummated also during March 1999
(see Subsequent Event footnote). The debt maturities herein reflect the
repayment schedule of the New Senior Credit Facility for the refinanced debt as
December 31, 1998. The New Senior Credit Facility includes two amortizing term
loans totaling $180 million and a $120 million revolving facility. Final
maturity for the amortizing term loan occurs in 2005 and 2006. The maturity for
the revolving facility occurs in 2006. Pro forma availability under the New
Senior Credit Facility (after the acquisition of Foginni discussed in Note 12,
Subsequent Event) was approximately $24 million at December 31, 1998.
At December 31, 1998, the Company had the following additional open
letters of credit. Economic and Industrial Development Revenue Bonds of $3.2
million are collateralized by a $3.2 million letter of credit. The revolving
credit facility payable in Portuguese escudos is collateralized by a $15 million
bank letter of credit. The Company is self-insured in the State of Michigan for
workers' compensation. As such, the Company has a bank letter of credit in the
amount of $0.5 million to serve as collateral for any potential claims.
The carrying amount of the bank debt and the remaining other long-term
debt instruments approximate fair value as the floating rates inherent in this
debt reflect changes in overall market interest rates.
F-13
35
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LEASES
The Company has entered into capital leases for facilities and
production equipment in Mexico, the United States and the United Kingdom
(equipment only). The gross amount of assets included in property, plant and
equipment under capital leases as of December 31, 1998 and 1997 $6.1 million
and $2.6 million, respectively.
Present value of net minimum lease payments under capital leases is
$3.7 million and $1.5 million as of December 31, 1998 and 1997, respectively.
The Company has significant operating leases at three of its
facilities. During 1995, the Company entered into a 10 year operating lease for
its World Headquarters located in Novi, Michigan. The Company's executive,
engineering and sales staffs are located at the World Headquarters. The Company
also has an operatings lease for the Grand Rapids, Michigan plant which expires
in 2000 and the Coventry, U.K. plant which expires in 2005. The rental expense
related to these leases amounted to $1,326 thousand in 1998, $682 thousand in
1997, and $530 thousand in 1996.
Minimum future lease obligations on capital and operating
leases in effect at December 31, 1998 are as follows:
CAPITAL OPERATING
------- ---------
1999..................................................... 1,705 1,476
2000..................................................... 973 1,438
2001..................................................... 700 1,176
2002..................................................... 460 1,116
2003..................................................... 72 1,135
Thereafter............................................... 24 2,078
F-14
36
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EMPLOYEE BENEFITS AND COMPENSATION COMMITMENTS
RETIREMENT AND PROFIT SHARING PLANS - Effective January 1, 1997 the
Company began providing a defined contribution retirement plan to substantially
all of its employees in the United States. Contributions are matched by the
Company up to a maximum of three percent. This plan replaced a profit sharing
plan, which provided for contributions determined at the Board of Directors'
discretion. Company contributions to these plans were approximately $1.0
million and $0.8 million in 1998 and 1997, respectively.
CHANGE IN CONTROL AGREEMENT -- Certain key management are included in a long
term incentive plan. The plan provides for payments upon the occurrence of an
initial public offering, sale of all or substantially all of the Company's stock
or sale of all or substantially all of the Company's assets. Payment is based
upon a formula specified in the plan.
F-15
37
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LITIGATION AND CLAIMS
The Company is subject to various legal and regulatory proceedings and
claims which arise in the ordinary course of business. In the opinion of
management, the amount of any liability which may result with respect to these
actions will not materially affect the financial position of the Company.
Additionally, the Company is under review by the Ohio Environmental
Protection Agency ("OEPA") for possible violations of environmental emission
standards and permitting regulations at its Ohio facility. The Company is in the
process of providing the information requested by the OEPA and is taking the
necessary steps to comply with the regulations. At this point, no fines and
penalties have been assessed against the Company. Based on current information,
management believes that the results of the investigation will not materially
affect the financial position or results of operations of the Company.
F-16
38
9. INCOME TAXES
Income before income taxes for U.S. and non-U.S. operations, excluding equity in
net income/(loss) of affiliated companies. The Company has elected to be taxed
as a limited liability corporation. Under the provisions of this election, the
Company is not subject to federal income taxes. Therefore, there is no U.S.
tax obligation to the Company. Total income before income taxes as follows
( $ in thousands):
1998 1997 1996
---- ---- ----
U.S. $(6,119) $6,102 $6,552
Non-U.S. 5,662 2,743 499
------- ------ ------
Total income before income taxes $ (457) $8,845 $7,051
======= ======= ======
The provision for income taxes was estimated as follows (in thousands):
1998 1997 1996
---- ---- ----
Currently payable
U.S. federal $ -- $ -- $ --
Non-U.S. 1,528 374 --
====== ===== =====
Total currently payable 1,528 374 --
Deferred tax liability/(benefits)
U.S. federal -- -- --
Non-U.S. 90 -- --
------ ----- -----
Total deferred 90 -- --
------ ----- -----
Total provision $1,618 $ 374 $ --
====== ===== =====
Deferred taxes are provided for earnings of non-U.S. subsidiaries which are
planned to be remitted. No provision for deferred taxes has been made on the
retained earnings (primarily prior to 1998) which are considered to be
indefinitely invested in the non-U.S. subsidiaries. Deferred taxes for the
undistributed earnings of non-U.S. subsidiaries are not practical to estimate.
A reconciliation of the provision for income taxes compared with the amounts at
the U.S. statutory tax rate.
1998 1997 1996
---- ---- ----
Tax provision at Foreign statutory rate of 40% 40% 40% 40%
Effect of:
Tax on non-U.S. income 0 Pts. 0 Pts. 0 Pts.
State and local income taxes 0 0 0
Other (Net operating losses) (11) (26) (40)
-------- -------- --------
Provision for income taxes 29% 14% 0%
Deferred income taxes reflect the estimated tax effect of accumulated temporary
differences between assets and liabilities for financial reporting purposes and
those amounts as measured by tax laws and regulations. The components of
deferred income tax assets and liabilities at December 31 were as follows (in
thousands):
1996 1997
---- ----
Deferred tax assets
- - -------------------
Allowance for credit losses $ 50 $ --
Accrued liabilities 10 --
---- ----
Total deferred tax assets 60 --
Deferred tax liabilities
- - ------------------------
Depreciation and amortization 150 --
------ ----
Total deferred tax liabilities 150 --
------ ----
Net deferred tax assets/(liabilities) $(90) $ --
------ ----
F-17
39
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ACQUISITIONS
The Company accounted for the following acquisitions using the Purchase
Method. The consolidated statements of operations include the operating results
of the acquired businesses from each date of acquisition.
During 1998, the Company completed three acquisitions which compliment
or expand the existing automotive parts manufacturing business. On May 29, 1998
the Company purchased the assets and business of Acco Plastics, Inc. located in
Markham, Ontario (Canada). The plant in Markham performs injection molding and
assembly operations. On June 4, 1998 the assets and business of the Howell,
Michigan division of Libralter Plastics was acquired. The Howell plant does
Class A surface exterior painting, injection molding and assembly. On August 20,
1998 the Company acquired certain injection molding assets and the related
business of Concentric, Inc. located in the U.K., Mexico and the United States.
During 1997, the Company completed three acquisitions, which expanded
its automotive plastic injection molding, assembly and painting capabilities. On
March 28, 1997 the Company purchased three North American manufacturing
facilities of the Aeroquip Division of the Aeroquip-Vickers Corporation. On June
30, 1997 the Company purchased the assets of T.D. Shea Manufacturing Inc., an
OEM supplier of decorative appliques with two factories in Indiana. On September
5, 1997 the Company acquired the Clearplas France division of Ascot Ltd.
located in Belleme, France.
During 1996, the Company acquired Clearplas, Ltd. (Clearplas) and
Materias Plasticas, S.A. ("MaP"). Both companies are automotive suppliers
specializing in injection molding, painting and assembly. At December 31, 1997,
Other Long-Term Obligations includes $1.8 million, representing the present
value of deferred payments for the MaP shares acquired.
During November 1996, the Company acquired MaP pursuant to an agreement
which provided for the Company's acquisition of 38% of the voting stock of MaP
and an option to purchase all of its remaining shares. Commencing in 1996, the
agreement gave the Company significant operational control, including the
appointment of a majority of the Board of Directors, appointment of the general
manager and the ability to influence significant operational decisions. During
March 1998, the Company completed the acquisition of the remaining outstanding
shares of MaP through the exercise of the aforementioned option pursuant to the
1996 agreement. Minority interest in the accompanying Consolidated Statements of
Income represents income attributable to MaP shareholders, other than the
Company, until March 1998. Other accrued liabilities at December 31, 1997
include approximately $1.6 million representing the other shareholder's interest
in the net assets of MaP.
None of the acquisitions completed by the Company during
the years 1996 through 1998 have exceeded the Securities and Exchange
Commission threshold, either individually or in the aggregate, for determining
if a Significant Subsidiary has been acquired.
On March 29, 1999 the Company completed the acquisition of the Foggini
group of companies, see Note 12, Subsequent Event.
F-18
40
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT DATA
The Company is a global supplier of highly engineered plastic
components for the automotive industry. Its comprehensive plastics manufacturing
capabilities include design and engineering, high-precision injection molding,
automated manufacturing and assembly, plastic painting and material and product
testing. Prior to the acquisition of the Foggini group of companies on March 29,
1999, discussed in Note 12, the Company conducted manufacturing, assembly and
painting operations from 19 facilities in North America and four facilities in
Europe. All of these activities constitute a single operating segment.
Financial information summarized by geographic area is as follows:
NET SALES: 1998 1997 1996
---------- ---- ---- ----
United States $254,155 $215,956 176,202
United Kingdom 41,109 34,679 24,166
Other Europe 48,765 33,051 5,284
Other North America 27,504 22,315 11,434
-------- --------- ---------
TOTAL $371,533 $306,001 $217,086
LONG-LIVED ASSETS
United States 119,715 87,119 73,808
United Kingdom 20,116 8,438 8,786
Other Europe 13,102 12,726 10,428
Other North America 18,600 14,002 7,255
--------- -------- ---------
TOTAL $171,533 $122,285 $100,277
Transfers between geographic areas are not significant, and when made,
are recorded at prices comparable to normal unaffiliated customer sales.
F-19
41
KEY PLASTICS L.L.C. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SUBSEQUENT EVENT
The Company completed the acquisition of the Foggini group of companies
("Foggini") effective March 29, 1999, for a total value including assumed debt
of $113 million. Foggini, headquartered in Turin, Italy, expects to report 1998
sales of approximately $130 million from its operations in France, Italy,
Switzerland, and the Czech Republic. Foggini is a leading supplier of air
louvers and other automotive interior and exterior trim components for most
major European original equipment manufacturers and tier one suppliers. The
purchase price was paid in cash, assumed debt and a 35% equity interest in the
combined European business of the Company. The cash portion of the acquisition
was funded with debt provided through a refinancing of the Company's term and
revolving loans consummated during March 1999, discussed more fully in Note 5,
Long-Term Debt, above.
* * * * * *
F-20
42
SIGNATURES
Pursuant to the requirements of Section 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.
KEY PLASTICS L.L.C.
Dated: March 31, 1999
By: /s/ Joseph A. White
-------------------
Joseph A. White
Vice President and Chief
Financial Officer
Dated: March 31, 1999
/s/ David M. Smith
------------------
David M. Smith
Corporate Controller
(Principal Accounting Officer)
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ David C. Benoit Chief Executive Officer and Director March 31, 1999
- - ---------------------- (Principal Executive Officer)
David C. Benoit
/s/ Leonard R. Griffin Chief Operating Officer, President March 31, 1999
- - ---------------------- and Director
Leonard R. Griffin
/s/ Stephen Eisenstein Director March 31, 1999
- - ----------------------
Stephen Eisenstein
/s/ Joel Tauber Director March 31, 1999
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Joel Tauber
43
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 * Share Purchase Agreement
3.2 Restated Articles of Organization of the Company. Incorporated
herein by reference to Exhibit 3.2 to Holdings' Annual Report
on Firm 10-K for the year ended December 31, 1997.
3.4 Amended and Restated Operating Agreement of Technology.
Incorporated herein by reference to Exhibit 3.2 to Holdings'
Annual Report on Firm 10-K for the year ended December 31,
1997.**
4.1 Indenture, dated November 17, 1992, by and between the Company
(as defined therein) and Society National Bank, as Trustee
(the "Senior Note Indenture"), including 14% Senior Notes
issued thereunder. Incorporated herein by referenced to
Exhibit 4.1 to Holdings' Registration Statement No. 33-56048.
4.1.1 Supplemental Indenture to the Senior Note Indenture, dated as
of February 9, 1998. Incorporated herein by reference to
Exhibit 3.2 to Holdings' Annual Report on Firm 10-K for the
year ended December 31, 1997.
4.2 Loan Agreement, dated as of August 1, 1989, between Key and
the Town of Hamilton, Indiana. Incorporated herein by
reference to Exhibit 4.5 of Holdings' Registration Statement
33-56048.
4.3 Reimbursement Agreement, dated as of November 17, 1992,
between the Key and Comerica Bank. Incorporated herein by
reference to Exhibit 4.6 to Holdings' Registration Statement
No. 33-56048.
4.4 Loan Agreement, dated as of December 1, 1987, between Key and
the Economic Development Corporation of the Township of
Plymouth, Michigan. Incorporated herein by reference to
Exhibit 4.7 to Holdings' Registration Statement No. 33-56048.
44
4.5 Reimbursement Agreement, dated as of December 1, 1987, between
Key and Manufacturers Bank of Detroit, as amended.
Incorporated herein by reference to Exhibit 4.8 to Holdings'
Registration Statement 33-56048.
4.7 Indenture, dated March 24, 1997, by and between the Company
(as defined therein) and Marine Midland Bank, as Trustee (the
"Senior Subordinated Note Indenture"). Incorporated herein by
reference to Exhibit 4.6 to the Company's Registration
Statement No. 333-26729.
45
4.7.1 First Amendment to the Senior Subordinated Note Indenture,
made as of February 9, 1998. Incorporated herein by reference
to Exhibit (4.7.1/4.7.2) to Holdings' Annual Report on Form
10-K for the year ended December 31, 1997.
4.7.2 Supplemental Indenture to the Senior Subordinated Note
Indenture, dated as of February 9, 1998. Incorporated herein
by reference to Exhibit (4.7.1/4.7.2) to Holdings' Annual
Report on Form 10-K for the year ended December 31, 1997.
4.8 10 1/4% Senior Subordinated Notes dated March 24, 1997.
Incorporated herein by reference to Exhibit 4.9 to the
Company's Registration Statement No. 333- 26729.
10.1 * Credit Agreement, dated as of March 26, 1999, by and among
the Company, the Borrowing Subsidiaries (as defined therein),
the lenders party thereto from time to time and NBD Bank, as
agent for such lenders (the "Credit Agreement").
10.2 Contribution and Assignment Agreement, dated as of February 9,
1998, by Key to Technology. Incorporated herein by reference
to Exhibit (10.8/10.9/10.10) to Holdings' Annual Report on
Form 10-K for the year ended December 31, 1997.
10.3 Assumption Agreement, made as of February 9, 1998 by and
between Key and Technology. Incorporated herein by reference
to Exhibit (10.8/10.9/10.10) to Holdings' Annual Report on
Form 10-K for the year ended December 31, 1997.
10.4 Equityholders Agreement, dated as of February 9, 1998, by and
among Key, the Company, Paribas Principal Incorporated and the
other Members signatory thereto. Incorporated herein by
reference to Exhibit (10.8/10.9/10.10) to Holdings' Annual
Report on Form 10-K for the year ended December 31, 1997.**
10.5 * Non-Competition and Non-Disclosure Agreement, entered into on
February 9, 1998, by and between the Company and Joel D.
Tauber.
10.6 * Non-Competition and Non-Disclosure Agreement entered into on
February 9, 1997, by and between the Company and David C.
Benoit.
10.7 * Shareholders Agreement
10.8 * Unilateral Promise to Sell Shares
21.1 * Subsidiaries of the Registrant.
27.1 * Financial Data Schedule (EDGAR version only).
* Filed herewith
** A portion of this document has been redacted pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission
("SEC"). An unredacted version of this document has been filed separately
with the SEC.