1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999 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 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 --- --- 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS KEY PLASTICS L.L.C. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 31, December 31, 1999 1998 ---- ---- (Unaudited) ASSETS Current assets: Cash .................................................................... $ 9,887 $ 3,798 Accounts receivable, net ................................................ 139,077 77,795 Inventories ............................................................. 73,799 53,006 Prepaid expenses ........................................................ 9,825 6,659 --------- --------- Total current assets ................................................. 232,588 141,258 Property, plant and equipment, net ....................................... 204,884 171,533 Tooling assets, net ...................................................... 24,408 24,800 Intangibles, net ......................................................... 93,458 42,292 Other assets ............................................................. 6,513 8,606 --------- --------- Total assets ......................................................... $ 561,851 $ 388,489 ========= ========= LIABILITIES AND MEMBERS' DEFICIT Current liabilities: Current maturities of long-term debt ...................................... $ 16,890 $ 20,666 Accounts payable .......................................................... 125,495 61,043 Other accrued liabilities ................................................. 37,951 22,095 --------- --------- Total current liabilities ............................................ 180,336 103,804 Long-term debt .............................................................. 341,741 280,372 Capital leases .............................................................. 3,414 3,692 Other long-term obligations ................................................. 10,055 9,080 Minority interest ........................................................... 33,906 -- Members' equity (deficit): Member contributions ..................................................... 19,355 19,355 Accumulated deficit ...................................................... (26,818) (27,960) Accumulated other comprehensive income: Currency translation .................................................. (138) 146 --------- --------- Total members' equity (deficit) ...................................... (7,601) (8,459) --------- --------- Total liabilities and members' equity (deficit) ............................. $ 561,851 $ 388,489 ========= ========= The accompanying notes are an integral part of the financial statements. 2 3 KEY PLASTICS L.L.C. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands) For the three months ended March 31, (Unaudited) 1999 1998 ---- ---- Net sales ............................................................................... $112,594 $ 82,424 Cost of sales ........................................................................... 91,991 66,707 Selling, general and administrative expenses ............................................ 11,088 8,539 -------- -------- 9,515 7,178 Amortization of Goodwill ................................................................ 818 647 Other non-operating income/(expense) .................................................... 198 (81) Interest expense and amortization of debt issuance costs ................................ 7,506 6,150 -------- -------- Net income (loss) before foreign income taxes, minority interest ........................................................................... 1,389 300 Minority interest ....................................................................... - 575 Foreign income tax expense .............................................................. 246 62 -------- -------- Net income (loss) ....................................................................... $ 1,143 $ (337) ======== ======== The accompanying notes are an integral part of the financial statements. 3 4 KEY PLASTICS L.L.C. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the three months ended March 31, (Unaudited) 1999 1998 ---- ---- Net cash from operating activities ................................................... $ 6,521 $ (20,965) --------- --------- Cash flows from investing activities: Acquisitions of property, plant and equipment, net ............................... (9,145) (7,803) Acquisition of Foggini Group of companies ........................................ (23,183) -- Increase in intangible assets .................................................... -- (6,773) Increase in other assets, net .................................................... -- (1,239) --------- --------- Net cash used in investing activities ............................................ (32,328) (15,815) Cash flows from financing activities: Net borrowings under debt agreements .............................................. 190,714 121,842 Principal payments under debt agreements and capital lease obligations ....................................................................... (162,023) (94,591) Proceeds from sale of equipment ................................................... 3,205 -- Net cash from member capital contributions ....................................... -- 7,225 --------- --------- Net cash provided by financing activities ............................................ 31,896 34,476 --------- --------- Net increase (decrease) in cash ...................................................... 6,089 (2,304) Cash, beginning of year ........................................................... 3,798 6,918 --------- --------- Cash, end of period .................................................................. $ 9,887 $ 4,614 ========= ========= Supplemental disclosure of cash flow information - Depreciation expense ................................................................ $ 6,871 $ 4,974 Cash paid during the period for interest ............................................ $ 11,313 $ 8,726 The accompanying notes are an integral part of the financial statements. 4 5 KEY PLASTICS L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Financial Statement Presentation: These financial statements should be read in conjunction with the Key Plastics L.L.C.'s (the "Company's") consolidated financial statements for the year ended December 31, 1998 which contain a summary of the Company's accounting principles and other information. The results of operations for any interim period should not necessarily be considered indicative of the results of operations for a full year. Information for the three months ended March 31, 1999 and 1998 is unaudited but includes all adjustments, consisting of normal recurring adjustments, which management considers necessary for a fair presentation of the Company's consolidated financial position, results of operations and cash flows. Certain information and footnotes necessary to comply with generally accepted accounting principles (GAAP) have been condensed or omitted. All significant intercompany balances and transactions have been eliminated in consolidation. Certain items in the 1998 financial statements presented herein have been reclassified to conform to the current period presentation. 2. Inventories: Inventories are stated at the lower of cost or market with cost determined using the FIFO (first in, first out) method. The components of inventories consisted of the following: March 31, December 31, 1999 1998 ---- ---- (Dollars in thousands) Unaudited Raw materials $ 28,236 $ 15,709 Work in progress 5,429 3,203 Finished goods 15,965 10,009 Customer tooling in progress 24,169 24,085 -------- -------- $ 73,799 $ 53,006 ======== ======== 5 6 KEY PLASTICS L.L.C. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. Acquisition of Foggini Group of Companies On March 29, 1999 the Company, through its subsidiary, Foggini-Key Europe, Sarl, ("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. The acquisition of Foggini has been accounted for using the Purchase Method. The purchase was completed with a payment of approximately $23 million on March 29, assumed debt of $38 million, an obligation to pay $19 million on June 30, 1999 and the contribution of 35% equity of Foggini-Key Europe Sarl. The results of operations include Foggini from the date of acquisition, March 29, 1999. The consolidated balance sheet at March 31, 1999 includes the unaudited balance sheet of Foggini with estimated adjustments to comply with United States GAAP. The audit of the Foggini financial statements will be completed during the second quarter of 1999. Proforma financial statements giving affect to this acquisition will be presented at a future date. On March 26, 1999, the Company refinanced a portion of its existing term loans and all of its revolving debt under its primary credit facility (the "Senior Credit Agreement" and incurred new debt through amendment to, and restatement of the Senior Credit Agreement (the "New Senior Credit Facility"). The new debt was used to fund the cash portion of the Foggini acquisition and replace certain assumed debt in that transaction. 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. 4. Comprehensive Income Effective January 1, 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. This statement also requires an entity to classify items of other comprehensive earnings by their nature in an annual financial statement as defined. The Company's total comprehensive earnings were as follows: 6 7 Comprehensive Income (Continued) For the three months ended March 31, 1999 1998 ----- ---- (Dollars in thousands) Unaudited Net earnings (loss) $1,143 $ (337) Other comprehensive income: Currency translation (284) 12 ------ ------ Total comprehensive earnings (loss) $ 859 $ (325) 5. 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. All of these activities constitute a single operating segment. Financial information summarized by geographic area is as follows: For the three months ended and as of March 31, Unaudited NET SALES: 1999 1998 ---------- ---- ---- United States $77,868 $56,659 United Kingdom 13,121 9,163 Other Europe 11,889 11,758 Other North America 9,716 4,844 -------- -------- TOTAL $112,594 $82,424 LONG-LIVED ASSETS United States 115,200 91,379 United Kingdom 19,196 8,425 France 17,784 1,795 Italy 19,366 - Other Europe 13,558 13,847 Other North America 19,780 9,668 -------- ------- TOTAL $204,884 $125,114 Transfers between geographic areas are not significant, and when made, are recorded at prices comparable to normal unaffiliated customer sales. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS KEY PLASTICS L.L.C. Certain statements contained or incorporated in this Quarterly Report on Form 10-Q, which are not statements of historical fact, constitute "Forward-Looking Statement" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company pursuant to the "Safe-Harbor" provisions of the Act makes such statements in good faith. Forward-looking statements include financial projections, estimates, and statement regarding plans, objectives and expectations of the Company and its management, including, without limitation, the Foggini acquisition, plans to address computer software issues related to the approach of the year 2000, and other risk factors set forth in the Company's 1998 Form 10-K, which are incorporated herein by reference. Forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, without limitation, those relating to the combination of the Company's business with that of Foggini, operating efficiencies and restructuring charges in connection with the acquisition, conditions in the automotive components industry, certain global and regional economic conditions and other factors detailed herein and from time to time in the documents incorporated by reference herein. Moreover, the Company's plans, objectives and intentions are subject to change based on these and other factors (some of which are beyond the Company's control). 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Below is a summary of period-to-period changes in the principal items of the condensed statements of operations. This is followed by a discussion and analysis of significant factors affecting the Company's earnings for the period. Comparison of Results of Operations Increase (Decrease) (Dollars in millions) Three Months Ended ------------------ March 31,1999 vs. March 31, 1998 Net sales $30.2 37% Cost of sales 25.3 38% Gross profit 4.9 31% Selling, general and Administrative expenses 2.5 30% Amortization of goodwill 0.2 26% Interest expense, net 1.4 22% 9 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended March 31,1999 compared to three months ended March 31,1998. Net sales for the first quarter of 1999 were $112.6 million, which was $30.2 million, or 37% higher than the comparable quarter of 1998. Revenues from operations acquired in the last 12 months accounted for approximately half of the sales increase over the 1998 first quarter. Sales in the base business (operations held as of January 1, 1998) increased by $10.0 million through a combination of additional programs and volume increases. Tooling revenues were also up about $3 million year over year. Gross profit in the first quarter of 1999 was $20.6 million, or 18.3% of sales, compared to $15.7 million, or 19.1% of sales in the first quarter of 1998. The increased gross profit is attributed to the increased sales. The decrease in gross profit as a percentage of sales of 0.8% is primarily attributable to certain of the Company's recent acquisitions. Selling, general and administrative ("SG&A") expenses increased by $2.5 million to $11.1 million, or 9.8% of sales, compared to 10.4% of sales in the first quarter of 1998. The decrease in SG&A as a percent of sales is attributed to lower SG&A requirements to support the Company's continued growth. Interest expense was $7.5 million for the quarter, a net increase of $1.3 million over the same period for 1998. The increase is primarily the result of debt incurred to finance 1998 and 1999 acquisitions. 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION 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 and assumed debt portions 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. Interest rates for the New Senior Credit Facility are based on a matrix and result in rates generally starting between 300 and 350 basis points above LIBOR. 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 $9.7 million in the first quarter of 1999 compared to $20.9 million used in the 1998 first quarter. The year over year increase in cash generated from operations primarily relates to working capital reductions and improved profitability. Net cash used in investing activities in the first three months of 1999 was $122.2 million compared to $15.8 million for the same period of 1998. The significant year over year change is attributable to the Foggini acquisition, which was completed on March 29, 1999 with cash, assumed debt and the transfer of 35% ownership of Foggini-Key in a transaction valued at $113.1 million. Capital expenditures include injection molding machines, assembly equipment and automation. The Company believes 1999 capital spending will be approximately $37 million. Actual capital expenditures may be greater as a result of acquisitions or new business opportunities. Net cash provided by financing activities in 1999 was $118.6 million which primarily relates to the acquisition of Foggini discussed elsewhere herein. At March 31, 1999, the Company had total indebtedness of $358.6 million, of which $125.0 million was incurred pursuant to issuance in 1997 of its 10.25% Senior Subordinated Notes due 2007, $211.9 million was incurred pursuant to the Company's New Senior Credit Agreement and $14 million represents the remaining principal balance outstanding for the Company's issuance in 1992 of its 14% Senior Notes due 1999. Availability under the revolving portion of the New Senior Credit Facility was approximately $21.1 million as of March 31, 1999. 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 11 12 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 and if they do occur, that they will not have a material adverse impact on the Company. 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 to 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, a final version is expected by September 30, 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 12 13 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. The foregoing disclosure contains information regarding Year 2000 readiness, which constitutes a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Readiness Disclosure Act. ITEM 3. 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, 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 approximate $40 million. The potential loss from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $4 million. This model assumes a parallel adverse shift in currency exchange rates which is not widely viewed as likely. As such, this assumption may overstate the impact of exchange rate changes on individual assets and liabilities denominated in a foreign currency. At March 31, 1999, the Company held foreign exchange forward contracts with a notional value of approximately $56 million. The contracts hedge US dollar debt at certain of the European subsidiaries. INTEREST RATE RISK Approximately two thirds of 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 partially mitigate the impact of potential interest rate fluctuations. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit 3 - A list of exhibits required to be filed as part of this Form 10-Q is included under the heading "Exhibit Index" included in this Form 10-Q and incorporated herein by reference. (b) Reports on Form 8-K - A Form 8-K was filed on April 13, 1999 to report the acquisition of the Foggini Group of companies which was completed on March 29, 1999. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KEY PLASTICS L.L.C. By: /S/ Joseph A. White ------------------------------------- Joseph A. White Vice President & Chief Financial Officer (on behalf of the registrant and as Principal Financial Officer) And: /S/ David M. Smith ------------------------------ David M. Smith Corporate Controller (Principal Accounting Officer) Dated: May 10, 1999 14 15 Exhibit Index Exhibit No. Description - ----------- ----------- 2.1 Share Purchase Agreement, dated as of March 29, 1999, between Foggini-Key and Massimo Foggini, Giovanni Foggini, Paolo Foggini, and Maria Alba Foggini (collectively, the "Sellers"). Incorporated herein by reference to Exhibit 2.1 of the Company's Current Report on Form 10-K for the year ended December 31, 1998. 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. Incorporated herein by reference to Exhibit 10.1 of the Company's Current Report on Form 10-K for the year ended December 31, 1998. 10.7 Shareholders Agreement, dated as of March 29, 1999, between the Sellers, the Company, Key Plastics Automotive L.L.C., Key Plastics International L.L.C. and Foggini-Key. Incorporated herein by reference to Exhibit 10.7 of the Company's Current Report on Form 10-K for the year ended December 31, 1998. 10.8 Unilateral Promise to Sell Shares, dated as of March 29, 1999 between the Company and the Sellers. Incorporated herein by reference to Exhibit 10.8 of the Company's Current Report on Form 10-K for the year ended December 31, 1998. 27.1 Financial Date Schedule (EDGAR version only).