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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-----------------------------
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission File Number 333-28157
Tekni-Plex, Inc.
----------------
(Exact name of registrant as specified in its charter)
Delaware 22-3286312
- ------------------------------ -------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
201 Industrial Parkway, Somerville, New Jersey 08876
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(Address of principal executive offices and zip code)
(908) 722-4800
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(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
stock as of the latest practicable date. None
----
Documents Incorporated by Reference: See Index to Exhibits.
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Item 1. BUSINESS
INTRODUCTION
We were founded as a Delaware corporation in 1967 to acquire the General
Felt Products division of Standard Packaging Corporation. At that time, we were
located in Brooklyn, NY, where we produced laminated closure (cap) liners
primarily for the pharmaceutical and food industries. Over the years, we have
built a reputation for solving difficult packaging problems and providing
customers with high quality, advanced packaging materials. In 1970, we built an
additional manufacturing facility in Somerville, New Jersey, diversifying into
the business of producing polystyrene foam trays for the poultry processing
industry. The Somerville facility serves as the current headquarters of the
Company.
In March 1994, Tekni-Plex was acquired by Dr. F. Patrick Smith and MST/TP
Partners, our controlling shareholder at that time Dr. Smith was elected Chief
Executive Officer. In April 1994, Mr. Kenneth W.R. Baker was appointed Chief
Operating Officer. At that time, the principal product lines consisted of clear,
high-barrier laminations for pharmaceutical blister packaging (which we refer to
as clear blister packaging); closure liners, primarily for pharmaceutical
end-uses; and foam processor trays primarily for the poultry industry.
In December 1995, Tekni-Plex acquired the Flemington, NJ, plant and
business of Hargro Flexible Packaging Corporation. At that time, the Flemington
plant produced packaging materials primarily for pharmaceutical products such as
transdermal patches, sutures, iodine and alcohol swabs, aspirin and other
physician samples. We relocated the Brooklyn equipment and business into the
Flemington facility during 1996. The synergistic result of having complementary
technologies in one location created a combined operation with considerably
higher efficiencies and lower costs than the sum of the stand-alone operations.
In February 1996, we expanded our food packaging business by completing
our acquisition of Dolco Packaging Corp., a publicly-traded $81 million foam
products company that was nearly twice the size of Tekni-Plex. Dolco had been in
the business of producing foam packaging products, primarily egg cartons, since
the 1960s. In August 1997, Dolco, which had been a wholly owned subsidiary of
Tekni-Plex, was merged into Tekni-Plex.
In July 1997, we acquired the business and operating facility of
PurePlast Inc. of Cambridge, Ontario, Canada. PurePlast produced calendered
polyvinyl chloride (vinyl) sheet primarily for food and electronics packaging
applications. Following the acquisition, we developed proprietary formulations
of vinyl sheet for vertical integration into our clear blister packaging
business and for sale directly to our global pharmaceutical customers.
In March 1998, we acquired PureTec Corporation, a publicly-traded company
with annual sales of $315 million. PureTec is a leading manufacturer of plastic
packaging, products, and materials primarily for the healthcare and consumer
markets. PureTec's core products include garden and irrigation hose, precision
tubing and gaskets primarily for the aerosol packaging industry, vinyl medical
tubing, and vinyl compounds for the production of medical devices. PureTec is a
wholly owned subsidiary of Tekni-Plex.
In January 1999, we acquired substantially all the assets of Tri-Seal
International, Inc., a leading manufacturer of sophisticated extruded and
coextruded cap liners and seals. The Tri-Seal operations have been integrated
with our closure liner business.
In April 1999, we acquired substantially all the assets of Natvar, Inc.,
a leading producer of disposable medical tubing. As with Tri-Seal, the Natvar
acquisition was intended to strengthen our existing core business and expand our
product offerings. The Natvar operation has been integrated into our medical
tubing business.
In June 2000, we completed a recapitalization of Tekni-Plex. As part of
the recapitalization, MST/TP Partners (the holders of a majority of our common
stock prior to the recapitalization) and certain other investors sold most of
their interests, and a group of new investors contributed an aggregate of $167
million in new equity, and agreed to contribute up to $103 million in
additional equity over the next five years. All members of management
maintained 100% of their interests in the Company. Also, Tekni-Plex entered
into a new credit agreement, issued $275 million in new senior subordinated
notes, and repaid the debt that existed prior to the recapitalization.
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DESCRIPTION OF BUSINESS
We are a global, diversified manufacturer of packaging, products, and
materials for the healthcare, consumer, and food packaging industries. We have
built a leadership position in our core markets, and focus on vertically
integrated production of highly specialized products. Our operations are aligned
under four primary business groups: Healthcare Packaging, Products, and
Materials; Consumer Packaging and Products; Food Packaging; and Specialty Resins
and Compounds. Our end market and product line diversity has the effect of
reducing overall risk related to any single product or customer. Representative
product lines in each group are listed below:
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HEALTHCARE PACKAGING, CONSUMER PACKAGING FOOD PACKAGING SPECIALTY RESINS
PRODUCTS, AND MATERIALS AND PRODUCTS AND COMPOUNDS
- -----------------------------------------------------------------------------------------------
Pharmaceutical packaging Precision tubing Foamed egg cartons Specialty PVC
and gaskets resins
Medical tubing Garden and Poultry and meat Recycled PET resins
irrigation hose processor trays
products
Medical device materials Pool hose products Agricultural foam General purpose PVC
packaging compounds
- -----------------------------------------------------------------------------------------------
HEALTHCARE PACKAGING, PRODUCTS, AND MATERIALS
Pharmaceutical Packaging
Our pharmaceutical packaging product line includes flexible, semi-rigid,
and rigid packaging films, coated films, co-extrusions, and laminations.
We believe that we are a market leader for clear, high-barrier
laminations for pharmaceutical blister packaging. These packaging materials are
used for fast-acting pharmaceuticals that are generally highly reactive to
moisture. Transparent, high-barrier blister packaging is primarily used to
protect drugs from moisture vapor infiltration or desiccation. Blister packaging
is the preferred packaging form when dispenser handling can affect shelf life or
drug efficacy, or when unit dose packaging is needed. Unit dose packaging is
being used to improve patient compliance with regard to dosage regimen, and has
been identified as the packaging form of choice in addressing child safety
aspects of drug packaging. The advantages of transparent blisters, as opposed to
opaque foil-based materials manufactured by various competitors, include the
ability to visually inspect the contents of the blister and to present the
product with maximum confidence.
We believe the flexible and semi-rigid plastic packaging segment of the
pharmaceutical packaging industry is growing at a faster rate than the
non-plastics segments because of the generally lower package cost and broader
range of functional characteristics of plastic packaging. As a result, the
technologies used to manufacture plastic packaging materials continue to develop
at a faster pace than those used in the more mature paper, glass, and metal
products.
Our high-barrier, blister packaging is sold to major pharmaceutical
companies (or their designated contract packagers). We market our full
pharmaceutical product line directly on a worldwide basis, and have assembled a
global network of sales and marketing personnel on six continents.
In the clear blister packaging market, we have two principal competitors
worldwide with resources equal to or greater than ours. However, we believe that
neither of these competitors has the breadth of product offering to match ours,
and that this differentiation is significant as viewed by the pharmaceutical
industry. Also, the high manufacturing and audit compliance standards imposed by
the pharmaceutical companies on their suppliers provide a significant barrier to
the entry of new competitors. Entry barriers also arise due to the lengthy and
stringent approval process required by pharmaceutical companies. Since approval
requires that the drug be tested while packaged in the same packaging materials
intended for commercial use, changing materials after approval risks renewed
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scrutiny by the FDA. The packaging materials for pharmaceutical applications
also require special documentation of material sources and uses within the
manufacturing process as well as heightened quality assurance measures.
Tekni-Plex is also a leading producer of sophisticated extruded,
coextruded and laminated cap liners and seals, known as closure liners, for
glass and plastic bottles. Closure liners perfect the seal between a container
and its closure, for example, between a bottle and its cap. The liner material
has become an integral part of the container/closure package. Without the
gasketing effect of the liner, most container/closure packages would not be
secure enough to protect the contents from contamination or loss of product
efficacy.
We sell these products through our direct sales force primarily to
packagers of pharmaceutical, healthcare and food products. We have two principal
competitors in North America but also compete with several smaller companies
having substantially smaller market shares. However, as a result of the Tri-Seal
acquisition, we believe that we offer the widest range of liner materials in the
industry. We remain competitive by focusing on product quality and performance
and prompt delivery.
Medical Tubing
We are a leading non-captive supplier of vinyl medical tubing in North
America and Europe. We specialize in high-quality, close tolerance tubing for
various surgical procedures and related medical applications. These applications
include intravenous ("IV") therapy, hemodialysis therapy, cardio-vascular
procedures such as coronary bypass surgery, suction and aspiration products, and
urinary drainage and catheter products. New medical tubing products we have
developed include microbore tubing and silicone substitute formulations.
Microbore tubing can be used to regulate the delivery of critical intravenous
fluids without the need for more expensive drip control devices. Medical
professionals can precisely control the drug delivery speed simply by selecting
the proper (color-coded) diameter tube, thereby improving accuracy and reducing
cost. More importantly, as home healthcare trends continue, the use of microbore
tubing will help eliminate critical dosage errors on the part of the
non-professional caregiver or the patient.
We manufacture medical tubing using proprietary plastic extrusion
processes. The primary raw materials are proprietary compounds, which we
produce. Our medical tubing is sold primarily to manufacturers of medical
devices that are packaged specifically for specific surgical procedures and
related medical applications. We sell our products through direct salespeople.
We remain competitive by focusing on product quality and performance and prompt
delivery.
Medical Device Materials
We believe that we are a leading non-captive producer of high quality
vinyl compounds for use in the medical industry. Our chemists work closely with
customers to develop compounds that address their specific requirements. Through
this custom work, we have introduced a number of breakthroughs to the medical
device industry by developing formulations with unique physical characteristics.
For example, we recently developed a new family of flexible vinyl compounds
designed to replace silicone rubber in a variety of medical tubing and
commercial applications.
These medical-grade materials are sold to leading manufacturers of
medical devices and equipment. They are also sold to producers of tubing and, to
some extent, to producers of closures for the food and beverage industry. We
sell these compounds in worldwide markets directly through our salespeople.
The market for medical-grade vinyl compounds is highly specialized, and
we have two smaller, but significant competitors. For more than 30 years, we
have been supplying these specialized vinyl compounds for FDA-regulated
applications. We believe that we compete effectively based on product quality
and performance and prompt delivery.
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CONSUMER PACKAGING AND PRODUCTS
Precision Tubing and Gaskets
Our precision tubing and gaskets product line is sold primarily to
manufacturers of aerosol valves, dispenser pumps, and writing instruments. Sales
to the aerosol valve and dispenser pump industries consist primarily of dip
tubes, which transmit the contents of a dispenser can to the nozzle, and
specialized molded or punched rubber-based valve gaskets that serve to control
the release of the product from the container. Writing instrument products
include pen barrels and ink tubing as well as ink reservoirs for felt-tip pens.
These products are sold throughout the United States and Europe, as well as
selected worldwide markets. Sales are made through our direct sales force. We
believe that we are a leading precision tubing extruder in North America and the
leading supplier of aerosol valve and dispenser pump gaskets worldwide.
Our precision tubing products are manufactured at extremely high speeds
while holding to precise tolerances. The process enhancements that allow
simultaneous high speed and precision are proprietary to us. The precision
gasket products, which we have manufactured for over fifty years, are produced
using proprietary formulations. These formulations are designed to provide
consistent functional performance throughout the entire shelf life of the
product by incorporating chemical resistance characteristics appropriate to the
fluid being packaged. For example, we have developed unique formulations that
virtually eliminate contamination of the products packaged in spray dispensers.
This has greatly expanded the use of these dispensers for personal hygiene
products, foods, and fragrances. We have also developed proprietary methods for
achieving extremely accurate thickness control, superior surface finish, and the
elimination of internal imperfections prevalent in other processing methods.
The principal competitive pressure in this product line is the
possibility of customers switching to internal production, i.e., vertical
integration. To counteract this possibility, the Company focuses on product
quality, cost reduction, prompt delivery, technical service and functional
innovation.
Garden and Irrigation Hose Products
We believe that we are a leading producer of garden hose in the United
States. We have produced garden hose and related products for fifty years. We
are vertically integrated and produce the primary components of our garden hoses
ourselves, including proprietary material formulations and brass couplings.
Innovations have included the patented Colorite(R) Evenflow(R) design and ultra
high quality product lines that utilize medical-grade plastics. We also
manufacture specialty hose products such as air hose and irrigation, or "soaker"
hose.
We sell these products primarily through our direct salespeople and also
through independent representatives. Both private label and brand-name products
are sold to the retail market, primarily to home centers, hardware cooperatives,
food, automotive, drug and mass merchandising chains and catalog companies
throughout the United States and Canada. Our customers include some of the
fastest growing and the most widely respected retail chains in North America.
Our market strategy is to provide a complete line of innovative, high-quality
products along with superior customer service.
The garden hose business is highly seasonal with approximately 75% of
sales occurring in the spring and early summer months. This seasonality tends to
have an impact on the Company's financial results from quarter to quarter.
FOOD PACKAGING
The Food Packaging group produces primarily thermoformed foam polystyrene
packaging products such as egg cartons and processor trays for the poultry and
meat industries. We believe that we are the leading manufacturer of foam egg
cartons in the United States and also a leading supplier of processor trays to
the poultry industry.
Thermoformed foam polystyrene packaging has been the material of choice
for food packaging cartons and trays for many years. In terms of economic and
functional characteristics, foamed polystyrene products offer a combination of
high strength, minimum material content and superior moisture barrier
performance. Foamed polystyrene products also offer greater dimensional
consistency that enhances the high speed mechanical feeding of cartons and trays
into automated package filling operations. We sell these products through our
direct sales force.
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Within the polystyrene foam processor tray market, we compete principally
with two large competitors, both of whom have financial resources greater than
ours, and who, together, control the largest share of this market. In the egg
packaging market, our primary competitor manufactures pulp-based egg cartons. We
believe, that we compete effectively based on product quality and performance
and prompt delivery.
SPECIALTY RESINS AND COMPOUNDS
Specialty Vinyl Resins
Tekni-Plex manufactures specialty vinyl resins, with an annual production
capacity of approximately 100 million pounds. We employ specialized technology
to produce dispersion, blending, and copolymer suspension resins for use by
suppliers to a variety of industries, including floor covering, automotive
sealants and adhesives, coil coatings, plastisol and medical device compounding,
and vinyl packaging.
We sell these products through our direct sales force as well as through
independent sales representatives. We compete with a number of large chemical
companies offering greater breadth of products. However, we believe that we are
building a relatively unique position in the specialty resins market by offering
customized products for niche markets that the larger producers do not serve. We
provide individual customer service and the highest standards of quality.
PATENTS AND TRADEMARKS
The Company seeks to protect its proprietary know-how through the
application of patent and trademark laws. However, in the opinion of management,
none of its patents or trademarks are material to its operations.
RESEARCH AND DEVELOPMENT
The Company employs certain professionals who, along with other
responsibilities, are engaged in research relating to the development of new
products and to the improvement of existing products and processes. The Company
works closely with certain clients to develop and improve certain products and
product lines. Our product development efforts are typically either funded by
clients or such costs are absorbed in the Company's manufacturing cost of sales,
and therefore are not reflected as research and development expense.
SALES, MARKETING AND CUSTOMERS
Excluding customer service representatives, as of June 30, 2000, we had a
total of approximately 51 direct sales and marketing personnel covering both our
domestic and international businesses. There were also approximately 153
commissioned independent sales representatives (not direct employees of
Tekni-Plex) providing additional coverage.
Overall customer concentration is low, with our largest single customer,
Wal-Mart, acccounting for approximately 10% of total sales and no other customer
accounting for 10% or more of total sales.
MANUFACTURING
As of June 30, 2000 we had 32 strategically located manufacturing
facilities throughout North America and Europe, totaling over 3,000,000 square
feet of floor space.
We utilize many proprietary material formulations throughout our
operations. These formulations provide superior processing and end-product
performance characteristics, giving us a competitive edge across many of our
businesses. Typically, these proprietary material formulations are protected by
trade secret rather than through patents. We believe this is a more effective
approach to maintaining our competitive edge.
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We utilize many proprietary, highly efficient manufacturing processes,
developed by our own engineering staffs throughout our operations. These
processes allow us to make products with superior dimensional tolerances at
higher speeds with lower waste factors than our competitors.
Our various business units share technological information regarding
process and material formulation improvements routinely, and actively seek new
synergistic applications for newly developed technologies throughout our
company.
RAW MATERIALS
We purchase raw materials from several sources that differ for each
product line. We use commodity petrochemicals, primarily polyvinyl chloride,
polystyrene, vinyl chloride monomer, polypropylene and polyethylene. All of
these materials are widely available from numerous sources and we currently
purchase them from multiple suppliers. This diversity of raw material suppliers,
as well as the availability of alternative suppliers, has the effect of reducing
our overall risk related to any one supplier. One exception is Aclar(R), a key
raw material used in manufacturing our clear blister packaging materials. We
currently have a long-term contract for Aclar(R) with Honeywell, the sole
manufacturer and supplier of Aclar(R). To the extent that our supply of this raw
material is hindered, we would substitute alternative materials. There has never
been a significant disruption of the supply of this material in our 32 years of
manufacturing this product line.
In the past we have generally been able to pass on raw materials cost
increases to customers on a relatively timely basis. The exception has been our
garden hose products, the prices for which are typically set annually in advance
of each season. To the extent that raw material costs increase more than
anticipated, these additional costs generally cannot be passed on until the
following season.
INTELLECTUAL PROPERTY
We primarily rely on confidentiality agreements contained in our
employment applications and the restriction of access to our plants and
confidential information to safeguard our proprietary technology. Although we
also file and register patents and trademarks, we do not believe that any of our
patents or trademarks is material to our operations.
EMPLOYEES
As of June 30, 2000, the Company employed approximately 2,900 full-time
employees. Approximately 30% of all employees are represented by various
collective bargaining agreements that expire between October 18, 2000 and July
31, 2003. Of these, 35 employees at one of our facilities are represented by an
agreement that expires October 18, 2000. We do not anticipate any difficulties
with extending that agreement.
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Item 2. FACILITIES
We believe that our facilities are suitable and have sufficient
productive capacity for our current and foreseeable operational and
administrative needs. Set forth below is a list and brief description of all of
our offices and facilities, all of which are owned unless otherwise indicated.
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
- -------- -------- -----------
Somerville, New Jersey Corporate Headquarters; Manufactures 172,000
food packaging and healthcare packaging
Auburn, Maine (5) Specialty resins 24,000
Belfast, Northern Ireland Healthcare materials 55,000
Blauvelt, New York (8) Healthcare packaging 56,400
Burlington, New Jersey Specialty resins 107,000
Cambridge, Ontario Healthcare packaging 25,000
City of Industry, Healthcare products 110,000
California (5)
Clayton, North Carolina Healthcare products 76,000
Clinton, Illinois Consumer packaging 62,500
Dallas, Texas (1) Food packaging 139,000
Dalton, Georgia Healthcare products 40,000
Decatur, Indiana Food packaging 187,000
Decatur, Indiana (1) Warehouse 3,750
East Farmingdale, New York (2) Specialty resins 50,000
Erembodegem Consumer packaging and 99,100
(Aalst), Belgium healthcare products
Flemington, New Jersey Healthcare packaging 145,000
Lakewood, Colorado (2) Healthcare products 17,300
Lawrenceville, Georgia Food packaging 150,000
Lawrenceville, Georgia (1) Warehouse 31,700
Livonia, Michigan (4) Specialty resins 60,000
McKenzie, Tennessee Consumer products 20,000
Milan (Gaggiano), Italy (7) Consumer packaging 14,100
Milan (Gaggiano), Italy Consumer packaging 25,800
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Milan (Rosate), Italy (3) Consumer packaging 24,000
Mississauga, Ontario (6) Consumer products 100,000
Piscataway, New Jersey (3) Compounds 150,000
Ridgefield, New Jersey Consumer products and 328,000
healthcare materials
Ridgefield, New Jersey (3) Warehouse 70,000
Rockaway, New Jersey Consumer packaging 98,600
Schaumburg, Illinois (9) Consumer packaging 58,000
Schiller Park, Illinois Consumer packaging 20,000
Sparks, Nevada (3) Consumer products and 248,000
healthcare materials
Tonawanda, New York (2) Consumer products 32,000
Waco, Texas Consumer products 104,600
Wenatchee, Washington Food packaging 97,000
Wenatchee, Washington (4) Warehouse 26,200
(Years relate to calendar years)
(1) Leased on a month-to-month basis.
(2) Lease expires in 2001.
(3) Lease expires in 2002.
(4) Lease expires in 2003.
(5) Lease expires in 2004.
(6) Lease expires in 2005.
(7) Lease expires in 2006.
(8) Lease expires in 2008.
(9) Lease expires in 2019.
Item 3. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
We are regularly involved in legal proceedings arising in the ordinary
course of business, none of which are currently expected to have a material
adverse effect on our businesses, financial condition or results of operation.
Like similar companies, our facilities, operations and properties are
subject to foreign, federal, state, provincial and local laws and regulations
relating to, among other things, emissions to air, discharges to water, the
generation, handling, storage, transportation and disposal of hazardous and
nonhazardous materials and wastes and the health and safety of employees. We
maintain a primary commitment to employee health and safety, and environmental
responsibility. Our intention and policy are to be at all times a responsible
corporate citizen.
We are not aware of any environmental proceedings that are likely to have
a material adverse effect on our consolidated financial position or results of
operations. Also, in our opinion, no such proceedings nor compliance with
federal, state and local environmental laws and regulations will require
material capital expenditures for environmental control facilities in the
foreseeable future.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Not Applicable.
Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands)
The following table sets forth our selected historical consolidated
financial information and has been derived from and should be read in
conjunction with our audited consolidated financial statements, including the
notes thereto, which appear elsewhere herein.
YEARS ENDED
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JUN. 28, JUN. 27, JULY 3, JULY 2, JUN. 30,
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Net sales $ 80,917 $ 144,736 $ 309,597 $ 489,237 $ 506,828
Cost of goods sold 62,335 107,007 232,499 358,293 376,491
Gross profit 18,582 37,729 77,098 130,944 130,337
Selling, general and administrative expenses 10,339 15,886 39,220 62,534 58,343
Income from operations 8,243 21,843 37,878 68,410 71,994
Interest expense, net 5,816 8,094 19,682 38,977 38,447
Other expense 469 646 415 286 4,705
Pre-tax income before extraordinary item 1,958 13,103 17,781 29,147 28,842
Income tax provision 982 4,675 9,112 14,150 14,436
Income before extraordinary item 976 8,428 8,669 14,997 14,406
Extraordinary item (loss) (c) (d) -- (20,666) -- -- (35,374)
Net income (loss) $ 976 $ (12,238) $ 8,669 $ 14,997 $ (20,968)
BALANCE SHEET DATA (at period end):
Working capital $ 11,660 $ 25,950 $ 84,897 $ 101,445 $ 145,879
Total Assets 121,770 129,029 539,279 559,436 574,789
Total debt (including current portion) 70,436 75,000 401,905 416,394 651,593
Stockholders' equity (deficit) 24,162 30,397 38,673 52,297 (149,150)
OTHER FINANCIAL DATA:
EBITDA (a) (b) $ 14,157 $ 30,223 $ 54,479 $ 101,681 $ 104,595
EBITDA margin (a) 17.5% 20.9% 17.6% 20.8% 20.6%
Depreciation and amortization $ 6,821 $ 9,551 $ 17,249 $ 35,343 $ 34,748
Capital expenditures 2,275 3,934 7,283 12,950 16,258
Cash flows:
From operations 6,568 19,537 29,009 38,794 9,485
From investing (49,522) (6,273) (310,672) (58,089) (16,905)
From financing 43,669 (3,217) 299,926 12,057 (1,687)
(a) EBITDA is defined as net income before 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. However, EBITDA should not be considered
in isolation as a substitute for net income or cash flow data
prepared in accordance with generally accepted accounting
principles or as a measure of a company's
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profitability or liquidity. In addition, this measure of EBITDA
may not be comparable to similar measures reported by other
companies. EBITDA margin is calculated as the ratio of EBITDA to
net sales for the period. For fiscal 1996, amortization included
$522 related to the write off of prior unamortized debt costs.
(b) EBITDA for fiscal 2000 includes $4.1 million of non-recurring
costs associated with our recapitalization.
(c) Net loss for the year ended June 27, 1997, includes an
extraordinary loss comprised of (i) a prepayment penalty of $1.2
million and the write-off of deferred financing costs and debt
discount of $3.4 million, net of the combined tax benefit of $1.8
million, and (ii) a loss of $17.8 million on the repurchase of
redeemable warrants.
(d) Net loss for the year ended June 30, 2000 includes an
extraordinary loss of approximately $35.4 million. The
extraordinary loss is comprised of prepayment penalties and other
interest costs of $39.3 million, the write-off of deferred
financing costs of $16.7 million and other fees of $1.3 million,
net of a tax benefit of $21.9 million.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Historical Financial Information" and the Financial Statements
included elsewhere in this Annual Report. The table below sets forth, for the
periods indicated, selected operating data as a percentage of net sales.
SELECTED FINANCIAL INFORMATION
(Percentage of net sales)
YEAR ENDED
------------------------------------------------
JULY 3, 1998 JULY 2, 1999 JUNE 30, 2000
------------------------------------------------
Net sales............................................. 100.0% 100.0% 100.0%
Cost of sales......................................... 75.1 73.2 74.3
Gross profit.......................................... 24.9 26.8 25.7
Selling, general and administrative expenses.......... 12.7 12.8 11.5
Income from operations................................ 12.2 14.0 14.2
Interest expense...................................... 6.4 8.0 7.6
Provision for income taxes............................ 2.9 2.9 2.8
Income before extraordinary item...................... 2.8 3.1 2.8
Extraordinary item (loss)............................. --- --- (7.0)
Net income (loss)..................................... 2.8 3.1 (4.1)
Depreciation and amortization......................... 5.6 7.2 6.9
EBITDA................................................ 17.6 20.8 20.6
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EBITDA is defined as net income before 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.
However, EBITDA should not be considered in isolation as a substitute for net
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of our profitability or liquidity. In
addition, this measure of EBITDA may not be comparable to similar measures
reported by other companies. EBITDA margin is calculated as the ratio of EBITDA
to net sales for the period.
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JULY 2, 1999
Net Sales, increased to $506.8 million for the year ended June 30, 2000
from $489.2 million for the year ended July 2, 1999, representing an increase of
$17.6 million or 3.6%. The increased sales occurred primarily in our Healthcare
and Food business segments and in our European Consumer operations. These
increases were partially offset by decreases in the Specialty Resins and
Compounding business segment, which continues its restructuring process of
developing new, differentiated product lines. Fiscal 2000 sales were also
negatively affected by the impact of an unusually wet spring and early summer on
our garden hose business.
Cost of Goods Sold, increased to $376.5 million for the year ended June
30, 2000 from $358.3 million for the year ended July 2, 1999. Expressed as a
percentage of net sales, cost of goods sold increased to 74.3% for the year
ended June 30, 2000 from 73.2% for the year ended July 2, 1999. The increase in
cost of goods sold as a percentage of net sales was primarily due to higher
resin costs, which escalated rapidly throughout fiscal year 2000. Our garden
hose business competes in the seasonal retail marketplace, where prices are
negotiated well in advance of the selling season. As such, we are unable to pass
through unanticipated resin cost increases affecting our garden hose business
during that season, and the timing of any pass through of cost increases falls
to the following selling season.
Gross Profit, as a result, was virtually unchanged for the fiscal year
ended June 30, 2000 at $130.3 million compared to $130.9 million in the fiscal
year ended July 2, 1999. The ratio of gross profit to net sales, therefore,
decreased to 25.7% for fiscal year 2000 from 26.8% in fiscal year 1999.
Selling, General and Administrative Expenses, decreased to $58.3 million
in the fiscal year ended June 30, 2000 from $62.5 million in the fiscal year
July 2, 1999. The resultant ratios to net sales decreased to 11.5% from 12.8%,
respectively. Primary reasons for the reduction were a decrease in
administrative costs and completion of our programs to integrate prior year
acquisitions into our operations.
Income from Operations, as a result of the above, increased to $72.0
million or 14.2% of sales in the fiscal year ended June 30, 2000 from $68.4
million or 14.0% for the fiscal year ended July 2, 1999.
Other Expenses, in the fiscal year ended June 30, 2000 included about
$4.1 million of non-recurring costs as a result of our recapitalization program
completed near the end of June 2000.
Interest Expense, was $38.4 million for the fiscal year ended June 30,
2000, down slightly from $39.0 million in the prior year. Average monthly usage
and interest rates were roughly the same in both years. Interest expense as a
ratio to net sales declined in fiscal year 2000 to 7.6% from 8.0% in the prior
year. The large increase in total debt at the end of fiscal year 2000 compared
to the end of fiscal year 1999, result from our recapitalization completed
June 21, 2000, had little impact on interest expense for the year ending June
30, 2000, but will increase in the future.
Provision for Income Taxes increased slightly to $14.4 million in the
fiscal year ended June 30, 2000, from $14.2 million in the fiscal year ended
July 2, 1999. Accordingly, the ratio of the provision for income taxes to net
sales fell to 2.8% from 2.9%, respectively. Our effective tax rate was 50.1% for
the fiscal year ended June 30, 2000 compared with 48.5% for the fiscal year
ended July 2, 1999. The difference between the two years was primarily a
function of tax carryover credits in the fiscal year ending July 2, 1999, and a
greater contribution to pretax income by our European operations in fiscal year
2000 than in fiscal year 1999.
Extraordinary Expense Net of Income Tax, of $35.4 million in the fiscal
year ended June 30, 2000 represented the costs of refinancing the old Senior
Subordinated Notes and bank debt with new Senior Subordinated Notes and bank
debt as part of our recapitalization in June 2000.
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Net Income (loss), for the fiscal year ending June 30, 2000 showed a loss
of ($21.0) million or (4.1)% of net sales due to the extraordinary loss net of
applicable taxes and non-recurring costs of the recapitalization which totaled
about $39.5 million. We showed a net profit in the fiscal year ending July 2,
1999 of $15.0 million or 3.1% of net sales.
Depreciation and Amortization decreased slightly to $34.7 million for the
year ended June 30, 2000 from $35.3 million for the year ended July 2, 1999.
Expressed as a percentage of net sales, depreciation and amortization decreased
to 6.9% for the year ended June 30, 2000 from 7.2% for the same period in 1999.
EBITDA, adjusted for $4.1 million in non-recurring costs of the
recapitalization, increased to $104.6 million or 20.6% of net sales for the year
ended June 30, 2000, from $101.7 million or 20.8% of net sales for the same
period in 1999 for the same reasons discussed above.
FOR THE YEAR ENDED JULY 2, 1999 COMPARED WITH THE YEAR ENDED JULY 3, 1998
Net Sales for the year ended July 2, 1999 were $489.2 million, a 58.0%
increase over net sales of $309.6 million for the year ended July 3, 1998. The
increase was due primarily to our acquisition of PureTec in March 1998, and, to
a lesser extent, our acquisition of Tri-Seal in January, 1999 and Natvar in
April, 1999. The year-over-year change related to the impact of these
acquisitions amounted to $184.4 million. This increase was partially offset by
the elimination in fiscal 1999 of certain low-margin sales related to the
restructuring of acquired operations.
Cost of Sales, increased to $358.3 million for the year ended July 2,
1999, of which $121.3 million was due to the acquired operations discussed
above, from $232.5 million for the year ended July 3, 1998. Expressed as a
percentage of net sales, cost of goods sold decreased to 73.2% for the year
ended July 2, 1999 from 75.1% for the same period in 1998. The decrease in cost
of goods sold as a percentage of net sales was due primarily to efficiencies
achieved in operations acquired with the purchase of PureTec, and lower raw
material costs.
Gross Profit as a result, increased to $130.9 million or 26.8% of net
sales for the year ended July 2, 1999, from $77.1 million or 24.9% of net sales
for the same period in 1998.
Selling, general and administrative expenses increased to $62.5 million
or 12.8% of net sales for the year ended July 2, 1999 from $39.2 million or
12.7% of net sales for the same period in 1998. Selling, general and
administrative expenses increased in proportion to the increase in net sales
resulting from acquired operations and related compensation increases.
Income from Operations increased to $68.4 million or 14.0% of net sales
for the year ended July 2, 1999, from $37.9 million or 12.2% for the same period
in 1998, for the reasons discussed above.
Interest expense increased to $39.0 million or 8.0% of net sales for the
year ended July 2, 1999, from $19.7 million or 6.4% of net sales for the same
period in 1998 due primarily to an issuance of new bonds and notes to acquire
PureTec. We also borrowed under our revolving line of credit in fiscal 1999 to
fund the purchase of Tri-Seal and Natvar.
Provision for income taxes increased to $14.2 million or 2.9% of net
sales for the year ended July 2, 1999, from $9.1 million or 2.9% for the same
period in 1998. Our effective tax rate was 48.5% for the year ended July 2, 1999
compared to 51.2% for the same period in 1998. The decrease between periods is
due primarily to the use of tax carryover credits.
Net income increased to $15.0 million or 3.1% of net sales for the year
ended July 2, 1999, from $8.7 million or 2.8% of net sales for the same period
in 1998, for the reasons discussed above.
Depreciation and Amortization increased to $35.3 million for the year
ended July 2, 1999 from $17.2 million for the year ended July 3, 1998. Expressed
as a percentage of net sales, depreciation and amortization increased to 7.2%
for the year ended July 2, 1999 from 5.6% for the same period in 1998. The
increase in depreciation and amortization as a percentage of net sales was due
to the effect of the full year of the PureTec acquisition and the acquisition of
Natvar and Tri-Seal during 1999.
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LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 30, 2000, net cash provided by operating
activities was $9.5 million compared to $38.8 million for the same period in the
prior year for an increased usage of $29.3 million. The increase was due to
higher inventories in Consumer Packaging and Products to accommodate a higher
anticipated sales level in that business segment, a reduction in accrued
expenses and liabilities, and the effect of non-recurring costs associated with
our recapitalization. Various year-over-year changes in operating assets,
accrued expenses, and liabilities are generally due to offsetting timing
differences.
Working capital at June 30, 2000 was $145.9 million compared to $101.4
million at July 2, 1999. The increase was primarily due to higher inventory
levels in our Consumer Packaging and Products business segment and higher
refundable income taxes for the year ended June 30, 2000. Approximately 75% of
the annual sales in garden hose, which is the largest business unit in the
Consumer Packaging and Products segment, normally occur in the spring and early
summer months.
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As of June 30, 2000, we had an outstanding balance of $30.0 million under
the $100.0 million revolving credit line of the existing credit facility. This
was an increase of $8.0 million from the outstanding balance as of July 2, 1999,
and was due primarily to higher inventory levels of our Consumer Packaging and
Products business segment.
The aggregate amount of funds required to be paid by us for the
recapitalization was $693.2 million. The financing for the recapitalization was
provided by the offering of the new Senior Subordinated Notes, the new credit
facility and new equity contributions by Tekni-Plex Partners.
In April 1997, we issued $75.0 million aggregate principal amount of 11
1/4% notes, and in March 1998, we issued $200.0 million aggregate principal
amount of 9 1/4% notes. As part of the recapitalization, we purchased all of the
outstanding 9 1/4% notes and 99.97% of the outstanding principal amount of the
11 1/4% notes.
In addition, as part of the recapitalization, we entered into a new
credit facility consisting of a $100.0 million A term loan maturing in 2006, a
$244.0 million B term loan maturing in 2008 and a $100.0 million revolving
credit facility maturing in 2006. The new revolving credit facility replaced our
$90.0 million prior revolving credit facility. As of June 30, 2000 and July 2,
1999, there were outstanding balances of $30.0 million and $22.0 million,
respectively, under the respective credit facility. Borrowings under the term
loan will be subject to annual amortization, payable in quarterly installments.
As of June 30, 2000, there was $70 million undrawn and available under
the new revolving credit facility to fund ongoing general corporate and working
capital requirements. In addition, as part of the recapitalization, our new
equity investors agreed to contribute to Tekni-Plex Partners $269.4 million in
the aggregate, of which $167 million has been contributed and used to purchase
interests of certain previous Tekni-Plex investors, Tekni-Plex Management LLC.
The managing member of Tekni-Plex Partners, may for at least five years call
upon the remainder of the commitment, $102.4 million, for our future use for
general corporate purposes, including acquisitions.
Apart from acquisitions, our principal uses of cash will be debt service,
capital expenditures and working capital requirements. Our capital expenditures
for the year ended June 30, 2000 and July 2, 1999 were $16.3 million and $13.0
million, respectively.
Management believes that cash generated from operations plus funds from
the new credit facility will be sufficient to meet our expected debt service
requirements, planned capital expenditures and operating needs. However, we
cannot assure you that sufficient funds will be available from operations or
borrowings under the new credit facility to meet our anticipated cash needs. To
the extent we pursue future acquisitions, we may be required to obtain
additional financing. We cannot assure you that we will be able to obtain such
financing in amounts and on terms acceptable to us. The terms of the notes and
the new credit facility each include various covenants that limit our ability to
incur additional debt.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued, SFAS 133, as amended by SFAS 137, is effective
for our 2001 fiscal year. SFAS 133 does not apply to us since we do not
currently have hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Recognition ("SAB 101") which broadly addresses how
companies report revenues in their financial statements. We are in the process
of evaluating the accounting requirements of SAB 101 and do not expect that
this standard will have an effect on our financial position, results of
operations or cash flows.
INFLATION
During fiscal year 2000, we have contended with rising raw material
prices. We believe we have generally been able to offset the effects thereof
through continuing improvements in operating efficiencies and by increasing
prices to our customers to the extent permitted by competitive factors. However,
we cannot assure you that such cost increases can be passed through to our
customers in the future or that the effects can be offset by further
improvements in operating efficiencies.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 8. FINANCIAL STATEMENTS
The financial statements commence on Page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our current directors and executive officers are listed below. Each
director is elected at the annual meeting of the stockholders of Tekni-Plex to
serve a one year term until the next annual meeting or until a successor is
elected and qualified, or until his earlier resignation. Each executive officer
holds his office until a successor is chosen and qualified or until his earlier
resignation or removal. Pursuant to our by-laws, we indemnify our officers and
directors to the fullest extent permitted by the General Corporation Law of the
State of Delaware and our certificate of incorporation.
The board of directors is composed of six directors. A nominating
committee composed of Dr. Smith and Mr. Cronin designate two directors, Dr.
Smith designates three members of management as directors, and the last director
is designated by Mr. Cronin. Directors may only be removed for cause or at the
request of the person entitled to designate that director.
NAME AGE POSITION
- ---- --- --------
Dr. F. Patrick Smith 52 Chairman of the Board and Chief Executive Officer
Kenneth W.R. Baker 56 President, Chief Operating Officer and Principal
Accounting and Financial Officer
Arthur P. Witt 70 Corporate Secretary and Director
John S. Geer 54 Director
J. Andrew McWethy 59 Director
Michael F. Cronin 46 Director
Dr. F. Patrick Smith has been Chairman of the Board and Chief Executive
Officer of Tekni-Plex since March 1994. He received his doctorate degree in
chemical engineering from Texas A&M University in 1975. He served as Senior
Chemical Engineer to Texas Eastman Company, a wholly owned chemical and plastics
subsidiary of Eastman Kodak, where he developed new grades of polyolefin resins
and hot melt and pressure sensitive adhesives. In 1979, he became Technical
Manager of the Petrochemicals and Plastics Division of Cities Service Company,
and a Member of the Business Steering Committee of that division. From 1982 to
1984, Dr. Smith was Vice President of R&D and Marketing for Guardian Packaging
Corporation, a diversified flexible packaging company. Thereafter, he joined
Lily-Tulip, Inc. and managed their research and marketing functions before
becoming Senior Vice President of Manufacturing and Technology. Following the
acquisition of Lily-Tulip by Fort Howard Corporation in 1986, he became the
Corporate Vice President of Fort Howard, responsible for the manufacturing and
technical functions of the combined Sweetheart Products and Lily-Tulip
operations. From 1987 to 1990, Dr. Smith was Chairman and Chief Executive
Officer of WFP Corporation. Since 1990, Dr. Smith has been a principal of Brazos
Financial Group, a business consulting firm. Dr. Smith is the managing member of
Tekni-Plex Management, which is the controlling member of both Tekni-Plex
Partners and MST/TP Partners, the limited liability companies that together own
100% of the issued and outstanding stock of Tekni-Plex. Dr. Smith is also a
member of Tekni-Plex Partners and MST/TP Partners.
Kenneth W.R. Baker has served as Tekni-Plex Chief Operating Officer since
April 1994 and as President since July 1995. Mr. Baker served in various
management roles including systems development, finance, industrial engineering,
research and development, and manufacturing operations at Owens-Illinois, Inc.
and Lily-Tulip, Inc. from 1965 to 1985. From 1986 to 1987, he served as Vice
President, Operations at Fort Howard Cup Corporation. In 1987, Mr. Baker joined
WFP Corporation, Inc. as Senior Vice President, Operations and eventually became
the company's President and CEO before leaving the company in 1992. Thereafter,
Mr. Baker became Vice President, Research and Development at the Molded Products
Division of Carlisle Plastics, Inc. until joining Tekni-Plex. Mr. Baker is a
member of Tekni-Plex Management, Tekni-Plex Partners and MST/TP Partners.
Arthur P. Witt has been a director of Tekni-Plex since March 1994 and was
appointed Secretary in January 1997. Since July 1989, he has been president of
PAJ Investments which is involved in financial consulting and property
management. Over the same period, Mr. Witt also served as a temporary chief
financial officer for WFP Corporation and Flexible Technology. Prior to 1989,
Mr. Witt served in a number of senior management positions for companies such as
Lily-Tulip, Inc., BMC Industries and Fort Howard Paper Co. Mr. Witt is a member
of Tekni-Plex Partners and MST/TP Partners.
John S. Geer has served as a director of Tekni-Plex since June 2000. He
is a partner of Mellon Ventures, Inc., having joined Mellon in 1997. Previously,
Mr. Geer was senior vice president of Security Pacific Capital Corp. He has
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served on 20 boards of directors of emerging growth and middle market companies.
Mellon Ventures, Inc. is a member of Tekni-Plex Partners.
J. Andrew McWethy has served as a director of Tekni-Plex since March
1994. He is a co-founder of Eastport Operating Partners L.P., a private equity
investment fund formed in January 2000. He was co-founder and General Partner of
MST Partners L.P. from 1989 to 2000. Prior to 1989, Mr. McWethy was employed by
Irving Trust Company for twelve years. Mr. McWethy is a member of MST/TP
Partners.
Michael F. Cronin has served as a director of Tekni-Plex since March
1994. He has invested in emerging growth companies and various industrial and
service businesses since 1978. Since June 1991, Mr. Cronin has been a general
partner of Weston Presidio Capital, which is a member of Tekni-Plex Partners.
COMPENSATION OF DIRECTORS
Tekni-Plex reimburses directors for any reasonable out-of-pocket expenses
incurred by them in connection with services provided in such capacity. In
addition, each director is paid an annual fee of $50,000.
Item 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the remuneration paid by Tekni-Plex to the
Chief Executive Officer and the next most highly compensated executive officer
of Tekni-Plex whose salary and bonus exceeded $100,000 for the years indicated
in connection with his position with Tekni-Plex:
SUMMARY COMPENSATION TABLE
FISCAL STOCK OTHER ANNUAL
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(a)
- ------------------------- ---- ------ ----- ------- ---------------
Dr. F. Patrick Smith 2000 $1,200,000 $4,622,100 -- $ 16,000
Chief Executive Officer 1999 1,200,000 8,981,000 -- 42,000
1998 770,577 5,072,134 9.15041 150,283
Mr. Kenneth W.R. Baker, 2000 $ 600,000 $2,311,050 -- $ 9,000
President, Chief Operating 1999 600,000 4,490,000 -- 9,000
Officer and Principal 1998 385,289 2,536,062 13.72562 6,315
Accounting Officer
(a) Includes amounts reimbursed during the fiscal year for payment of taxes,
auto expense, membership fees, etc.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL POTENTIAL
REALIZABLE REALIZABLE
PERCENT VALUE AT VALUE AT
NUMBER OF TOTAL ASSUMED ASSUMED
OF OPTIONS/ EXER- ANNUAL RATES ANNUAL RATES
SECURITIES SARS CISE OR OF STOCK OF STOCK
UNDER- GRANTED BASE PRICE PRICE
LYING TO PRICE APPRECIATION APPRECIATION
OPTIONS/ EMPLOYEES PER EXPI- FOR OPTION FOR OPTION
SARS IN FISCAL SHARE RATION TERM 5% TERM 10%
NAME GRANTED YEAR ($000) DATE ($000) ($000)
Dr. F. Patrick Smith --- ---% --- --- --- ---
Kenneth W.R. Baker --- ---% --- --- --- ---
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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE ($000) OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END FY-END
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
--- --- --- / --- --- / ---
Dr. F. Patrick Smith
--- / ---
Kenneth W.R. Baker --- --- --- / ---
EMPLOYMENT AGREEMENTS
As part of the recapitalization, Dr. Smith and Mr. Baker entered into
amended and restated employment agreements that expire June 27, 2003 and contain
renewal provisions.
Each employment agreement provides that the executive may be terminated
by us for cause or upon death or disability of the executive. Each of Dr. Smith
and Mr. Baker is entitled to severance benefits if he is terminated due to death
or disability. The employment agreements also contain certain non-compete
provisions.
The amended and restated employment agreement annual salaries of Dr.
Smith and Mr. Baker are $5 million and $2.5 million, respectively. Neither Dr.
Smith's nor Mr. Baker's amended and restated employment agreement provides for
any mandatory bonus compensation. No other provisions of the employment
agreements changed materially.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The board of directors maintains a three-member compensation committee
comprised of Dr. Smith, Mr. Witt and Mr. Cronin. The compensation committee's
duties include the annual review and approval of the compensation for each of
our Chief Executive Officer and President, as well as the administration of our
stock incentive plan. No member of the compensation committee is allowed to vote
on issues pertaining to that member's compensation (including option grants).
The board may also delegate additional duties to the compensation committee in
the future.
The bonus awards for fiscal 2000 for Dr. Smith and Mr. Baker were based
upon their respective employment contracts as amended in March of 1998, and are
performance based.
Compensation levels and bonus awards for all other employees are
controlled by Dr. Smith and Mr. Baker.
In fiscal 2000, Dr. Smith recommended, and the Board approved, stock
options to seven employees under a stock option plan approved by the Board of
Directors effective December 31, 1997.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Witt, who is also the corporate Secretary of Tekni-Plex, serves as a
member of the compensation committee of Tekni-Plex's board of directors. In
addition, as Chief Executive Officer of Tekni-Plex, Dr. Smith participated in
deliberations concerning the compensation of the Chief Operating Officer of
Tekni-Plex (but not the compensation for himself or Mr. Witt).
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Tekni-Plex Partners holds approximately 95.6% (approximately 93.0% on a
fully diluted basis) and MST/TP Partners holds approximately 4.4% (approximately
4.2% on a fully diluted basis) of Tekni-Plex's outstanding common stock.
Tekni-Plex Management, controlled by Dr. Smith, is the sole managing
member of both Tekni-Plex Partners and MST/TP Partners, and is entitled to
receive the first 20% of profits from each of these companies regardless of its
capital contribution to each. Dr. Smith and Messrs. Baker and Witt are members
of Tekni-Plex Partners and MST/TP Partners.
In connection with the recapitalization, Dr. Smith and Messrs. Baker and
Witt acquired a class of membership interest in Tekni-Plex Partners and MST/TP
Partners entitling them to receive priority capital account allocations in the
aggregate equal to the first $25.6 million in profits of Tekni-Plex Partners and
MST/TP Partners.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INVESTOR'S AGREEMENT
MST/TP Partners and Tekni-Plex Partners are parties to an investor's
agreement that provides as follows:
- Board of directors. The board of directors is composed of six
directors. A nominating committee composed of Dr. Smith and Mr. Cronin
has the right to designate two directors, Dr. Smith has the right to
designate three members of management as directors and the last director
is designated by Mr. Cronin. Each stockholder of Tekni-Plex has agreed to
vote its shares of common stock for these designees. Each director is
paid an annual fee of $50,000. Directors may only be removed for cause or
at the request of the person entitled to designate that director. The
board of directors must maintain a compensation committee and an audit
committee. All actions of the board require the affirmative vote of at
least a majority of the directors present; a quorum of the board consists
of four directors. If either Dr. Smith or Mr. Cronin ceases to own at
least 20% of the outstanding Tekni-Plex common stock and to be actively
involved in the management of Tekni-Plex, he will lose his right to
designate directors and to participate on the nominating committee.
- Employment agreements. We may not further amend the employment
agreements with Dr. Smith or Mr. Baker unless a majority of the board of
directors (including at least one director not designated by Dr. Smith)
determines that the amendment is desirable for Tekni-Plex. This
restriction shall terminate at any time Dr. Smith is entitled to
designate two-thirds or more of the directors pursuant to the investor's
agreement.
- Capital contributions. Tekni-Plex Partners and MST/TP Partners, in
connection with any capital contribution they make to Tekni-Plex, will
receive a number of shares of Tekni-Plex common stock equal to the amount
of its respective capital contribution divided by an amount equal to:
- The enterprise value of Tekni-Plex on the date the shares
are issued to Tekni-Plex Partners; minus
- Tekni-Plex's funded debt as of such date; plus
- Cash held by Tekni-Plex, outstanding loans to Tekni-Plex
shareholders and aggregate option
Exercise prices for all options on Tekni-Plex stock
outstanding on such date; divided by
- The aggregate number of shares (on a fully diluted basis)
issued by Tekni-Plex before such
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date.
- Transfer restrictions. A stockholder may only transfer its common
stock to third parties with the approval of Tekni-Plex Management or,
after an initial public offering, to its members as a distribution in
kind with the approval of Tekni-Plex Management.
- Registration rights. Beginning nine months after an initial public
offering of our stock, stockholders holding 51% of our common stock may
require us to file a registration statement registering at least 51% of
their common stock with the SEC. We refer to this as a demand
registration. We are only required to file two completed demand
registration statements and only one in any 12-month period. Stockholders
also have rights to be included in three other registrations of our
common stock. We may delay or withdraw a registration if we determine
that the registration would be significantly disadvantageous to us. In
the event of a withdrawal, we must file a new registration statement
within 120 days of the withdrawal. Stockholders will also agree not to
sell their common stock during a period of seven days prior to and up to
180 days in the case of the initial public offering and 90 days in the
event of any other public offering after the effectiveness of a
registration statement. The registration rights provisions of the
investors' agreement will terminate when we have satisfied our demand
registration and incidental registration obligations.
- Purchase right. Stockholders will have the right of first offer on
all newly issued common stock or securities convertible into common stock
(other than stock issued pursuant to an employee benefit plan, an
acquisition by Tekni-Plex, a capital contribution by Tekni-Plex Partners
or the conversion of securities for which the right of first offer has
already been extended). If the stockholders do not purchase 100% of the
securities to be issued, however, we may sell the entire new issuance to
one or more third parties.
- Termination. Except for the registration rights provisions, the
transfer restrictions on the common stock, certain miscellaneous
provisions and as otherwise noted above, the provisions of the investors'
agreement will terminate upon an initial public offering of our common
stock.
CONSULTING ARRANGEMENTS
We had a Management consulting agreement with MST Management
Company. Pursuant to this agreement, MST Management Company provided us
with regular and customary management consulting services. The terms of
the agreement required us to pay a monthly management fee to MST
Management Company for a period of ten years from March 18, 1994 with
certain renewal provisions. In June 2000, we agreed to terminate the
consulting agreement for $3,651.
We also have an arrangement with Arthur P. Witt, one of our
directors and our corporate secretary, under which Mr. Witt provides us
with customary management consulting services. Mr. Witt's compensation
for consulting services rendered on our behalf was approximately $66,500
and $95,000 for fiscal years 2000 and 1999, respectively.
Our policy is not to enter into any significant transaction with
one of our affiliates unless a majority of the disinterested directors of
the board of directors determines that the terms of the transaction are
at least as favorable as those we could obtain in a comparable
transaction made on an arm's-length basis with unaffiliated parties. This
determination is made in the board's sole discretion.
GOVERNANCE OF TEKNI-PLEX
Tekni-Plex Management is the sole managing member of Tekni-Plex
partners. As the sole managing member, Tekni-Plex Management has the
power and authority to conduct the affairs of Tekni-Plex Partners without
requiring the consent or vote of any other member (except as described
below). Tekni-Plex Management is the only member with the power and
authority to act on behalf of or to bind Tekni-Plex Partners, unless
Tekni-Plex Management expressly grants another member the authority to do
so. Tekni-Plex Management, as sole managing member, has the authority to
approve any merger or consolidation of Tekni-Plex Partners without
approval or consent of any other member. Tekni-Plex Management will
delegate the right to approve or disapprove any transaction between
Tekni-Plex (or any of its subsidiaries) and Tekni-Plex Management (or any
of its affiliates) to the disinterested directors on the Tekni-Plex
board. Substantially similar arrangements exist with respect to
Tekni-Plex Management's control of MST/TP Partners.
21
22
Tekni-Plex Partners owns approximately 95.6% and MST/TP Partners
owns approximately 4.4% of the outstanding common stock of Tekni-Plex.
Tekni-Plex Management, which is controlled by Dr. F. Patrick Smith, our
chairman of the board and chief executive officer, is the sole managing
member of both Tekni-Plex Partners and MST/TP Partners and as a result
controls both Tekni-Plex Partners and MST/TP Partners. Therefore,
Tekni-Plex Management also controls Tekni-Plex. Dr. Smith also owns
approximately 30% of Tekni-Plex Partners (not including the priority
allocation discussed in the section entitled "security ownership").
Pursuant to the amended and restated Tekni-Plex Partners Limited
Liability Company agreement and the MST/TP Partners limited liability
company agreement, if there is a change of governance of Tekni-Plex (as
described below), then Tekni-Plex Management must obtain the prior
written approval of the members holding a majority interest in Tekni-Plex
Partners or MST/TP Partners, as the case may be, in order to:
- Cause Tekni-Plex Partners or MST/TP Partners, as the case
may be, to vote for the directors proposed for election to our board;
- Issue or enter into an agreement to issue any Tekni-Plex
common stock, other than that permitted by the employee stock incentive
plan;
- Declare or pay individuals or other distributions on
Tekni-Plex common stock or repurchase Tekni-Plex common or preferred
stock, other than redemptions under the employee stock incentive plan;
- Permit us or any of our subsidiaries to make any loans
except to Tekni-Plex or a subsidiary;
- Permit us or any of our subsidiaries to make any loans to
any employee, except in the ordinary course of business;
- Make any guarantees for the benefit of any person except in
the ordinary course of business;
- Mortgage, pledge or create a security interest in all or
substantially all of our or any of our subsidiaries' property;
- Merge or consolidate with, or sell or dispose of all or
substantially all of our assets to, any entity; or
- Make any amendment to our certificate of incorporation or
bylaws or file any resolution of our or Tekni-Plex Partners' or MST/TP
Partners', as the case may be, board of directors with the Secretary of
State of the state of Delaware.
The amended and restated Tekni-Plex Partners Limited Liability
Company agreement and the MST/TP Partners Limited Liability Company
agreement provide that the following events are considered changes of
governance:
- If we default in the performance or breach of any material
covenant in the investors agreement, any of the credit
facilities or the indenture relating to the notes and the
default or breach continues for 60 consecutive days aFTER
the members holding a majority interest in Tekni-Plex
Partners or MST/TP Partners, as the case MAY BE, GIVE US
Written notice of the default or breach;
- An involuntary bankruptcy case or other insolvency
proceeding is commenced against us and remains undismissed
for a period of 60 days or an order for relief is entered
against us under Federal Bankruptcy Laws;
22
23
- A voluntary bankruptcy case or other insolvency proceeding
is commenced by us, we consent to the appointment of a
receiver or liquidator for all or substantially all of our
assets or we effect any general assignment for the benefit
of our creditors;
- Dr. Smith is not employed as our chief executive officer
because of death, disability or voluntary resignation,
unless within six months we appoint a replacement chief
executive officer acceptable to the members holding a
majority interest in Tekni-Plex Partners; or
- We have cumulative negative cash flow (adjusted for
positive cash flow) from operating activities (and not redemptions or
other extraordinary activities) in excess of 25% of the value of our
equity today.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Schedules
The financial statements listed in the Index to Financial
Statements under Part II, Item 8 and the financial statement
schedules listed under Exhibit 27 are filed as part of this annual
report.
(a)(2) Financial Statement Schedule - Schedule II - Valuation and
Qualifying Accounts
(a)(3) Exhibits
The exhibits listed on the Index to Exhibits following the
Signature Page herein are filed as part of this annual report or
by incorporation by reference from the documents there listed.
(b) Reports on Form 8-K
On April 17, 2000, we filed a report with the Securities and
Exchange Commission on Form 8-K, under Item 5, announcing our
Recapitalization Agreement.
23
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
TEKNI-PLEX, INC.
By: /S/ F. PATRICK SMITH
F. Patrick Smith
Chairman of the Board and
Chief Executive Officer
Dated: September 3, 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 Registrant
and in the capacities indicated, on September 3, 1999.
SIGNATURE TITLE
/s/ F. PATRICK SMITH Chairman of the Board and Chief Executive
F. Patrick Smith Officer
/s/ KENNETH W.R. BAKER President and Chief Operating Officer
Kenneth W.R. Baker Principal Accounting and Financial Officer
/s/ ARTHUR P. WITT
Arthur P. Witt Corporate Secretary and Director
/s/ JOHN S. GEER
John S. Geer Director
/s/ J. ANDREW MCWETHY
J. Andrew McWethy Director
/s/ MICHAEL F. CRONIN
Michael F. Cronin Director
25
EXHIBIT INDEX
Exhibit
- -------
Number Document Description
- ------ --------------------
3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc. (Filed
as Exhibit 3.1 to Registrant's Registration Statement on Form S-4,
Commission File No. 333-43800, and incorporated herein by
reference.)
3.2 Amended and Restated By-laws of Tekni-Plex, Inc. (Filed as Exhibit
3.2 to Registrant's Registration Statement on Form S-4, Commission
File No. 333-43800, and incorporated herein by reference.)
4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc., the
Guarantors listed therein and HSBC Bank USA, as Trustee (Filed as
Exhibit 4.1 to Registrant's Registration Statement on Form S-4,
Commission File No. 333-43800, and incorporated herein by
reference.)
4.2 Senior Subordinated Note and Guarantee (original not included;
form of Note and Guarantee included in Exhibit 4.1).
4.3 Purchase Agreement, dated as of June 15, 2000 among Tekni-Plex,
Inc., the Guarantors listed therein, and J.P. Morgan Securities,
Inc. (Filed as Exhibit 4.3 to Registrant's Registration Statement
on Form S-4, Commission File No. 333-43800, and incorporated
herein by reference.)
4.4 Registration Right Agreement, dated as of June 21, 2000 among
Tekni-Plex, Inc. the Guarantors listed therein, and J.P. Morgan
Securities, Inc. (Filed as Exhibit 4.4 to Registrant's
Registration Statement on Form S-4, Commission File No. 333-43800,
and incorporated herein by reference.)
10.1 Credit Agreement, dated as of June 21, 2000, among Tekni-Plex,
Inc., the Guarantors party thereto, the Lenders party thereto, the
LC Issuing Banks referred to therein and Morgan Guaranty Trust
Company of New York, as Agent. (Filed as Exhibit 10.1 to
Registrant's Registration Statement on Form S-4, Commission File
No. 333-43800, and incorporated herein by reference.)
10.2 Note (original not included; form of Note included in Exhibit
10.1).
10.3 Security Agreement, dated as of June 21, 2000, among Tekni-Plex,
Inc., the Guarantors listed therein and Morgan Guaranty Trust
Company of New York, as Collateral Agent (original not included;
form of Security Agreement included in Exhibit 10.1).
10.4 Pledge Agreement, dated as of June 21,2000, between Tekni-Plex,
Inc. and Morgan Guaranty Trust Company of New York, as Agent
(original not included; form of Pledge Agreement included in
Exhibit 10.1).
10.5 Form of Mortgage, dated as of June 21,2000, made by Tekni-Plex,
Inc., or the Guarantors listed therein. in favor of Morgan
Guaranty Trust Company, as Agent (original not included; form of
Mortgage included in Exhibit 10.1).
10.6 Employment Agreement, dated as of June 21,2000, between Dr. F.
Patrick Smith and Tekni-Plex, Inc. (Filed as Exhibit 10.6 to
Registrant's Registration Statement on Form S-4, Commission File
No. 333-43800, and incorporated herein by reference).
10.7 Employment Agreement, dated as of June 21,2000, between Mr.
Kenneth W.R. Baker and Tekni-Plex, Inc. (Filed as Exhibit 10.7 to
Registrant's Registration Statement on Form S-4, Commission File
No. 333-43800, and incorporated herein by reference).
26
10.8 Form of Amended and Restated Option Agreement, dated as of June
21,2000, among Tekni-Plex, Inc., Tekni-Plex Partners L.P. and F.
Patrick Smith (Filed as Exhibit 10.8 to Registrant's Registration
Statement on Form S-4, Commission File No. 333-43800, and
incorporated herein by reference).
21.0 List of Subsidiaries.*
25.1 Statement of Eligibility of Trustee, HSBC Bank USA, on Form T-1
(Filed as Exhibit 25.1 to Registrant's Registration Statement on
Form S-4, Commission File No. 333-43800, and incorporated herein
by reference.)
27.1 Financial Data Schedule.*
* Filed herewith.
27
{LAST PRINTED ON SEPTEMBER 25, 2000}
CONTENTS
===============================================================================
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-3
Statements of operations F-4
Statements of comprehensive income (loss) F-5
Statements of stockholders' equity (deficit) F-6
Statements of cash flows F-7
Notes to financial statements F-8-F-44
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE F-45
SUPPLEMENTAL SCHEDULE:
Valuation and qualifying accounts and reserves F-46
F-1
28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc.
and its wholly owned subsidiaries (the "Company") as of June 30, 2000 and July
2, 1999, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity (deficit) and cash flows for each of the
three years in the period ended June 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tekni-Plex, Inc. and
its wholly owned subsidiaries as of June 30, 2000 and July 2, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with generally accepted accounting
principles.
August 15, 2000
F-2
29
{LAST PRINTED ON SEPTEMBER 25, 2000}
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
JUNE 30, 2000 July 2, 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash $ 12,525 $ 22,117
Accounts receivable, net of an allowance of $1,642 and $1,662 for possible losses 96,039 96,835
Inventories (Note 4) 91,233 63,190
Deferred income taxes (Note 7) 4,997 5,900
Refundable income taxes 14,883 -
Prepaid expenses and other current assets 2,171 3,664
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 221,848 191,706
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 5) 135,926 136,953
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $45,480 AND $29,581 190,492 206,140
DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $0 AND $4,287 18,897 19,358
DEFERRED INCOME TAXES (NOTE 7) 5,398 1,346
OTHER ASSETS 2,228 3,933
- -----------------------------------------------------------------------------------------------------------------------------
$ 574,789 $ 559,436
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt (Note 6) $ 8,401 $ 5,748
Accounts payable trade 30,026 27,612
Accrued payroll and benefits 11,662 21,581
Accrued interest 2,359 7,965
Accrued liabilities - other 23,521 26,613
Income taxes payable - 742
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 75,969 90,261
LONG-TERM DEBT (NOTE 6) 643,192 410,646
OTHER LIABILITIES 4,778 6,232
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 723,939 507,139
- -----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 7, 8, 9 AND 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, authorized 20,000 shares, issued 848 at June 30,
2000 and July 2, 1999 - -
Additional paid-in capital 84,176 41,075
Cumulative currency translation adjustment (4,486) (1,368)
Retained earnings (deficit) (8,378) 12,590
Less: Treasury stock at cost, 432 shares (Note 2) (220,462) -
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (149,150) 52,297
- -----------------------------------------------------------------------------------------------------------------------------
$ 574,789 $ 559,436
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
30
{LAST PRINTED ON SEPTEMBER 25, 2000}
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998
- --------------------------------------------------------------------------------------------------------------------
NET SALES $ 506,828 $ 489,237 $ 309,597
COST OF SALES 376,491 358,293 232,499
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 130,337 130,944 77,098
OPERATING EXPENSES:
Selling, general and administrative 58,343 62,534 39,220
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 71,994 68,410 37,878
OTHER EXPENSES:
Interest, net 38,447 38,977 19,682
Other (Note 9) 4,705 286 415
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM 28,842 29,147 17,781
PROVISION FOR INCOME TAXES (NOTE 7):
Current 12,333 7,004 7,232
Deferred 2,103 7,146 1,880
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 14,406 14,997 8,669
EXTRAORDINARY ITEM, NET OF INCOME TAXES (NOTE 2) (35,374) - -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (20,968) $ 14,997 $ 8,669
====================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
31
{LAST PRINTED ON SEPTEMBER 25, 2000}
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998
- --------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(20,968) $ 14,997 $ 8,669
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES:
Foreign currency translation (3,118) (1,373) 5
- --------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(24,086) $ 13,624 $ 8,674
========================================================================================================
See accompanying notes to consolidated financial statements.
F-5
32
{LAST PRINTED ON SEPTEMBER 25, 2000}
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Cumulative
Additional Currency
Common Paid-In Translation Retained Treasury
stock Capital Adjustment Earnings Stock TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 27, 1997 $ - $ 41,473 $ - $ (11,076) $ - $ 30,397
Repurchase and cancellation of shares - (398) - - - (398)
Foreign currency translation - - 5 - - 5
Net income - - - 8,669 - 8,669
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 3, 1998 - 41,075 5 (2,407) - 38,673
Foreign currency translation - - (1,373) - - (1,373)
Net income - - - 14,997 - 14,997
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 2, 1999 - 41,075 (1,368) 12,590 - 52,297
Foreign currency translation - - (3,118) - - (3,118)
Net loss - - - (20,968) - (20,968)
Purchase of treasury stock - - - - (220,462) (220,462)
Capital contribution - 43,101 - - - 43,101
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 $ - $ 84,176 $ (4,486) $ (8,378) $(220,462) $(149,150)
===================================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
33
{LAST PRINTED ON SEPTEMBER 25, 2000}
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (20,968) $ 14,997 $ 8,669
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 16,026 16,930 8,856
Amortization 18,722 18,413 8,393
Provision for bad debts 310 370 705
Deferred income taxes 2,103 7,146 1,880
Loss on sale of assets 62 - -
Extraordinary loss on extinguishment of debt 35,374 - -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 186 (5,709) (22,269)
Inventories (29,243) (4,778) 24,730
Prepaid expenses and other current assets 4,898 (1,483) 1,918
Other assets 205 (532) 534
Accounts payable and other current liabilities (15,994) (4,859) (4,335)
Income taxes payable (742) (1,701) 4,262
Other liabilities (1,454) - (4,334)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,485 38,794 29,009
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of net assets including acquisition costs, net of
cash acquired - (45,139) (303,389)
Capital expenditures (16,258) (12,950) (7,283)
Additions to intangibles (805) - -
Cash proceeds from sale of assets 158 - -
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (16,905) (58,089) (310,672)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (2,030) 22,234 7
Proceeds from long-term debt 645,232 - 319,156
Repayments of long-term debt (448,631) (10,177) (787)
Proceeds from capital contribution 43,101 - -
Debt financing costs (18,897) - (18,052)
Redemption of capital - - (398)
Purchase of treasury stock (220,462) - -
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,687) 12,057 299,926
- ----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (485) (8) 5
- ----------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH (9,592) (7,246) 18,268
CASH, BEGINNING OF PERIOD 22,117 29,363 11,095
- ----------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 12,525 $ 22,117 $ 29,363
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
34
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
1. SUMMARY OF Nature of Business
ACCOUNTING
POLICIES Tekni-Plex, Inc. is a global, diversified manufacturer
of packaging, products, and materials for the
healthcare, consumer, and food packaging industries. The
Company has built a leadership position in its core
markets, and focuses on vertically integrated production
of highly specialized products. The Company's operations
are aligned under four primary business groups:
Healthcare Packaging, Products, and Materials; Consumer
Packaging and Products; Food Packaging; and Specialty
Resins and Compounds.
Consolidation Policy
The consolidated financial statements include the
financial statements of Tekni-Plex, Inc. and its
wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost (weighted
average) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost.
Depreciation and amortization are computed over the
estimated useful lives of the assets by the
straight-line method for financial reporting purposes
and by accelerated methods for income tax purposes.
Repairs and maintenance are charged to expense as
incurred.
Intangible Assets
The Company amortizes the excess of cost over the fair
value of net assets acquired on a straight-line basis
over 15 years, and the cost of acquiring certain patents
and trademarks, over seventeen and ten years,
respectively. Recoverability is evaluated periodically
based on the expected undiscounted net cash flows of the
related businesses.
F-8
35
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Deferred Financing Costs
The Company amortizes the deferred financing costs
incurred in connection with the Company's borrowings
over the life of the related indebtedness (5-10 years).
Income Taxes
The Company accounts for income taxes under the
provisions of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Deferred income tax assets and liabilities are
recognized for differences between the financial
statement and income tax basis of assets and liabilities
based upon statutory rates enacted for future periods.
Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized.
Revenue Recognition
The Company recognizes revenue when goods are shipped to
customers. The Company provides for returned goods and
volume rebates on an estimated basis.
Cash Equivalents
The Company considers all highly liquid debt instruments
with an original maturity of three months or less to be
cash equivalents.
Fiscal Year-End
The Company utilizes a 52/53 week fiscal year ending on
the Friday closest to June 30. The years ended June 30,
2000 and July 2, 1999 contained 52 weeks each, the year
ended July 3, 1998 contained 53 weeks.
Reclassifications
Certain items in the prior year financial statements
have been reclassified to conform to the current year
presentation.
Foreign Currency Translation
Assets and liabilities of international subsidiaries are
translated at current exchange rates and related
translation adjustments are reported as a component of
stockholders' equity. Income statement accounts are
translated at the average rates during the period.
F-9
36
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Long-Lived Assets
Long-lived assets, such as goodwill and property and
equipment, are evaluated for impairment when events or
changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through the
estimated undiscounted future cash flows from the use of
these assets. When such impairments exist, the related
assets will be written down to fair value. No impairment
losses have been recorded through June 30, 2000.
Use of 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 revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Stock Based Compensation
The Company applies the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which allows
the Company to apply APB Opinion 25 and related
interpretations in accounting for its stock options and
present pro forma effects of the fair value of such
options.
New Accounting Pronouncements
In June 1998, SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued. SFAS
133, as amended by SFAS 137, is effective for the
Company's 2001 fiscal year. SFAS 133 is not currently
expected to be applicable to the Company since the
Company does not currently have hedging activities.
In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue
Recognition ("SAB 101") which broadly addresses how
companies report revenues in their financial statements.
The Company is in the process of evaluating the
accounting requirements of SAB 101 and does not expect
that this standard will have an effect on its financial
position, results of operations, or cash flows.
F-10
37
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
2. RECAPITALIZATION In June 2000, the Company entered into a
Recapitalization (the "Recapitalization") with certain
of its stockholders, whereby the Company purchased
approximately 51% of the outstanding stock for
approximately $220,500 including related transaction
fees. This stock has been reflected as treasury stock in
the accompanying balance sheet. As a result of
provisions in the Company's Senior Debt and Subordinated
Note Agreements, the Company redeemed it's $200,000 9
1/4% Senior Subordinated Notes, its $75,000 11 1/4%
Senior Subordinated Notes and repaid its Senior Debt in
the amount of approximately $153,000. These transactions
resulted in an extraordinary loss on the extinguishment
of debt of approximately $35,374. The extraordinary loss
is comprised of prepayment penalties and other interest
costs of $39,303, the write-off of deferred financing
costs of $16,696 and other fees of $1,325, net of a tax
benefit of $21,950.
These transactions were funded by $43,101 of new equity,
$275,000 12 3/4% Senior Subordinated Notes (see Note 6)
and initial borrowings of $374,000 on a $444,000 Senior
Credit Facility (see Note 6).
3. ACQUISITIONS On April 24, 1999, the Company purchased certain assets
and assumed certain liabilities of High Voltage
Engineering Corp. - Natvar Division ("Natvar"), for
approximately $26,000. The acquisition was recorded
under the purchase method, whereby Natvar's net assets
were recorded at estimated fair value and its operations
have been reflected in the statement of operations since
that date. As a result of the acquisition, goodwill of
approximately $19,786 has been recorded, which is being
amortized over 15 years.
On January 25, 1999, the Company purchased certain
assets and assumed certain liabilities of Tri-Seal
International, Inc. ("Tri-Seal") for approximately
$21,000. The acquisition was recorded under the purchase
method and Tri-Seal's operations have been reflected in
the statement of operations since that date. As a result
of the acquisition, goodwill of approximately $13,848
has been recorded, which is being amortized over 15
years.
F-11
38
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The following table presents the unaudited pro forma
results of operations as though the acquisition of
Tri-Seal and Natvar occurred on June 28, 1997:
Year ended JULY 2, 1999 July 3, 1998
- ---------------------------------------------------------------------------------------------
Net sales $510,050 $342,910
Income from operations 70,691 38,477
Income before provision for income taxes $ 31,211 $ 18,731
=============================================================================================
On March 3, 1998, Tekni-Plex acquired PureTec
Corporation ("PureTec"), a publicly traded company with
annual sales of $315,000, for a purchase price of
$312,000. PureTec is a leading manufacturer of plastic
packaging, products and materials primarily for the
healthcare and consumer markets. PureTec is a
wholly-owned subsidiary of Tekni-Plex. This acquisition
was financed by the issuance of $200,000 of Senior
Subordinated Debt (Note 6(c)) and $115,000 of Senior
Term Debt (Note 6(e)).
The acquisition was recorded under the purchase method
and its operations have been reflected in the statement
of operations since the acquisition date. As a result of
the acquisition, goodwill of approximately $157,940 has
been recorded, which is being amortized over 15 years.
In connection with the acquisition of PureTec, a reserve
of $24,000 was established. The reserve was comprised of
the costs to close or sell incompatible and duplicate
facilities, terminate employees and provide for existing
litigation. At June 30, 2000, approximately $3,200 was
remaining in this reserve, which is included in accrued
expenses. The remaining reserve is primarily to cover
pre-existing litigation.
F-12
39
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The following table presents the unaudited pro forma
results of operations as though the acquisition of
PureTec occurred on June 28, 1997:
Year ended
July 3, 1998
- ---------------------------------------------------------------------------------------------
Net sales $507,482
Income from operations 45,858
Income before provision for income taxes $ 3,494
=============================================================================================
Proforma adjustments were made to the related historical
results to reflect changes in interest expense and
goodwill amortization.
The pro forma results are not necessarily indicative of
what actually would have occurred if the acquisitions
had been in effect for the entire periods presented. In
addition, they are not intended to be a projection of
future results and do not reflect any synergies that
might be achieved from combined operations.
4. INVENTORIES Inventories are summarized as follows:
JUNE 30, 2000 July 2, 1999
- ---------------------------------------------------------------------------------------------
Raw materials $44,002 $26,663
Work-in-process 7,024 5,282
Finished goods 40,207 31,245
- ---------------------------------------------------------------------------------------------
$91,233 $63,190
=============================================================================================
F-13
40
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
5. PROPERTY, PLANT Property, plant and equipment consists of the following:
AND EQUIPMENT
JUNE 30, July 2, Estimated
2000 1999 useful lives
- -------------------------------------------------------------------------------
Land $ 15,106 $ 14,611
Building and improvements 32,016 31,043 30 - 40 years
Machinery and equipment 124,549 114,927 5 - 10 years
Furniture and fixtures 4,045 2,691 5 - 10 years
Construction in progress 10,009 8,768
- -------------------------------------------------------------------------------
185,725 172,040
Less: Accumulated depreciation 49,799 35,087
- -------------------------------------------------------------------------------
$135,926 $136,953
===============================================================================
6. LONG-TERM DEBT Long-term debt consists of the following:
JUNE 30, 2000 July 2, 1999
- ----------------------------------------------------------------------------------
Senior Debt (b):
Revolving line of credit $ 30,000 $ -
Term notes 344,000 -
Senior Subordinated Notes issued
June 21, 2000 at 12 3/4%, due
June 15, 2010 (less
unamortized discount of $3,768) (a) 271,232 -
Old Senior Subordinated Notes issued March 3,
1998 at 9 1/4%, due March 1, 2008 (c) - 200,000
Old Senior Subordinated Notes issued April 4,
1997 at 11 1/4%, due April 1, 2007 (d) - 75,000
Old Senior Debt (e):
Revolving line of credit - 22,000
Term notes - 111,063
Other, primarily foreign term loans,
with interest rates ranging from
3.74% to 8.4% and maturities from
2000 to 2004 6,361 8,331
- ----------------------------------------------------------------------------------
651,593 416,394
Less: Current maturities 8,401 5,748
- ----------------------------------------------------------------------------------
$643,192 $410,646
==================================================================================
F-14
41
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
(a) Senior Subordinated Notes Issued June 2000
In June 2000, the Company issued $275,000 of 12 3/4%
ten year Senior Subordinated Notes less a discount
of $3,768, the proceeds of which were used in
connection with the Recapitalization. Interest is
payable semi-annually and the notes are unsecured
obligations and rank subordinate to existing and
future senior debt, including current term loans and
revolving credit facilities. The notes are callable
by the Company after June 15, 2005 at a premium of
6.375%, which decreases to par after June 2008. In
addition, prior to June 15, 2003, the Company may
call up to 35% of the principal amount of the notes
outstanding with proceeds from one or more public
offerings of the Company's Capital Stock at a
premium of 12.75%. Upon a change in control the
Company is required to make an offer to repurchase
the notes at 101% of the principal amount. These
notes also contain various covenants including a
limitation on future indebtedness; limitation of
payments, including prohibiting the payment of
dividends; and limitations on mergers,
consolidations and the sale of assets. The discount
is being amortized over the term of the notes.
(b) Senior Debt
The Company has a Senior Debt agreement, which
includes a $100,000 revolving credit agreement, and
two term loans in the aggregate amount of $344,000.
The proceeds of the credit agreement were used as
part of the Recapitalization. These loans are senior
to all other indebteness and are collateralized by
substantially all the assets of the Company. The
debt agreement includes various covenants including
a limitation on capital expenditures and compliance
with customary financial ratios. At June 30, 2000,
the Company is in compliance with these covenants.
F-15
42
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Revolving Credit Agreement
Borrowings under the agreement may be used for
general corporate purposes and at June 30, 2000
$70,000 is available for borrowing. Interest, at the
Company's option, is charged at the Prime Rate, plus
the Applicable Base Rate (initially 2%) or the
Adjusted LIBOR Rate, as defined, plus the Applicable
Euro-Dollar Margin (initially 3%). The Applicable
Base Rate and Applicable Euro-Dollar Margin can be
reduced by up to 1.25 % based on the maintenance of
certain leverage ratios. At June 30, 2000, the rate
charged is 9.69% on $25,000 and 11.5% on $5,000. The
Revolving Credit Agreement expires in June 2006.
Term Loan A
Borrowings under this loan in the amount of
$100,000, were used in connection with the
Recapitalization. Interest is payable quarterly at
the same rates and margins discussed above under the
Revolving Credit Agreement, 9.81% at June 30, 2000.
Principal is payable in quarterly installments of
$1,250 beginning in September, 2000. The quarterly
installments increase with payments totaling $70,000
due in the final two years ending in June 2006.
Term Loan B
Borrowings under this loan in the amount of $244,000
were used in connection with the Recapitalization.
Interest is payable quarterly at the same rate
discussed above, except the Applicable Base Rate is
initially 2.5% and the Applicable Euro-Dollar Margin
is initially 3.5%. The rate at June 30, 2000 is
10.31%. In addition, the Applicable Base Rate and
Applicable Euro-Dollar Margin can be reduced by .5%
based on the maintenance of certain leverage ratios.
Principal is payable in quarterly installments of
$610 beginning September, 2000. The quarterly
installments increase with payments totaling
$229,000 due in the final two years ending in June
2008.
F-16
43
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
(c) Old Senior Subordinated Notes Issued March 1998
In March 1998, the Company issued $200,000 of 9
1/4%, ten year Senior Subordinated Notes, the net
proceeds of which were used in connection with the
PureTec acquisition (Note 3). Interest was payable
semi-annually. The notes were uncollateralized and
ranked equally to the $75,000 Senior Subordinated
Notes discussed below and were subordinate to all
current and future senior indebtedness of the
Company. Upon the Recapitalization, the Company
repurchased the notes (see Note 2).
(d) Old Senior Subordinated Notes Issues April 1997
In April 1997, the Company issued $75,000 of 11 1/4%
ten year notes. Interest on the notes was payable
semi-annually. These notes were uncollateralized and
ranked equally with the $200,000 Senior Subordinated
Notes discussed above and were subordinate to all
current and future senior indebtedness of the
Company. Upon the Recapitalization, the notes were
repurchased during June 2000 (see Note 2).
(e) Old Senior Debt
The Company had a Senior Debt agreement, which
included a $90,000 revolving credit agreement, and
two term loans in the aggregate amount of $115,000.
The proceeds of the term loans were used as part of
the financing for the PureTec acquisition (Note 3).
These loans were senior to all other indebtedness
and were collateralized by substantially all the
assets of the Company. The debt agreement included
various covenants including a limitation on capital
expenditures and compliance with customary financial
ratios. At June 30, 2000 the loans were repaid as
part of the Recapitalization (see Note 2).
F-17
44
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Old Revolving Credit Agreement
Borrowings under the agreement were used for general
corporate purposes. Interest, at the Company's
option, was charged at the Prime Rate, plus the
Applicable Base Rate (initially 1.25%) or the
Adjusted LIBOR Rate, as defined, plus the Applicable
Euro-Dollar Margin (initially 2.25%). The Applicable
Base Rate and Applicable Euro-Dollar Margin can be
reduced by up to 1.25% based on the maintenance of
certain leverage ratios.
Old Term Loan A
Borrowings under this loan in the amount of $50,000,
were used in connection with the acquisition of
PureTec. Interest was payable quarterly at the same
rates discussed above under the Revolving Credit
Agreement.
Old Term Loan B
Borrowings under this loan in the amount of $65,000,
were used solely in connection with the acquisition
of PureTec. Interest was payable quarterly at the
same rate discussed above, except the Applicable
Base Rate was initially 1.75% and the Applicable
Euro-Dollar Margin was initially 2.75%.
Principal payments on long-term debt over the next five
years and thereafter are as follows:
- --------------------------------------------------------------------------------
2001 $ 8,401
2002 8,656
2003 12,888
2004 12,888
2005 37,888
Thereafter 574,634
================================================================================
The Company believes the recorded value of long-term
debt approximates fair value based on current rates
available to the Company for similar debt.
F-18
45
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
7. INCOME TAXES The provision for income taxes, excluding the income
tax benefit associated with the extinguishment of debt,
is summarized as follows:
JUNE 30, July 2, July 3,
Years ended 2000 1999 1998
- -------------------------------------------------------------------------------
Current:
Federal $ 7,763 $ 3,604 $ 4,492
Foreign 3,554 2,900 1,345
State and local 1,016 500 1,395
- -------------------------------------------------------------------------------
12,333 7,004 7,232
- -------------------------------------------------------------------------------
Deferred:
Federal 1,756 5,918 1,656
Foreign 217 328 182
State and local 130 900 42
- -------------------------------------------------------------------------------
2,103 7,146 1,880
- -------------------------------------------------------------------------------
Provision for income taxes $14,436 $14,150 $ 9,112
===============================================================================
The components of income before income taxes are as
follows:
JUNE 30, July 2, July 3,
Years ended 2000 1999 1998
- ----------------------------------------------------------------------------
Domestic $20,150 $21,198 $14,754
Foreign 8,692 7,949 3,027
- ----------------------------------------------------------------------------
$28,842 $29,147 $17,781
============================================================================
F-19
46
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The provision for income taxes differs from the amounts
computed by applying the applicable Federal statutory
rates due to the following:
JUNE 30, July 2, July 3,
Years ended 2000 1999 1998
- ----------------------------------------------------------------------------------------------
Provision for Federal income taxes at $ 9,806 $ 9,910 $ 6,046
statutory rate
State and local income taxes, net of
Federal benefit 670 330 921
Non-deductible goodwill amortization 3,765 3,765 1,838
Foreign tax rates in excess of Federal
tax rate 658 465 328
Other, net (463) (320) (21)
- ----------------------------------------------------------------------------------------------
Provision for income taxes $ 14,436 $ 14,150 $ 9,112
==============================================================================================
Significant components of the Company's deferred tax
assets and liabilities are as follows:
JUNE 30, July 2,
2000 1999
- ----------------------------------------------------------------------------------------
Current deferred taxes:
Allowance for doubtful accounts $ 637 $ 533
Inventory 309 934
Accrued expenses 4,051 4,433
- ----------------------------------------------------------------------------------------
Total current deferred tax assets $ 4,997 $ 5,900
========================================================================================
Long-term deferred taxes:
Net operating loss carryforwards $ 29,997 $ 29,363
Accrued pension and post-retirement 1,434 1,497
Accrued expenses 1,108 626
Difference in book vs. tax basis of assets (4,556) (6,668)
Accelerated tax vs. book depreciation (16,885) (17,972)
- ----------------------------------------------------------------------------------------
Total long-term net deferred tax assets 11,098 6,846
Valuation allowance (5,700) (5,500)
- ----------------------------------------------------------------------------------------
Total long-term net deferred tax assets $ 5,398 $ 1,346
========================================================================================
F-20
47
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Net Operating Losses
The Company and its U.S. subsidiaries file a
consolidated tax return. The net operating loss
carryforwards ("NOL"), as a result of the PureTec
acquisition, involve complex issues of federal tax
law and are subject to various limitations as follows:
- $38,800 - Subject to IRC Section 382 change of
ownership annual limitation of approximately $3,900;
this includes $4,600 of losses incurred prior to
1992, which are subject to additional limitations;
expire 2002-2010.
- $17,400 - Subject to IRC Section 382 change of
ownership annual limitation of approximately $3,100;
expire 2001 - 2010.
- $29,900 - Subject to IRC Section 382 change of
ownership annual limitation of approximately $5,900;
expires 2013.
In addition to the domestic NOL balances, the Company
has incurred losses relating to a subsidiary, taxable in
Northern Ireland. Through fiscal 2000 losses aggregated
$2,310 which have no expiration date. The Company
believes that it is more likely than not that this
deferred tax asset will not be realized and has recorded
a full valuation allowance on these amounts.
In addition, the net long-term domestic deferred tax
assets have been subjected to a valuation allowance
since management believes it is more likely than not
that a portion of the NOL balance will not be realized
as a result of the various limitations on their usage,
discussed above.
The domestic net operating losses are subject to matters
discussed above and are subject to change due to the
restructuring occurring at the subsidiary level, as well
as adjustment for the timing of inclusion of expenses
and losses in the federal returns as compared to amounts
included for financial statement purposes.
To the extent the amounts of NOL's reserved are
subsequently recognized, they will cause changes in the
goodwill arising from the acquisition of PureTec.
F-21
48
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
8. EMPLOYEE BENEFIT (a) Savings Plans
PLANS i. The Company had a defined contribution profit
sharing plan for the benefit of all employees
having completed one year of service with its
Dolco Division ("Dolco"). The Company
contributed 3% of compensation for each
participant and a matching contribution of up
to 1% when an employee contributed 3%
compensation. Contributions totaled
approximately $727 and $653 for the years
ended July 2, 1999 and July 3, 1998,
respectively.
ii. Additionally, the Company had a savings plan
for all employees of two wholly-owned
subsidiaries who are not covered under a
collective bargaining agreement. The two
subsidiaries are Plastic Specialties &
Technology, Inc. ("PST") and Burlington
Resins, Inc. ("Burlington"). Under the savings
plan, the Company matched each eligible
employees' contribution up to 3% of the
employees' earnings. Such contribution
amounted to approximately $362 for the year
ended July 2, 1999 and $215 for the period
March 3 through July 3, 1998.
iii. The Company maintains a discretionary 401(k)
plan covering all eligible employees,
excluding those employed by Dolco and PureTec,
with at least one year of service.
Contributions to the plan were determined
annually by the Board of Directors. There were
no contributions for years ended July 2, 1999
and July 3, 1998.
Effective December 1, 1999 the above plans
were merged into this plan. The Company will
determine matching contributions to the plan
each year not to exceed 2% of the employee's
eligible compensation. Contributions for the
fiscal year ended June 30, 2000 amounted to
approximately $996.
F-22
49
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
(b) Pension Plans
i. The Company's Burlington subsidiary has a
non-contributory defined benefit pension plan
that covers substantially all hourly
compensated employees covered by a collective
bargaining agreement, who have completed one
year of service. The funding policy of the
Company is to make contributions to this plan
based on actuarial computations of the minimum
required contribution for the plan year.
The components of net periodic pension costs
are as follows:
YEAR ENDED Year ended
JUNE 30, 2000 July 2, 1999
- ----------------------------------------------------------------------------
Service cost $ 117 $ 133
Interest cost on projected benefit
obligation 390 366
Expected actual return on plan assets (492) (453)
- ----------------------------------------------------------------------------
Net pension cost $ 15 $ 46
============================================================================
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation,
beginning of period $ 5,292 $ 4,974
Service cost 117 133
Interest cost 390 366
Actuarial (loss) (230) -
Benefits paid (235) (181)
- ----------------------------------------------------------------------------
Projected benefit obligation, end of
period $ 5,334 $ 5,292
============================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning
of period $ 5,431 $ 4,978
Actual return on plan assets 158 410
Company contributions 196 224
Benefits paid (235) (181)
- ----------------------------------------------------------------------------
Plan assets at fair value, end of
period $ 5,550 $ 5,431
============================================================================
F-23
50
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The funded status of the Plan and amounts
recorded in the Company's balance sheets are
as follows:
JUNE 30, 2000 July 2, 1999
- -----------------------------------------------------------------------------
Funded status of the plan $216 $139
Unrecognized net gain 147 43
- -----------------------------------------------------------------------------
Prepaid (accrued) pension cost $363 $182
=============================================================================
The expected long-term rate of return on plan
assets was 9% for the periods presented and
the discount rate was 7 1/2% at June 30, 2000
and July 2, 1999.
ii. The Company maintains a non-contributory
defined benefit pension plan that covers
substantially all non-collective bargaining
unit employees of PST and Burlington, who have
completed one year of service and are not
participants in any other pension plan. The
funding policy of the Company is to make
contributions to the plan based on actuarial
computations of the minimum required
contribution for the plan year. On September
8, 1998, the Company approved a plan to freeze
this defined benefit pension plan effective
September 30, 1998, resulting in a curtailment
gain of $576.
YEAR ENDED Year ended
JUNE 30, 2000 July 2, 1999
- -------------------------------------------------------------------------------
Service cost $ - $ 253
Interest cost on projected benefit
obligation 704 674
Expected actual return on plan assets (986) (938)
Amortization of unrecognized net gain - (8)
Recognized curtailment gain - (576)
- -------------------------------------------------------------------------------
Net pension cost $ (282) $ (595)
===============================================================================
F-24
51
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
YEAR ENDED Year ended
JUNE 30, 2000 July 2, 1999
- -------------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation,
beginning of period 9,555 10,127
Service cost - 253
Interest cost 704 674
Curtailments - (576)
Actuarial (gain) loss 146 (512)
Benefits paid (427) (411)
- -------------------------------------------------------------------------------
Projected benefit obligation, end of
period $ 9,978 $ 9,555
===============================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning
of period $ 11,113 $ 9,555
Actual return on plan assets 369 827
Company contributions - 1,142
Benefits paid (427) (411)
- -------------------------------------------------------------------------------
Plan assets at fair value, end of
period $ 11,055 $ 11,113
===============================================================================
The funded status of the Plan and amounts
recorded in the Company's balance sheets are
as follows:
JUNE 30, 2000 July 2, 1999
- ----------------------------------------------------------------------------
Funded status of the plan $1,077 $ 1,558
Unrecognized net gain (loss) 296 (467)
- ----------------------------------------------------------------------------
Prepaid (accrued) pension cost $1,373 $ 1,091
============================================================================
The expected long-term rate of return on plan
assets was 9% for the periods presented and
the discount rate was 7 1/2% at June 30, 2000
and July 2, 1999.
F-25
52
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
iii. The Company also has a defined benefit
pension plan for the benefit of all employees
having completed one year of service with
Dolco. The Company's policy is to fund the
minimum amounts required by applicable
regulations. Dolco's Board of Directors
approved a plan to freeze the pension plan on
June 30, 1987, at which time benefits ceased
to accrue. The Company has not been required
to contribute to the plan since 1990.
(c) Post-retirement Benefits
In addition to providing pension benefits, the
Company also sponsors the Burlington Retiree Welfare
Plan, which provides certain healthcare benefits for
retired employees of the Burlington division who
were employed on an hourly basis, covered under a
collective bargaining agreement and retired prior to
July 31, 1997. Those employees and their families
became eligible for these benefits after the
employee completed five years of service, if
retiring at age fifty-five, or at age sixty-five,
the normal retirement age. Post retirement
healthcare benefits paid for the years ended June
30, 2000 and July 2, 1999 amounted to $130 and $84,
respectively.
Net periodic post-retirement benefit costs are as
follows:
YEAR ENDED Year ended
JUNE 30, 2000 July 2, 1999
- ------------------------------------------------------------------------------------
Service cost $ 45 $ 42
Interest cost 155 146
- ------------------------------------------------------------------------------------
Net post-retirement benefit cost $200 $188
====================================================================================
F-26
53
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
==================================================================================
YEAR ENDED Year ended
JUNE 30, 2000 July 2, 1999
- ----------------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of
period $ 2,101 $ 1,997
Service cost 45 42
Interest cost 155 146
Actuarial loss (gain) 286 -
Benefits paid (130) (84)
- ----------------------------------------------------------------------------------
Projected benefit obligation, end of period $ 2,457 $ 2,101
==================================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of
period $ - $ -
Company contributions 130 84
Benefits paid (130) (84)
- ----------------------------------------------------------------------------------
Plan assets at fair value, end of period $ - $ -
==================================================================================
The funded status of the Plan and amounts recorded
in the Company's balance sheets are as follows:
YEAR ENDED Year ended
JUNE 30, 2000 July 2, 1999
- -----------------------------------------------------------------------------------
Funded status of the plan $(2,457) $(2,101)
Unrecognized gain (loss) 286 -
- -----------------------------------------------------------------------------------
Accrued post retirement cost $(2,171) $(2,101)
===================================================================================
F-27
54
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The accumulated post-retirement benefit obligation
was determined using a 7 1/2% discount rate for the
periods presented. The healthcare cost trend rate
for medical benefits was assumed to be 6%, gradually
declining until it reaches a constant annual rate of
5% in 2002. The healthcare cost trend rate
assumption has a significant effect on the amounts
reported. A 1% increase in healthcare trend rate
would increase the accumulated post-retirement
benefit obligation by $254 and $239 and increase the
service and interest components by $26 and $6 at
June 30, 2000 and July 2, 1999.
9. RELATED PARTY The Company had a management consulting agreement with
TRANSACTIONS an affiliate of a stockholder. The terms of the
agreement required the Company to pay a fee of
approximately $30 per month for a period of ten years,
with certain renewal provisions. Consulting service fees
were approximately $400 for each of the years ending
July 2, 1999 and July 3, 1998, respectively. In June
2000 the Company agreed to terminate the management
consulting agreement at a cost of $3,651 which has been
included in other income/expense, as well as
approximately $400 of other related charges.
10. STOCK OPTIONS In April 1994, the Company granted options to an
employee to acquire 2 1/2% of the outstanding common
stock for $13.50 per share, with anti-dilution
provisions. The options are exercisable as to 33 1/3% of
the shares on the first, second and third anniversary
dates of the original grant and expire fifteen years
from the date of the grant. These options were cancelled
in June 2000.
F-28
55
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
In January 1998, the Company adopted an incentive stock
plan (the "Stock Incentive Plan"). Under the Stock
Incentive Plan, 45.75206 shares are available for awards
to employees of the Company. Options will be granted at
fair market value on the date of grant. During 2000,
1999 and 1998, options were granted to purchase 1.26,
7.32 and 28.37 shares of common stock at an exercise
price of $507.93, $222.40 and $154.50 per share,
respectively. The options are subject to vesting
provisions, as determined by the Board of Directors, at
date of grant and expire 10 years from date of grant. In
connection with the Recapitalization 22.88 of the 1998
options were cancelled.
In addition, an option to purchase 2.29 shares of common
stock was granted to a member of the Board of Directors,
in April 1998, at an exercise price of $154.50 per
share. The options are subject to vesting provisions as
determined by the Board of Directors at date of grant,
and expire 10 years from date of grant. These options
were cancelled in June 2000.
At June 30, 2000, no options were exercisable and no
options have been exercised or forfeited as of June 30,
2000.
F-29
56
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The Company applies APB Opinion 25 and related
interpretations in accounting for these options.
Accordingly, no compensation cost has been recognized.
Had compensation cost been determined based on the fair
value at the grant dates for these awards consistent
with the method of SFAS Statement 123, the Company's
income before extraordinary items would have been
reduced to the pro forma amounts indicated below. The
calculations were based on a risk free interest rate of
5.70%, 4.75% and 5.28% for the 2000, 1999 and 1998
options, respectively, expected volatility of zero, a
dividend yield of zero and expected lives of 8 years.
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998
-----------------------------------------------------------------------------------------
Income before extraordinary item:
As reported $14,406 $14,997 $8,669
=========================================================================================
Pro forma $14,343 $14,868 $8,618
=========================================================================================
11. COMMITMENTS AND Commitments
CONTINGENCIES
(a) The Company leases building space and certain
equipment in 20 locations throughout the United
States, Canada and Europe. At June 30, 2000, the
Company's future minimum lease payments are as
follows:
-----------------------------------------------------
2001 $ 3,349
2002 3,710
2003 2,198
2004 1,491
2005 1,171
Thereafter 6,681
-----------------------------------------------------
$18,600
=====================================================
Rent expense, including escalation charges, amounted
to approximately $3,427, $3,756 and $2,802 for the
years ended June 30, 2000, July 2, 1999 and July 3,
1998, respectively.
F-30
57
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
(b) The Company has employment contracts with two
employees, which provided for minimum salaries of
$1,800 and bonuses based on performance and was
scheduled to expire in June 2002. Salaries and
bonuses for the year ended July 2, 1999 under these
contracts were $1,800 and $13,471, respectively. As
part of the Recapitalization, the above employment
agreement was amended and restated on June 21, 2000,
providing minimum salaries of $7,500. The salaries
will increase 10% annually until the agreement
expires in June 2002. Salaries and bonuses for the
year ended June 30, 2000 were $1,800 and $6,933,
respectively.
Contingencies
(a) In January 1993 and 1994, the Company's Belgian
subsidiary received income tax assessments
aggregating approximately $1,758 (75,247 Belgian
Francs) for the disallowance of certain foreign tax
credits and investment losses claimed for the years
ended July 31, 1990 and 1991. Additionally, in
January 1995, the subsidiary received an income tax
assessment of approximately $749 (32,083 Belgian
francs) for the year ended July 31, 1992. By Belgian
law, these assessments are capped at the values
above and do not continue to accrue additional
penalties or interest. Although the future outcome
of these matters are uncertain, the Company believes
that its tax position was appropriate and that the
assessments are without merit. Therefore, the
Company has appealed the assessments. Based on
advice of legal counsel in Belgium, the Company
believes that the assessment appeals will be
accepted by the tax authorities in Belgium, although
there can be no assurance whether or when such
appeals will be accepted.
(b) The Company is a party to various other legal
proceedings arising in the normal conduct of
business. Management believes that the final outcome
of these proceedings will not have a material
adverse effect on the Company's financial position.
F-31
58
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
12. CONCENTRATIONS OF Financial instruments that potentially subject the
CREDIT RISKS Company to significant concentrations of credit risk
consist principally of cash deposits and trade accounts
receivable.
The Company provides credit to customers on an unsecured
basis after evaluating customer credit worthiness. Since
the Company sells to a broad range of customers,
concentrations of credit risk are limited. The Company
provides an allowance for bad debts where there is a
possibility for loss.
The Company maintains demand deposits at several major
banks throughout the United States. As part of its cash
management process, the Company periodically reviews the
credit standing of these banks.
13. SUPPLEMENTAL CASH (a) Cash Paid
FLOW INFORMATION
Years ended JUNE 30, 2000 July 2, 1999 July 3, 1998
------------------------------------------------------------------------
Interest $44,031 $37,376 $15,776
========================================================================
Income taxes $ 7,540 $10,185 $ 5,832
========================================================================
(b) Non-Cash Financing and Investing Activities
The Company purchased certain assets and assumed
certain liabilities of Natvar, effective April 24,
1999, for approximately $26,169 in cash. In
conjunction with the acquisition, liabilities were
assumed as follows:
--------------------------------------------------------------------
Fair value of assets acquired $ 7,513
Goodwill 19,786
Cash paid (26,169)
--------------------------------------------------------------------
Liabilities assumed $ 1,130
====================================================================
F-32
59
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
The Company purchased certain assets and assumed
certain liabilities of Tri-Seal, effective January
25, 1999, for approximately $21,272 in cash. In
conjunction with the acquisition, liabilities were
assumed as follows:
- -------------------------------------------------------------------------------------
Fair value of assets acquired $ 11,400
Goodwill 13,848
Cash paid (21,272)
- -------------------------------------------------------------------------------------
Liabilities assumed $ 3,976
=====================================================================================
The Company purchased the outstanding stock of
PureTec Corporation on March 3, 1998 for
approximately $312,047. In conjunction with the
acquisition, liabilities were assumed as follows:
- -------------------------------------------------------------------------------------
Fair value of assets acquired $ 246,160
Goodwill 157,940
Cash paid (312,047)
- -------------------------------------------------------------------------------------
Liabilities assumed $ 92,053
=====================================================================================
14. SEGMENT The Company operates in four industry segments:
INFORMATION healthcare packaging, products, and materials; consumer
packaging and products; food packaging; and specialty
resins and compounds. The healthcare packaging,
products, and materials segment principally produces
pharmaceutical packaging, medical tubing and medical
device materials. The consumer packaging and products
segment principally produces precision tubing and
gaskets, and garden and irrigation hose products. The
food packaging segment produces foamed polystyrene
packaging products for the poultry, meat and egg
industries. The specialty resins and compounds segment
produces specialty PVC resins, recycled PET resins, and
general purpose PVC compounds. The healthcare packaging,
products, and materials and consumer packaging and
products segments have operations in the United States,
Europe and Canada.
F-33
60
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Healthcare
Packaging, Consumer
Products Packaging Specialty
and and Food Resins and
June 30, 2000 Materials Products Packaging Compounds TOTALS
- ------------------------------------------------------------------------------------------------------
Revenues from
external customers $153,716 $189,336 $106,311 $ 57,465 $506,828
Interest expense 11,217 12,537 9,001 5,692 38,447
Depreciation and
amortization 10,876 12,316 6,866 4,480 34,538
Segment income from
operations 26,202 35,491 22,842 161 84,696
Segment assets 171,764 220,576 77,642 83,900 553,882
Expenditures for
segment fixed assets $ 7,224 $ 4,012 $ 3,247 $ 1,775 $ 16,258
======================================================================================================
F-34
61
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Healthcare
Packaging, Consumer
Products Packaging Specialty
and and Food Resins and
July 2, 1999 Materials Products Packaging Compounds TOTALS
- ------------------------------------------------------------------------------------------------------
Revenues from
external customers $137,309 $184,684 $100,258 $ 66,986 $489,237
Interest expense 11,818 13,254 8,014 5,891 38,977
Depreciation and
amortization 7,327 13,072 9,640 5,086 35,125
Segment income from
operations 25,027 37,848 18,777 6,810 88,462
Segment assets 173,704 216,067 73,351 83,601 546,723
Expenditures for
segment fixed assets $ 3,761 $ 3,540 $ 4,567 $ 1,082 $ 12,950
======================================================================================================
Healthcare
Packaging, Consumer
Products Packaging Specialty
and and Food Resins and
July 3, 1998 Materials Products Packaging Compounds TOTALS
- ------------------------------------------------------------------------------------------------------
Revenues from
external customers $ 90,708 $103,744 $ 99,336 $ 15,809 $309,597
Interest expense 4,844 6,395 6,346 2,097 19,682
Depreciation and
amortization 1,705 3,854 9,320 1,952 16,831
Segment income from
operations 13,563 14,866 18,321 2,955 49,705
Segment assets 134,053 224,754 73,261 87,105 519,173
Expenditures for
segment fixed assets $ 1,347 $ 1,387 $ 4,316 $ 233 $ 7,283
======================================================================================================
F-35
62
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
JUNE 30, 2000 July 2, 1999 July 3, 1998
- ---------------------------------------------------------------------------------------
PROFIT OR LOSS
Total operating profit for
reportable segments before
income taxes $ 84,696 $ 88,462 $ 49,705
Corporate and eliminations (12,702) (20,052) (11,827)
- ---------------------------------------------------------------------------------------
$ 71,994 $ 68,410 $ 37,878
=======================================================================================
ASSETS
Total assets from reportable
segments $ 553,882 $ 546,723 $ 519,173
Other unallocated amounts 20,907 12,713 20,106
- ---------------------------------------------------------------------------------------
Consolidated total $ 574,789 $ 559,436 $ 539,279
=======================================================================================
DEPRECIATION AND AMORTIZATION
Segment totals $ 34,538 $ 35,125 $ 16,831
Corporate 210 218 418
- ---------------------------------------------------------------------------------------
Consolidated total $ 34,748 $ 35,343 $ 17,249
=======================================================================================
REVENUES
YEARS ENDED JUNE 30, 2000 July 2, 1999 July 3, 1998
- ---------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
United States $ 459,500 $ 445,603 $ 288,520
Canada 5,975 4,996 5,868
Europe 41,353 38,638 15,209
- ---------------------------------------------------------------------------------------
Total $ 506,828 $ 489,237 $ 309,597
=======================================================================================
LONG-LIVED ASSETS
- ---------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
United States $ 323,691 $ 339,409 $ 325,292
Canada 2,580 2,542 2,302
Europe 26,670 25,779 27,961
- ---------------------------------------------------------------------------------------
Total $ 352,941 $ 367,730 $ 355,555
=======================================================================================
F-36
63
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Income from operations is total net sales less cost of
goods sold and operating expenses of each segment before
deductions for general corporate expenses not directly
related to an individual segment and interest.
Identifiable assets by industry are those assets that
are used in the Company's operation in each industry
segment, including assigned value of goodwill. Corporate
identifiable assets consist primarily of cash, prepaid
expenses, deferred income taxes and fixed assets.
For the year ended June 30, 2000, one customer
represented 10% of sales and one customer represented
11% of accounts receivable at June 30, 2000.
For the year ended July 2, 1999, one customer
represented 11% of sales and two customers each
represented 10% of accounts receivable at July 2, 1999.
For the year ended July 3, 1998, one customer
represented 10% of sales and two customers each
represented 11% of accounts receivable at July 3, 1998.
F-37
64
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
15. SUPPLEMENTAL Tekni-Plex, Inc. issued 12 3/4 % Senior Subordinated
CONDENSED Notes in June 2000. These notes are guaranteed by all
CONSOLIDATING domestic subsidiaries of Tekni-Plex. The following
FINANCIAL condensed consolidating financial statements present
STATEMENTS separate information for Tekni-Plex (the "Issuer") and
its domestic subsidiaries (the "Guarantors") and the
foreign subsidiaries (the "Non-Guarantors").
Condensed Consolidating Statement of Operations - For
the year ended June 30, 2000
Issuer Guarantors Non-Guarantors TOTAL
- ---------------------------------------------------------------------------------------------------
Sales, net $ 147,098 $ 312,402 $ 47,328 $ 506,828
Cost of sales 105,783 238,012 32,696 376,491
- ---------------------------------------------------------------------------------------------------
Gross profit 41,315 74,390 14,632 130,337
Selling, general and
administrative 37,991 16,042 4,310 58,343
- ---------------------------------------------------------------------------------------------------
Income from operations 3,324 58,348 10,322 71,994
Interest expense, net 38,717 (280) 10 38,447
Other expense (income) 4,272 (1,187) 1,620 4,705
- ---------------------------------------------------------------------------------------------------
Income (loss) before (39,665) 59,815 8,692 28,842
provision for income
taxes and extraordinary
item
Provision for income taxes (22,359) 33,211 3,584 14,436
- ---------------------------------------------------------------------------------------------------
Income (loss) before
extraordinary item (17,306) 26,604 5,108 14,406
Extraordinary item (35,374) - - (35,374)
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ (52,680) $ 26,604 $ 5,108 $ (20,968)
====================================================================================================
F-38
65
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Condensed Consolidating Balance Sheet - At June 30, 2000
Issuer Guarantors Non-Guarantors Eliminations TOTAL
- --------------------------------------------------------------------------------------------------------------
CURRENT ASSETS $ 61,275 $ 134,456 $ 26,117 $ - $ 221,848
Property, plant and
equipment, net 41,852 78,957 15,117 - 135,926
Intangible assets 31,519 150,476 8,497 - 190,492
Investment in
subsidiaries 398,879 - - (398,879) -
Deferred financing
costs, net 18,897 - - - 18,897
Deferred taxes 5,398 - - - 5,398
Other long-term
assets 50,471 240,823 12,636 (301,702) 2,228
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 608,291 $ 604,712 $ 62,367 $(700,581) $ 574,789
==============================================================================================================
CURRENT LIABILITIES $ 37,296 $ 24,390 $ 14,283 $ - $ 75,969
Long-term debt 637,793 - 5,399 - 643,192
Other long-term
liabilities 72,660 211,846 20,682 (300,410) 4,778
- --------------------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES 747,749 236,236 40,364 (300,410) 723,939
- --------------------------------------------------------------------------------------------------------------
Additional paid-in
capital 85,355 296,880 15,641 (313,700) 84,176
Retained earnings
(deficit) (4,351) 71,596 10,848 (86,471) (8,378)
Cumulative currency
translation
adjustment - - (4,486) - (4,486)
Treasury stock (220,462) - - - (220,462)
- --------------------------------------------------------------------------------------------------------------
TOTAL EQUITY (139,458) 368,476 22,003 (400,171) (149,150)
- --------------------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES
AND EQUITY $ 608,291 $ 604,712 $ 62,367 $(700,581) $ 574,789
==============================================================================================================
F-39
66
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Condensed Consolidating Statement of Operations - For
the year ended July 2, 1999
Issuer Guarantors Non-Guarantors TOTAL
- -------------------------------------------------------------------------------------------------------
Sales, net $ 150,564 $ 295,039 $ 43,634 $ 489,237
Cost of sales 110,057 218,428 29,808 358,293
- -------------------------------------------------------------------------------------------------------
Gross profit 40,507 76,611 13,826 130,944
Selling, general and
administrative 44,815 13,243 4,476 62,534
- -------------------------------------------------------------------------------------------------------
Income from operations (4,308) 63,368 9,350 68,410
Interest expense, net 39,487 (739) 229 38,977
Other expense (income) 294 (1,180) 1,172 286
- -------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income taxes (44,089) 65,287 7,949 29,147
Provision for income taxes (23,682) 34,604 3,228 14,150
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ (20,407) $ 30,683 $ 4,721 $ 14,997
=======================================================================================================
F-40
67
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Condensed Consolidating Balance Sheet - at July 2, 1999:
Issuer Guarantors Non-Guarantors Eliminations TOTAL
- --------------------------------------------------------------------------------------------------------------
CURRENT ASSETS $ 45,967 $ 117,689 $ 28,050 $ - $ 191,706
Property, plant and
equipment, net 44,507 77,132 15,314 - 136,953
Intangible assets 50,965 153,747 1,428 - 206,140
Investment in
subsidiaries 367,167 - - (367,167) -
Deferred financing
costs, net 19,257 (128) 229 - 19,358
Deferred taxes 1,346 - - - 1,346
Other long-term
assets 106,330 18,938 11,350 (132,685) 3,933
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 635,539 $ 367,378 $ 56,371 $(499,852) $ 559,436
==============================================================================================================
CURRENT LIABILITIES $ 52,551 $ 26,868 $ 10,842 $ - $ 90,261
Long-term debt 404,288 - 6,358 - 410,646
Other long-term
liabilities 119,759 - 19,158 (132,685) 6,232
- --------------------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES 576,598 26,868 36,358 (132,685) 507,139
- --------------------------------------------------------------------------------------------------------------
Additional paid-in
capital 41,095 296,747 15,641 (312,408) 41,075
Retained earnings
(deficit) 17,846 43,763 5,740 (54,759) 12,590
Cumulative currency
translation
adjustment - - (1,368) - (1,368)
- --------------------------------------------------------------------------------------------------------------
TOTAL EQUITY 58,941 340,510 20,013 (367,167) 52,297
- --------------------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES
AND EQUITY $ 635,539 $ 367,378 $ 56,371 $(499,852) $ 559,436
==============================================================================================================
F-41
68
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Condensed Consolidating Statement of Operations - For
the year ended July 3, 1998
Issuer Guarantors Non-Guarantors TOTAL
- -------------------------------------------------------------------------------------------------------
Sales, net $ 151,507 $ 137,013 $ 21,077 $ 309,597
Cost of sales 110,886 106,543 15,070 232,499
- -------------------------------------------------------------------------------------------------------
Gross profit 40,621 30,470 6,007 77,098
Selling, general and
administrative 24,218 12,581 2,421 39,220
- -------------------------------------------------------------------------------------------------------
Income from operations 16,403 17,889 3,586 37,878
Interest expense, net 18,996 477 209 19,682
Other expense (income) 346 (281) 350 415
- -------------------------------------------------------------------------------------------------------
Income (loss) before
provision for income taxes (2,939) 17,693 3,027 17,781
Provision for income taxes (1,447) 9,023 1,536 9,112
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ (1,492) $ 8,670 $ 1,491 $ 8,669
=======================================================================================================
F-42
69
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Condensed Consolidating Balance Sheet - at July 3, 1998:
Issuer Guarantors Non-Guarantors Eliminations Total
- --------------------------------------------------------------------------------------------------------------
CURRENT ASSETS $ 18,510 $ 100,147 $ 24,621 $ 40,446 $ 183,724
Property, plant and
equipment, net 40,535 71,304 16,395 - 128,234
Goodwill 30,624 151,055 12,170 - 193,849
Investment in
subsidiaries 333,498 - - (333,498) -
Deferred financing
costs, net 22,277 396 118 - 22,791
Other long-term
assets 7,041 2,060 1,580 - 10,681
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 452,485 $ 324,962 $ 54,884 $(293,052) $ 539,279
==============================================================================================================
CURRENT LIABILITIES $ 28,855 $ 57,395 $ 12,577 $ - $ 98,827
Long-term debt 386,063 6,755 3,633 - 396,451
Other long-term
liabilities (6,377) (48,273) 21,266 38,712 5,328
- --------------------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES 408,541 15,877 37,476 38,712 500,606
- --------------------------------------------------------------------------------------------------------------
Additional paid-in
capital 41,095 296,747 15,641 (312,408) 41,075
Retained earnings
(deficit) 2,849 12,611 1,489 (19,356) (2,407)
Cumulative currency
translation
adjustment - (273) 278 - 5
- --------------------------------------------------------------------------------------------------------------
TOTAL EQUITY 43,944 309,085 17,408 (331,764) 38,673
- --------------------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES
AND EQUITY $ 452,485 $ 324,962 $ 54,884 $(293,052) $ 539,279
==============================================================================================================
F-43
70
{LAST PRINTED ON SEPTEMBER 25, 2000}
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
16. QUARTERLY RESULTS First Second Third Fourth
OF OPERATIONS 2000 Quarter Quarter Quarter Quarter
(UNAUDITED) -------------------------------------------------------------------------------------------
Net sales $ 109,926 $ 102,381 $ 138,872 $ 155,649
Gross profit 29,005 27,498 37,994 50,027
Income from
operations 14,863 12,652 23,988 20,491
Extraordinary item
- net of taxes - - - (35,374)
Net income (loss) $ 2,556 $ 1,197 $ 7,020 $ (31,741)
1999
-------------------------------------------------------------------------------------------
Net sales $ 108,069 $ 94,004 $ 129,754 $ 157,410
Gross profit 27,091 24,878 37,680 41,295
Income from
operations 13,131 10,320 21,273 23,686
Net income $ 1,543 $ 505 $ 5,849 $ 7,100
1998
-------------------------------------------------------------------------------------------
Net sales $ 37,791 $ 37,831 $ 68,388 $ 165,587
Gross profit 9,934 10,464 17,152 39,548
Income from
operations 5,886 6,257 7,438 18,297
Net income $ 2,305 $ 2,436 $ 1,635 $ 2,293
===========================================================================================
Fluctuations in net sales are due primarily to
seasonality in a number of product lines, particularly
garden hose and irrigation hose products.
The extraordinary loss in the fourth quarter of fiscal
2000 was the result of the Recapitalization (Note 2).
F-44
71
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL SCHEDULE
Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
The audits referred to in our report dated August 15, 2000 relating to the
consolidated financial statements of Tekni-Plex, Inc. and its wholly owned
subsidiaries (the "Company"), which are contained in this Form 10-K, included
the audits of the financial statement schedule for the years ended June 30,
2000, July 2, 1999 and July 3, 1998 listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
Woodbridge, New Jersey
August 15, 2000
F-45
72
{LAST PRINTED ON SEPTEMBER 25, 2000}
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Balance at Charged to Charged to BALANCE AT
Beginning of Costs and Other END OF
Period Expenses (1) Accounts Deductions (2) PERIOD
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 3, 1998
Accounts receivable allowance $ 313 $ 705 $1,592(3) $1,284 $1,326
================================================================================================================
YEAR ENDED JULY 2, 1999
Accounts receivable allowance $1,326 $ 370 $ 68(3) $ 102 $1,662
================================================================================================================
YEAR ENDED JUNE 30, 2000
Accounts receivable allowance $1,662 $ 310 $ - $ 330 $1,642
================================================================================================================
(1) To increase accounts receivable allowance.
(2) Uncollectible accounts written off, net of recoveries.
(3) Balances related to acquisitions.
F-46