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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 29, 2001
[ ] 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.)
260 North Denton Tap Road, Coppell, Texas 75019
(Address of principal executive offices and zip code)
(972) 304-5077
(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.
In March 1994, Tekni-Plex was acquired by Dr. F. Patrick Smith and
other investors. 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. The Flemington plant utilizes
lamination and coating technology to produce 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 since the
1960s and had attained the leading share of foam egg carton sales in the United
States. The Dolco acquisition also solidified our position as a leading supplier
of foam processor trays. 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, Tekni-Plex 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 enjoys leading market positions in its
core products, including garden and irrigation hose, precision tubing and
gaskets primarily for the 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 leader in sophisticated extruded and co-extruded
capliners 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, a
producer of disposable medical tubing. As with Tri-Seal, the Natvar acquisition
was intended to strengthen our existing core business and expand 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, existing investors other than management 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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In October 2000, we acquired substantially all the assets of the Super
Plastics division of RCR International Inc. Super Plastics is primarily a
manufacturer of garden hose and has a manufacturing facility in Mississauga,
Ontario Canada. The Super Plastics operations have been integrated with our
garden hose business.
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:
HEALTHCARE PACKAGING, PRODUCTS, CONSUMER PACKAGING AND FOOD PACKAGING SPECIALTY RESINS AND
AND MATERIALS PRODUCTS COMPOUNDS
------------------------------ ---------------------- -------------- --------------------
Pharmaceutical packaging Precision tubing and Foamed egg cartons Specialty PVC resins
gaskets
Medical tubing Garden and irrigation Poultry and meat Recycled PET resins
hose products processor trays
Medical device materials Pool hose products Agricultural foam General purpose PVC
packaging compounds
Foamed Consumer Plates
COMPETITIVE STRENGTHS
We believe that our competitive strengths include:
- Strong customer relationships. We have long-standing
relationships with many of our customers. We estimate the
average tenure among our largest customers at more than 17
years. We attribute our long-term customer relationships to
our ability to consistently manufacture high quality products
and provide a superior level of customer service. We routinely
win customer awards for our superior products and customer
service and have recently been recognized for supplier
excellence by 3M Pharmaceuticals, Pfizer, Eli Lilly, Boston
Scientific, Kraft Foods and Perdue Farms, among others.
- Strong market positions in core businesses. We have a strong
market presence in our product lines. The following table
shows what we believe to be our market position in the U.S. in
each core product line:
PRODUCT MARKET POSITION
Medical device materials...................................... 1
Vinyl medical tubing.......................................... 1
Clear, high barrier blister packaging......................... 1
Closure liners................................................ 1
Garden and irrigation hose.................................... 1
Precision tubing and gaskets.................................. 1
Egg cartons................................................... 1
Foam processor trays.......................................... 2
- Experienced management team. Our management team has been
successful in selecting and integrating strategic acquisitions
as well as improving underlying business fundamentals. After
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significantly improving the business of Tekni-Plex following
our 1994 acquisition, management successfully integrated both
the Flemington and Dolco operations during 1996, the latter
being a public company then nearly twice our size. During the
same period, the Brooklyn and Flemington operations were also
successfully merged. In 1997, we acquired and integrated the
PurePlast operations. In 1998, we acquired PureTec, a public
company then more than twice our size. In 1999, we acquired
and integrated the assets and business of Tri-Seal and Natvar.
Management has substantially improved the operating margins of
each of these acquisitions. Members of our management team
have integrated acquisitions, effected turnarounds, provided
strategic direction and leadership, increased sales and market
share, improved manufacturing efficiencies and productivity,
and developed new technologies to enhance the competitive
strengths of the companies they have managed.
- Cost efficient producer. We continually focus on improving
underlying operations and reducing costs. Since the 1994
acquisition, current management has improved our cost
structure from an EBITDA margin of 8.5% with EBITDA of $3.8
million on sales of $44.9 million for the 12 months ended
December 31, 1993 to an EBITDA margin of 19.0% with EBITDA of
$100.0 million on sales of $525.8 million for the trailing 12
months ended June 29, 2001. Our seven add-on acquisitions
since 1995 have provided significant opportunities to realize
cost savings and synergies in the combined businesses through
the sharing of complementary technologies and manufacturing
techniques, as well as economics of scale including the
purchase of raw materials.
- Producer of high quality, technically sophisticated products.
We believe, based upon our knowledge and experience in the
industry, that we have a long-standing reputation as a
manufacturer of high quality, high performance products,
materials and primary packaging (where the packaging material
comes into direct contact with the end product). Our emphasis
on quality is evidenced by our product lines which address the
more technically sophisticated areas of their respective
markets.
- Strong equity sponsorship. We have obtained a strong equity
commitment from co-investors in conjunction with the
recapitalization. New investors agreed to contribute $269.6
million in the aggregate to Tekni-Plex Partners, of which
$167.0 million was contributed to consummate the
recapitalization in June 2000. An additional $5.0 million was
contributed in conjunction with our acquisition of Super
Plastics in October 2000, and $30.0 million was contributed in
June 2001 in anticipation of our announced acquisition of Mark
IV's Swan Division. The remainder ($67.6 million) is available
for at least five years from the recapitalization to be used
for our general corporate purposes, including acquisitions. We
believe that these equity commitments will provide us with
significant flexibility to take advantage of business
opportunities as they arise. In connection with the
recapitalization, all members of our current management
maintained their entire equity investment, which had an
implied aggregate value of approximately $96.0 million.
BUSINESS STRATEGY
We seek to maximize our profitability and growth and take advantage of
our competitive strengths by pursuing the following business strategy:
- Ongoing cost reduction through technical process improvement.
We have an ongoing program to improve manufacturing and other
processes in order to drive down costs. Examples of cost
improvement programs include:
- material and energy conservation through enhanced
process controls and advanced product design.
- reduction in machine set-up time through the use of
proprietary technology.
- continual product line rationalization; and
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- development of backward and forward integration
opportunities.
- Internal growth through product line extension and
improvement. We continually seek to improve and extend our
product lines and leverage our existing technological
capabilities in order to increase market share in existing
markets, effectively penetrate new markets and improve
profitability. Our strategy is to emphasize our expertise in
providing packaging, products and materials with specific high
performance characteristics through the development of various
unique proprietary materials and proprietary manufacturing
process techniques.
- Growth through international expansion. We believe that there
is significant opportunity to expand our international sales,
which currently represent approximately 15% of our total
revenues. At present, we have manufacturing operations in
Canada, the United Kingdom, Belgium and Italy. We have
recently added regional sales offices in Belgium, Germany,
Argentina and Singapore to our existing offices in Canada,
Italy and the United Kingdom. We have also recently entered
into manufacturing liaisons in Italy, Japan, Argentina and
Germany which supplement our existing liaisons in Switzerland
and the Phillipines. In addition, we have recently added sales
representatives in Peru and throughout Central America to our
existing representatives in Australia, China (including Hong
Kong), Italy, Malaysia, Thailand, Taiwan, South Africa,
Argentina, Chile, Brazil and Mexico. We also have a licensee
in Japan. We believe that our growing international presence
will generate an increase in our sales.
- Growth through acquisitions. We will continue to pursue
acquisitions selectively when the opportunity arises. Our
objective is to pursue acquisitions that provide us with the
opportunity to gain economies of scale and reduce costs
through, among other things, technology sharing and
synergistic cost reduction.
HEALTHCARE PACKAGING, PRODUCTS, AND MATERIALS
The Healthcare Packaging, Products and Materials segment of our business had
revenues of $148.4 million (28.2% total revenues) for the 12 months ended June
29, 2001.
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 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.
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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 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.
Closure Liners
Tekni-Plex is also the leading producer of sophisticated extruded,
co-extruded 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 the 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.
Medical tubing is sold primarily to manufacturers of medical devices
that are packaged specifically for such procedures and applications. These
products are sold through direct salespeople. We remain competitive by focusing
on product quality and performance and prompt delivery.
We manufacture medical tubing using proprietary plastic extrusion
processes. The primary raw materials are proprietary compounds, which we
produce. As a result of the Natvar acquisition, we believe that we are the
largest third-party supplier of disposable medical tubing in North America.
Medical Device Materials
We believe that we are the 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.
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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,
performance and prompt delivery.
CONSUMER PACKAGING AND PRODUCTS
The Consumer Packaging and Products segment of our business had
revenues of $202.0 million (38.4% of total revenues) for the 12 months ended
June 29, 2001.
Precision Tubing and Gaskets
The 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. The Company has also developed proprietary
methods for achieving extremely accurate thickness control, superior surface
finish, and the elimination of internal imperfections prevalent in other
processing methods.
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 it is the leading precision tubing extruder in North America and is
the leading supplier of aerosol valve and dispenser pump gaskets worldwide.
We are the single-source supplier to much of the industry. The
principal competitive pressure in this product line is the possibility of
customers switching to internal production, or vertical integration. To
counteract this possibility, the Company focuses on product quality, cost
reduction, prompt delivery, technical service and innovation.
Garden and Irrigation Hose Products
We believe that we are the leading producer of garden hose in the
United States. We have produced garden hose products for fifty years, and
produce its primary components internally, 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 irrigator "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.
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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 segment of our business had revenues of $124.5
million (23.7% of total revenues) for the 12 months ended June 29, 2001.
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
egg cartons in the United States. We are 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.
Within the polystyrene foam processor tray market, we compete
principally with two large competitors, both of which have significantly greater
financial resources 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. Our customer base includes most of
the domestic egg packagers (including those owned by egg retailers) and many
prominent poultry processors.
SPECIALTY RESINS AND COMPOUNDS
The Specialty Resins and Compounds segment of our business had revenues
of $50.9 million (9.7% of total revenues) for the 12 months ended June 29, 2001.
Specialty Vinyl Resins
Tekni-Plex manufactures specialty vinyl resins, with an annual
production capacity of 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 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
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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. Much of this product development is either funded by clients or
its cost is absorbed in the Company's manufacturing cost of sales, and therefore
is not reflected as research and development expense.
SALES, MARKETING AND CUSTOMERS
Excluding customer service representatives, as of June 29, 2001, we had
a total of 49 direct sales and marketing personnel covering both our domestic
and international businesses. There were also commissioned independent sales
representatives (not direct employees of Tekni-Plex) providing additional
coverage.
We estimate the average tenure among our ten largest customers at more
than 17 years. Overall customer concentration is low with no customer accounting
for more than 10% of total sales and the top ten customers generating less than
32% of sales for the 12 months ended June 29, 2001.
MANUFACTURING
As of June 29, 2001 we had 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, as opposed to patents which, we believe would be a less effective
approach to maintaining our competitive edge.
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 routinely share technological information
regarding process and material formulation improvements, 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.
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
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 during that
season. Conversely, we benefit from any decrease in raw material costs after
garden hose prices have been set for the upcoming selling 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.
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EMPLOYEES
As of June 29, 2001, the Company employed approximately 3,000 full-time
employees. Approximately 28% of all employees are represented by various
collective bargaining agreements that expire between June 2003 and June 2004.
Item 2. FACILITIES
The Company believes that its facilities are suitable and have
sufficient productive capacity for its current and foreseeable operational and
administrative needs. Set forth below is a list and brief description of all of
the Company's offices and facilities, all of which are owned unless otherwise
indicated.
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
-------- -------- -----------
Somerville, New Jersey Food Packaging and Healthcare packaging 172,000
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
Coppell, Texas (7) Executive Offices 3,125
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
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
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Milan (Gaggiano), Italy (7) Consumer packaging 14,900
Milan (Gaggiano), Italy Consumer packaging 25,800
Milan (Rosate), Italy (3) Consumer packaging 24,000
Mississauga, Ontario (6) Consumer products 100,000
Mississauga, Ontario (5) Consumer Products 126,650
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
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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.
Our management includes a Director of Environmental Affairs who is
responsible for compliance with all foreign, federal, state and local laws and
regulations relating to the environment, and health and safety. This director
performs internal auditing procedures and provides direction to all local
facility managers in the compliance areas. The Director of Environmental Affairs
and our President direct outside environmental counsel and outside environmental
consulting firms to ensure that regulations are properly interpreted and
reporting requirements are met.
We are also subject to environmental laws requiring the investigation
and cleanup of environmental contamination. Currently, we are remediating
contamination resulting from past industrial activity at three of our New Jersey
facilities which we acquired from PureTec in 1998. This remediation is being
conducted pursuant to the requirements of New Jersey's Industrial Site Recovery
Act which were triggered by the 1998 PureTec transaction. We believe that any
costs ultimately borne by us in connection with this remediation would not be
material.
Although we believe that, based on historical experience, the costs of
achieving and maintaining compliance with environmental laws and regulations are
unlikely to have a material adverse effect on our business, financial condition
or results of operations, it is possible that we could incur significant fines,
penalties, capital costs or other liabilities associated with any confirmed
noncompliance or remediation of contamination or natural resource damage
liability at or related to any of our current or former facilities, the precise
nature of which we cannot now predict. Furthermore, we cannot assure you that
future environmental laws or regulations will not require substantial
expenditures by us or significant modifications of our operations.
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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 selected historical consolidated
financial information of the Company, and has been derived from and should be
read in conjunction with the Company's audited consolidated financial
statements, including the notes thereto, which appear elsewhere herein.
YEARS ENDED
-----------
JUNE 27, JULY 3, JULY 2, JUNE 30, JUNE 29,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA:
Net sales $ 148,501 $ 316,332 $ 507,314 $ 524,817 $ 525,837
Cost of goods sold 110,772 239,234 376,370 394,480 399,836
Gross profit 37,729 77,098 130,944 130,337 126,001
Selling, general and administrative expenses 15,886 39,220 62,534 58,343 60,999
Income from operations 21,843 37,878 68,410 71,994 65,002
Interest expense, net 8,094 19,682 38,977 38,447 76,569
Unrealized loss on derivative contracts -- -- -- -- (13,891)
Other expense 646 415 286 4,705 605
Pre-tax income (loss) before extraordinary item 13,103 17,781 29,147 28,842 (26,063)
Income tax provision (benefit) 4,675 9,112 14,150 14,436 (7,069)
Income before extraordinary item 8,428 8,669 14,997 14,406 (18,994)
Extraordinary item (loss)(b) (20,666) -- -- (35,374) --
Net income (loss) $ (12,238) $ 8,669 $ 14,997 $ (20,968) $ (18,994)
BALANCE SHEET DATA (at period end):
Working capital $ 25,950 $ 84,897 $ 101,445 $ 145,879 $ 199,129
Total Assets 129,029 539,279 559,436 574,789 621,494
Total debt (including current portion) 75,000 401,905 416,394 651,593 678,150
Stockholders' equity (deficit) 30,397 38,673 52,297 (149,150) (134,697)
OTHER FINANCIAL DATA:
EBITDA(a) $ 30,223 $ 54,479 $ 101,681 $ 100,527 $ 100,064
EBITDA margin(a) 20.4% 17.2% 20.0% 19.2% 19.0%
Depreciation and amortization $ 9,551 $ 17,249 $ 35,343 $ 34,748 $ 37,670
Capital expenditures 3,934 7,283 12,950 16,258 17,116
Cash flows:
From operations 19,537 29,009 38,794 9,485 (3,266)
From investing (6,273) (310,672) (58,089) (16,905) (26,777)
From financing (3,217) 299,926 12,057 (1,687) 62,180
(a) EBITDA is defined as earnings before interest, unrealized loss on
derivative contracts, income taxes, depreciation and amortization.
EBITDA is presented because it is a widely accepted financial indicator
of the 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 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.
(b) Net loss for the year ended June 27, 1997 includes an extraordinary
loss is 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.
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(c) Net loss for the year ended June 30, 2000 includes an extraordinary
loss 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.
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 2, 1999 JUNE 30, 2000 JUNE 29, 2001
------------ ------------- -------------
Net sales .................................. 100.0% 100.0% 100.0%
Cost of sales .............................. 74.2 75.2 76.0
Gross profit ............................... 25.8 24.8 24.0
Selling, general and administrative expenses 12.3 11.1 11.6
Income from operations ..................... 13.5 13.7 12.4
Interest expense ........................... 7.7 7.3 14.6
Provision (Benefit) for income taxes ....... 2.8 2.8 (1.3)
Income (loss) before extraordinary item .... 3.0 2.7 (5.0)
Extraordinary item (loss) .................. -- (6.7) --
Net income (loss) .......................... 3.0 (4.0) (3.6)
Depreciation and amortization .............. 7.0 6.6 7.2
EBITDA ..................................... 20.0 19.2 19.0
EBITDA is defined as earnings before interest, unrealized loss on
derivative contracts, 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 29, 2001 COMPARED TO YEAR ENDED JUNE 30 2000
Net Sales, increased to $525.8 million for the year ended June 29, 2001 from
$524.8 million for the year ended June 30, 2000, representing an increase of
$1.0 million or 0.2%. Sales increases in our Food and Consumer businesses were
generally offset by weaker sales in our Healthcare and Specialty Resins
businesses. Healthcare sales were down because of generally soft economic
conditions and inventory de-stocking by some of our customers. Sales of our
Specialty Resins segment were down as we continue to reposition this business in
both markets and products.
Cost of Goods Sold, increased to $399.8 million for the year ended June 29, 2001
from $394.5 million for the year ended June 30, 2000. Expressed as a percentage
of Net Sales, Cost of Goods Sold increased to 76.0% for the year ended June 29,
2001 compared to 75.2% for the year ended June 30, 2000. The increase in Cost of
Goods Sold as a
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percentage of Net Sales was due primarily to raw material costs, which rose
rapidly in the early part of the year before trending down over the remainder of
the year.
Gross Profit, as a result, fell to $126.0 million for the year ended June 29,
2001 from $130.3 million for the year ended June 30, 2000. The ratio of Gross
Profit to Net Sales decreased to 24.0% for the year ended June 29, 2001 from
24.8% for the year ended June 30, 2000.
Selling, General and Administrative Expenses, increased to $61.0 million for the
year ended June 29, 2001 from $58.3 million for the year ended June 30, 2000, an
increase of $2.7 million or 4.6%. This increase reflects general cost of living
increases for our salaried personal as well as the Selling, General and
Administrative expenses associated with our Super Plastics acquisition. The
resultant ratio to Net Sales increased to 11.6% for the year ended June 29, 2001
from 11.1% for the year ended June 30, 2000.
Operating Profit, as a result of the above, decreased to $65.0 million or 12.4%
for the year ended June 29, 2001 from $72.0 million or 13.7% for the year ended
June 30, 2000.
Other Expenses, decreased to $0.6 million for the year ended June 29, 2001 from
$4.7 million for the year ended June 29, 2000 primarily due to non-recurring
expenses associated with the recapitalization. The year ended June 30, 2000
included approximately $4.0 million of non-recurring expenses associated with
the recapitalization.
Interest Expense, increased to $76.6 million for the fiscal year ending June 29,
2001 from $38.4 million for the fiscal year ending June 30, 2000 primarily due
to increased debt associated with the recapitalization. The Company has also
incurred an unrealized loss of $13.9 million from derivative contracts for the
year ended June 29, 2001. The Company had no similar gains or losses for the
year ended June 30, 2000.
The ratio of the provision (benefit) for income taxes to income (loss) before
income taxes was 27.1% for the year ended June 29, 2001 compared to 50.1% for
the year ending June 30, 2000. The decrease in the effective rate for the year
ended June 29, 2001 is due to non-deductible goodwill and other permanent
differences in foreign subsidiaries.
Net Income (loss), as a result, was a loss of ($19) million or (3.6%) of net
sales for the fiscal year ending June 29, 2001 compared to a loss of ($21.0)
million or (4.0%) of net sales after an extraordinary charge of ($35.4) million
for the year ending June 30, 2000.
Depreciation and Amortization Expense, increased to 37.7 million or 7.2% of net
sales for the fiscal year ending June 29, 2001 from $34.7 million or 6.6% of net
sales for the fiscal year ending June 30, 2000 due to increased depreciation and
amortization expense primarily associated with our Super Plastics acquisition.
EBITDA, decreased slightly to $100.1 million or 19.0% for the year ended June
29, 2001 from $100.5 million or 19.2% for the fiscal year ending June 30, 2000
for the same reasons discussed above.
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JULY 2, 1999
Net Sales, increased to $524.8 million for the year ended June 30, 2000 from
$507.3 million for the year ended July 2, 1999, representing an increase of
$17.5 million or 3.5%. The increased sales occurred primarily in the Company's
Food Packaging business segment and in the European operations, which are
accounted for in the Consumer Packaging and Products business segment. These
increases were partially offset by decreases in the compounding business units
within the Healthcare Packaging, Products and Materials business segment and in
the Specialty Resins and Compounding business segment. Compounding sales in the
Healthcare Packaging, Products and Materials segment are down because of
scattered customer resistance to rapidly rising resin cost increases throughout
the year and to the completion of the Company's program over the last several
years to eliminate low profit sales. Sales were down in the Specialty Resins and
Compounding business segment because the Burlington business segment was
completely repositioned in both markets and products. In addition, sales growth
was delayed in several business units that were merged and repositioned to
emphasize national sales and marketing strategies rather than regional ones in
the Healthcare Packaging, Products and Materials segment. Thus, the level of
growth for the year ended June 30, 1999 may not be indicative of future
operations.
Cost of Goods Sold, increased to $394.5 million for the year ended June
30, 2000 from $376.4 million for the year ended July 2, 1999. Expressed as a
percentage of net sales, cost of goods sold increased to 75.2% for the year
ended June 30, 2000 from 74.2% for the year ended July 2, 1999. The increase in
cost of goods sold as a
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percentage of net sales was due primarily to resin costs, which rose rapidly
throughout the year ended June 30, 2000. Several of the Company's business units
were unable to pass on all resin cost increases fully and quickly. Of these, the
Garden Hose business unit in the Consumer Packaging and Products business
segment suffered the most because it could not pass on any of the resin cost
increases due to the industry practice of fixing prices with customers in the
summer of each year for a full model year.
Gross Profit, as a result, stayed virtually the same in the fiscal year
ended June 30, 2000 at $130.3 million versus $130.9 million in the fiscal year
ended July 2, 1999. The ratio of gross profit to net sales decreased from 25.8%
in fiscal year ended July 2, 1999 to 24.8% for the fiscal year ended June 30,
2000.
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 from 12.3% to
11.1% respectively. Primary reasons for the reduction were a decrease in
incentive compensation expenses and completion of the Company programs to
integrate the acquisitions made in the fiscal year ended July 2, 1999 into
Tekni-Plex's culture and operations.
Operating Profit, as a result of the above, increased to $72.0 million
or 13.7% of sales in fiscal year ended June 30, 2000 from $68.4 million or 13.5%
for the fiscal year ended July 2, 1999.
Other Expenses, in the fiscal year ended June 30, 2000 included
non-recurring expenses of about $4.0 million incurred as a result of the
Company's recapitalization program completed near the end of June, 2000.
Interest Expense, was $38.4 million for the fiscal year ended June 30,
2000. This was virtually unchanged from the fiscal year ended July 2, 1999 when
interest expense was $39.0 million as average monthly usage and the interest
rate remained about the same in both years. Interest expense as a ratio to net
sales declined in the fiscal year ended June 30, 2000 to 7.3% from 7.7% in the
fiscal year ended July 2, 1999. The large increase in total debt at the end of
the year ended June 30, 2000 from the debt at the end of July 2, 1999, as shown
on the Company's Consolidated Balance Sheet, was incurred in late June of 2000
as a result of the Company's recapitalization thereby having little or no impact
on interest expense for the year ending June 30, 2000.
Extraordinary Expense Net of Income Tax, of $35.4 million in the fiscal
year ended June 30, 2000 represented the costs of calling in the old debt to be
replaced by new debt in the Company's recapitalization program.
Provision for Income Taxes increased to $14.4 million in the fiscal
year ended June 30, 2000, from $14.2 million in the fiscal year ended July 2,
1999. The ratio of the provision for income taxes to net sales remained constant
at 2.8%. The Company's effective tax 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 the Company's European operations in the fiscal year ending
June 30, 2000 than in the fiscal year ending July 2, 1999.
Net Income, for the fiscal year ending June 30, 2000 showed a loss of
($20.9) million or (4.0%) of net sales due to the non-recurring costs of the
recapitalization program totaling about $39.1 million. The Company showed a
profit in the fiscal year ending July 2, 1999 of $15.0 million or 3.0% of net
sales.
Depreciation and Amortization decreased 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 6.6% for the year ended June 30, 2000 from 7.0% for the same period in 1999.
EBITDA decreased to $100.5 million or 19.2% of net sales for the year
ended June 30, 2000, from $101.7 million or 20.0% of net sales for the same
period in 1999 for the same reasons discussed above.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended June 29, 2001, net cash used by operating activities
was ($3.3) million compared to $9.5 million of cash provided by operating
activities for the same period in the prior year for an increased usage of $12.8
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million. The increase was due to higher inventories and receivables in our
Consumer Segment to accommodate a shift in the buying patterns of this segment's
largest customer and a reduction in accrued expenses and liabilities. Various
year-over-year changes in operating assets, accrued expenses, and liabilities
are generally due to offsetting timing differences.
Working capital at June 29, 2001 was $199.1 million compared to $145.9
million at June 30, 2000. The increase was primarily to increased borrowings of
$35 million and the capital contribution of $30 million which were invested in
increased inventory. The inventory increase resulted from a shift in the buying
pattern of our Consumer Segment's largest customer. Approximately 75% of the
annual sales in garden hose, which is the largest business unit in that segment,
normally occur in the spring and early summer months.
As of June 29, 2001, we had an outstanding balance of $65.0 million
under the $100.0 million revolving credit line of the existing credit facility.
This was an increase of $35.0 million from the outstanding balance as of June
30, 2000 and was due primarily to normal seasonal requirements of our Consumer
Packaging and Products business segment. In addition, as of June 29, 2001 we had
$44.6 million of cash compared to $12.5 million of cash as of June 30, 2000. The
$32.1 million increase in cash was largely due to new capital contributions.
As of June 29, 2001, there was $35.0 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 $269.6 million
in the aggregate, of which $167.0 million has been contributed and used to
purchase interests of certain previous Tekni-Plex investors and an additional
$35.0 million was used to finance acquisitions, including the announced
acquisition of Swan Hose. Tekni-Plex Management, the managing member of
Tekni-Plex Partners, may for at least five years from the recapitalization call
upon the remainder of the commitment, $67.6 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 29, 2001 and June 30, 2000 were $17.1
million and $16.3 million, respectively. We expect that annual capital
expenditures will increase somewhat from historical levels during the next few
years as we make improvements in the recently acquired operations.
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 you 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
Effective July 1, 2000, Tekni-Plex adopted Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended and interpreted. FAS 133 requires that all derivative
instruments, such as interest rate swaps, be recognized in the financial
statements and measured at their fair market value. Changes in the fair market
value of derivative instruments are recognized each period in current
operations or stockholders equity (as a component of accumulated other
comprehensive loss), depending on whether a derivative instrument qualifies as
a hedge transaction.
In the normal course of business, Tekni-Plex is exposed to changes in
interest rates. The objective in managing its exposure to interest rates is to
decrease the volatility that changes in interest rates might have on operations
and cash flows. To achieve this objective, Tekni-Plex uses interest rate swaps
and caps to hedge a portion of total long-term debt that is subject to variable
interest rates. These derivative contracts are considered to be a hedge against
changes in the amount of future cash flows associated with the interest payments
on variable-rate debt obligations however, they do not qualify for hedge
accounting under FASB 133. Accordingly, the interest rate swaps are reflected at
fair value in the Consolidated Balance Sheet and the related gains or losses on
these contracts are recorded as an unrealized loss from derivative instruments
in the Consolidated Statements of Operations. Currently these are the only
derivative instruments held by Tekni-Plex as of June 29, 2001. The fair value of
derivative contracts are determined based on quoted market values obtained from
a third party. At July 1, 2000, there was no cumulative effect adjustment
required to reflect the accounting change. As of July 1, 2000, Tekni-Plex had
interest rate swap contracts to pay variable rates of interest based on a basket
of LIBOR Benchmarks and receive variable rates of interest based on 3 month
dollar LIBOR on an aggregate of $344 million amount of indebtedness with
maturity dates ranging from June 2006 through June 2008. In conjunction with
these swap contracts, Tekni-Plex also purchased an interest rate cap. The
aggregate fair market value of these interest rate swaps contracts was $(13,891)
on June 29, 2001 and is included in other liabilities on the Consolidated
Balance Sheet. For the year ended June 29, 2001, Tekni-Plex incurred realized
losses of $1,806, which have been reflected in interest expense.
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within
the first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of June 29, 2001, the net carrying amount of goodwill is
$179,100 and other intangible assets is $516. Amortization expense during the
period ended June 29, 2001 was $15,400. Currently, the Company is assessing but
has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.
INFLATION
During the first half of fiscal year 2001, we 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
The market risk inherent in the Company's financial instruments and
positions represents the potential loss arising from adverse changes
in interest rates. At June 29, 2001 and June 30, 2000 the principal
amount of the Company's aggregate outstanding variable rate
indebtedness was $401,560 and $374,000 respectively. A hypothetical 1%
adverse change in interest rates would have had an annualized
unfavorable impact of approximately $4,000 and $3,700, respectively,
on the Company's earnings and cash flows based upon these year-end
debt levels. To ameliorate these risks, in June 2000, the Company
entered into interest rate Swap and Cap Agreements with a notional
amount of $344,000. The specific terms of the Swap and Cap Agreements
are more fully discussed above in Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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 designated two directors, Dr.
Smith designated three members of management as directors (Dr. Smith, Mr. Baker
and Mr. Witt and the last director was 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 53 Chairman of the Board and Chief Executive Officer
Kenneth W.R. Baker 57 President, Chief Operating Officer and Director
Arthur P. Witt 71 Corporate Secretary and Director
John S. Geer 55 Director
J. Andrew McWethy 60 Director
Michael F. Cronin 47 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.
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 in 1994.
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.
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
served on 20 boards of directors of emerging growth and middle market companies.
Andrew McWethy has served as a director of Tekni-Plex since March 1994.
He co-founded and managed MST Partners L.P., a private equity investment fund,
from 1989 to 2000. In 2000, Mr. McWethy co-founded Eastport Operating Partners,
L.P., a private equity investment fund that he continues to manage. Prior to
1989, Mr. McWethy was employed by Irving Trust Company for 12 years.
19
20
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.
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.
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, 2001 $5,000,000 $ -- -- $16,000
Chief Executive Officer 2000 1,200,000 4,622,100 -- 16,000
1999 1,200,000 8,981,000 -- 42,000
Mr. Kenneth W.R. Baker, 2001 $2,500,000 $ -- -- $ 9,000
President and Chief Operating 2000 600,000 2,311,050 -- 9,000
Officer 1999 600,000 4,490,000 -- 9,000
(a) Includes amounts reimbursed during the fiscal year for payment of
taxes, auto expense, membership fees, etc.
In connection with the recapitalization, the employment agreements of
Dr. Smith and Mr. Baker were amended and restated as described below.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
PERCENT OF POTENTIAL POTENTIAL
TOTAL REALIZABLE REALIZABLE VALUE
NUMBER OF OPTIONS/ VALUE AT AT ASSUMED
SECURITIES SARS GRANTED EXERCISE ASSUMED ANNUAL ANNUAL RATES OF
UNDER-LYING TO EMPLOYEES OR BASE RATES OF STOCK STOCK PRICE
OPTIONS/ IN FISCAL PRICE PRICE APPRECIATION FOR
SARS GRANTED YEAR PER EXPIRATION APPRECIATION OPTION TERM 10%
SHARE DATE FOR OPTION TERM ($000)
NAME ($000) 5%
($000)
Dr. F. Patrick Smith -- --% -- -- -- --
Kenneth W.R. Baker -- --% -- -- -- --
20
21
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 ON EXERCISABLE/ EXERCISABLE/
NAME 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 currently expire July 2, 2004
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 annual salaries of Dr. Smith and Mr. Baker are $5 million and $2.5
million, respectively, and each of these salaries will be increased by 10%
annually. Neither Dr. Smith's nor Mr. Baker's amended and restated employment
agreement provides for any mandatory bonus compensation. No other provisions of
Dr. Smith's and Mr. Baker's 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.
Compensation levels and bonus awards for all other employees are
controlled by Dr. Smith and Mr. Baker.
COMPENSATION COMMITTEE
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.
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).
21
22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Tekni-Plex Partners LLC holds approximately 95.6% (approximately 93.0%
on a fully diluted basis) and MST/TP Partners LLC holds approximately 4.4%
(approximately 4.2% on a fully diluted basis) of Tekni-Plex's outstanding common
stock.
Tekni-Plex Management LLC, controlled by Dr. Smith, is the sole
managing member of both Tekni-Plex Partners LLC and MST/TP Partners LLC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING ARRANGEMENTS
We 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
$50,400 and $66,500 for fiscal years 2001 and 2000, 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.
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
None
22
23
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: October 4, 2001
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 October 1, 2001.
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 and Director
Kenneth W.R. Baker
/s/ ARTHUR P. WITT Corporate Secretary and Director
Arthur P. Witt
/s/ JOHN S. GEER Director
John S. Geer
/s/ J. ANDREW MCWETHY Director
J. Andrew McWethy
/s/ MICHAEL F. CRONIN Director
Michael F. Cronin
24
TEKNI-PLEX, INC.
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-42
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE F-43
SUPPLEMENTAL SCHEDULE:
Valuation and qualifying accounts and reserves F-44
F-1
25
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 29, 2001 and June
30, 2000, 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 29, 2001. 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 auditing standards generally accepted
in the United States of America. 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 29, 2001 and June 30, 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended June 29, 2001, in conformity with accounting principles
generally accepted in the United States of America.
BDO Seidman, LLP
Woodbridge, New Jersey
September 20, 2001, except for Note 6
for which the date is October 4, 2001
F-2
26
TEKNI-PLEX, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
JUNE 29, 2001 June 30, 2000
---------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash $ 44,645 $ 12,525
Accounts receivable, net of an allowance of $1,500 and
$1,642 for possible losses 105,316 96,039
Inventories (Note 4) 106,258 91,233
Deferred income taxes (Note 7) 5,153 4,997
Refundable income taxes -- 14,883
Prepaid expenses and other current assets 5,595 2,171
---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 266,967 221,848
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 5) 137,008 135,926
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
$62,271 AND $45,480 179,616 190,492
DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION
OF $2,549 AND $0 16,607 18,897
DEFERRED INCOME TAXES (NOTE 7) 19,010 5,398
OTHER ASSETS 2,286 2,228
---------------------------------------------------------------------------------------------
$ 621,494 $ 574,789
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long term debt (Note 6) $ 8,072 $ 8,401
Accounts payable trade 34,076 30,026
Accrued payroll and benefits 5,222 11,662
Accrued interest 1,673 2,359
Accrued liabilities - other 15,446 23,521
Income taxes payable 3,349 --
---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 67,838 75,969
LONG-TERM DEBT (NOTE 6) 670,078 643,192
OTHER LIABILITIES 18,275 4,778
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 756,191 723,939
---------------------------------------------------------------------------------------------
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 29, 2001 and June 30, 2000 -- --
Additional paid-in capital 120,176 84,176
Accumulated other comprehensive loss (7,039) (4,486)
Accumulated deficit (27,372) (8,378)
Less: Treasury stock at cost, 432 shares (Note 2) (220,462) (220,462)
---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (134,697) (149,150)
---------------------------------------------------------------------------------------------
$ 621,494 $ 574,789
=============================================================================================
See accompanying notes to consolidated financial statements.
F-3
27
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
================================================================================
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
------------------------------------------------------------------------------------------
NET SALES $ 525,837 $ 524,817 $507,314
COST OF SALES 399,836 394,480 376,370
------------------------------------------------------------------------------------------
GROSS PROFIT 126,001 130,337 130,944
OPERATING EXPENSES:
Selling, general and administrative 60,999 58,343 62,534
------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 65,002 71,994 68,410
OTHER EXPENSES:
Interest, net 76,569 38,447 38,977
Unrealized loss on derivative contracts
(Note 1) 13,891 -- --
Other (Note 9) 605 4,705 286
------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES AND
EXTRAORDINARY ITEM (26,063) 28,842 29,147
PROVISION (BENEFIT) FOR INCOME TAXES
(NOTE 7):
Current 4,098 12,333 7,004
Deferred (11,167) 2,103 7,146
------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (18,994) 14,406 14,997
EXTRAORDINARY ITEM, NET OF INCOME TAXES
(NOTE 2) -- (35,374) --
------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (18,994) $ (20,968) $ 14,997
==========================================================================================
See accompanying notes to consolidated financial statements.
F-4
28
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
================================================================================
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
----------------------------------------------------------------------------------
NET INCOME (LOSS) $(18,994) $(20,968) $ 14,997
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAXES:
Foreign currency translation (2,553) (3,118) (1,373)
----------------------------------------------------------------------------------
COMPREHENSIVE INCOME (LOSS) $(21,547) $(24,086) $ 13,624
==================================================================================
See accompanying notes to consolidated financial statements.
F-5
29
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
================================================================================
Accumulated
Additional Other
Common Paid-In Comprehensive Accumulated Treasury
stock Capital Loss deficit Stock TOTAL
--------------------------------------------------------------------------------------------------------------
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)
Foreign currency translation -- -- (2,553) -- -- (2,553)
Net loss -- -- -- (18,994) -- (18,994)
Capital contributions -- 36,000 -- -- -- 36,000
--------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 29, 2001 $ -- $120,176 $(7,039) $(27,372) $(220,462) $(134,697)
==============================================================================================================
See accompanying notes to consolidated financial statements.
F-6
30
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
================================================================================
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(18,994) $ (20,968) $ 14,997
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 18,741 16,026 16,930
Amortization 18,929 18,722 18,413
Unrealized loss on derivative contracts 13,891
Provision for bad debts 250 310 370
Deferred income taxes (11,167) 2,103 7,146
Loss on sale of assets -- 62 --
Extraordinary loss on extinguishment of debt -- 35,374 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (9,527) 186 (5,709)
Inventories (11,019) (29,243) (4,778)
Prepaid expenses and other current assets 8,859 4,898 (1,483)
Other assets (58) 205 (532)
Accounts payable and other current liabilities 2,713 (15,994) (4,859)
Income taxes payable 3,349 (742) (1,701)
Other liabilities (19,233) (1,454) --
-------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,266) 9,485 38,794
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of net assets including acquisition costs,
net of cash acquired (9,233) -- (45,139)
Capital expenditures (17,116) (16,258) (12,950)
Additions to intangibles (428) (805) --
Cash proceeds from sale of assets -- 158 --
-------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (26,777) (16,905) (58,089)
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 35,000 (2,030) 22,234
Proceeds from long-term debt -- 645,232 --
Repayments of long-term debt (8,820) (448,631) (10,177)
Proceeds from capital contributions 36,000 43,101 --
Debt financing costs -- (18,897) --
Purchase of treasury stock -- (220,462) --
-------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 62,180 (1,687) 12,057
-------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (17) (485) (8)
-------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH 32,120 (9,592) (7,246)
CASH, BEGINNING OF PERIOD 12,525 22,117 29,363
-------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 44,645 $ 12,525 $ 22,117
=============================================================================================================
See accompanying notes to consolidated financial statements.
F-7
31
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
1. SUMMARY OF ACCOUNTING POLICIES
Nature of Business
Tekni-Plex, Inc. ("Tekni-Plex" or the "Company") 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 primarily on 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
32
TEKNI-PLEX, INC.
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.
Shipping and Handling Costs
During fiscal year 2001, the Company adopted EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs." Shipping and handling costs of $19,400
were charged to cost of sales for the year ended June 29, 2001. In prior years
these costs were recorded as a reduction to sales. The 2000 and 1999 sales and
cost of sales were reclassified by $18,000 and $18,100, respectively to reflect
the adoption of EITF 00-10.
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 29, 2001, June 30, 2000 and July 2, 1999 contained
52 weeks each.
Reclassifications
Certain items in the prior year financial statements have been reclassified to
conform to the current year presentation.
F-9
33
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Foreign Currency Translation
Assets and liabilities of international subsidiaries are translated at year end
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.
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 29, 2001.
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.
F-10
34
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
Derivative Instruments
Effective July 1, 2000, Tekni-Plex adopted Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," as amended
and interpreted. FAS 133 requires that all derivative instruments, such as
interest rate swaps, be recognized in the financial statements and measured at
their fair market value. Changes in the fair market value of derivative
instruments are recognized each period in current operations or stockholders'
equity (as a component of accumulated other comprehensive loss), depending on
whether a derivative instrument qualifies as a hedge transaction.
In the normal course of business, Tekni-Plex is exposed to changes in interest
rates. The objective in managing its exposure to interest rates is to decrease
the volatility that changes in interest rates might have on operations and cash
flows. To achieve this objective, Tekni-Plex uses interest rate swaps and caps
to hedge a portion of total long-term debt that is subject to variable interest
rates. These derivative contracts are considered to be a hedge against changes
in the amount of future cash flows associated with the interest payments on
variable-rate debt obligations however, they do not qualify for hedge
accounting under FASB 133. Accordingly, the interest rate swaps are reflected at
fair value in the Consolidated Balance Sheet and the related gains or losses on
these contracts are recorded as an unrealized loss from derivative instruments
in the Consolidated Statements of Operations. Currently these are the only
derivative instruments held by Tekni-Plex as of June 29, 2001. The fair value of
derivative contracts are determined based on quoted market values obtained from
a third party. At July 1, 2000, there was no cumulative effect adjustment
required to reflect the accounting change. As of July 1, 2000, Tekni-Plex had
interest swap contracts to pay variable rates of interest based on a basket of
LIBOR Benchmarks and receive variable rates of interest based on a 3 month
dollar LIBOR on an aggregate of $344 million amount of indebtedness with
maturity dates ranging from June 2006 through June 2008. In conjunction with
these swap contracts, Tekni-Plex also purchased an interest rate cap. The
aggregate fair market value of these interest rate swap and cap contracts was
$(13,891) on June 29, 2001 and is included in other liabilities on the
Consolidated Balance Sheet. For the year ended June 29, 2001, Tekni-Plex
incurred realized losses of $1,806, which have been reflected in
interest expense.
F-11
35
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 29, 2001, the net carrying amount of goodwill is
$179,100 and other intangible assets is $6,516. Amortization expense during the
period ended June 29, 2001 was $15,400. Currently, the Company is assessing but
has not yet determined how the adoption of SFAS 141 and SAFS 142 will impact its
financial position and results of operations.
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(b)) and initial borrowings of $374,000 on
a $444,000 Senior Credit Facility (see Note 6(a)).
F-12
36
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
3. ACQUISITIONS
In November 2000, the Company purchased certain assets of Super Plastics
Division ("Super Plastics") of RCR International, Inc., for approximately
$10,200. The acquisition was recorded under the purchase method, whereby Super
Plastics' 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 $5,500 has been recorded, which is
being amortized over 15 years. In connection with the acquisition, the Company
established a reserve of $2,600. The reserve was comprised of the costs to close
a duplicate facility and terminate employees. There is no balance remaining in
this reserve at June 29, 2001. Proforma results of operations, assuming Super
Plastics was acquired on July 3, 1999, would not be materially different from
the consolidated results of operations.
In April 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.
In January 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-13
37
TEKNI-PLEX, INC.
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 July 4, 1998:
Years ended JULY 2, 1999
--------------------------------------------------------------------------------
Net sales $510,050
Income from operations 70,691
Income before provision for income taxes 31,211
================================================================================
4. INVENTORIES
Inventories are summarized as follows:
JUNE 29, 2001 June 30, 2000
--------------------------------------------------------------------------------
Raw materials $ 33,971 $44,002
Work-in-process 7,812 7,024
Finished goods 64,475 40,207
--------------------------------------------------------------------------------
$106,258 $91,233
================================================================================
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
Estimated
JUNE 29, 2001 June 30, 2000 useful lives
--------------------------------------------------------------------------------
Land $ 15,390 $ 15,106
Building and improvements 34,886 32,016 30 - 40 years
Machinery and equipment 139,591 124,549 5 - 10 years
Furniture and fixtures 6,176 4,045 5 - 10 years
Construction in progress 10,115 10,009
--------------------------------------------------------------------------------
206,158 185,725
Less: Accumulated depreciation 69,150 49,799
--------------------------------------------------------------------------------
$137,008 $135,926
================================================================================
F-14
38
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
================================================================================
6. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 29, 2001 June 30, 2000
--------------------------------------------------------------------------------
Senior Debt(a):
Revolving line of credit $ 65,000 $ 30,000
Term notes 336,560 344,000
Senior Subordinated Notes issued
June 21, 2000 at 12-3/4%, due
June 15, 2010 (less unamortized
discount of $3,391 and $3,768)(b). 271,609 271,232
Other, primarily foreign term loans, with
interest rates ranging from 4.44% to 5.44%
and maturities from 2000 to 2010. 4,981 6,361
--------------------------------------------------------------------------------
678,150 651,593
Less: Current maturities 8,072 8,401
--------------------------------------------------------------------------------
$670,078 $643,192
================================================================================
a) Senior Debt
The Company has a Senior Debt agreement, which includes a $100,000 revolving
credit agreement, and two term loans in the original amount of $344,000. The
proceeds of the credit agreement were used as part of the Recapitalization.
These loans are senior to all other indebtedness 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.
On October 2, 2001, the Company's Senior Debt agreement was amended to
retroactively modify certain financial covenants effective June 29, 2001 and
thereafter. The Company is in compliance with all such financial covenants, as
amended.
F-15
39
TEKNI-PLEX, INC.
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
$35,000 is available for borrowing at June 29, 2001. 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 29, 2001 the balance of $65,000 outstanding was
borrowed at various rates ranging from 6.75% to 8.75%. At June 30, 2000, the
rates charged were 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 original 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, 7.5% and
9.81% at June 29, 2001 and June 30, 2000, respectively. Principal is currently
payable in quarterly installments of $1,250. The quarterly installments
subsequently increase with payments totaling $70,000 due in the final two years
in the period ending in June 2006.
Term Loan B
Borrowings under this loan in the original 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%. Rates of 7.25% and 10.31% were
charged at June 29, 2001 and June 30, 2000, respectively. 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 currently
payable in quarterly installments of $610. The quarterly installments
subsequently increase with payments totaling $229,000 due in the final two years
in the period ending in June 2008.
F-16
40
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
b) 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. The discount is being amortized over
the term of the notes on the interest method. 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.
Principal payments on long-term debt over the next five years and thereafter are
as follows:
-------------------------------------------
2002 $ 8,072
2003 12,913
2004 12,913
2005 37,913
2006 102,913
Thereafter 506,817
===========================================
F-17
41
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company believes the recorded value of long-term debt approximates fair
value based on current rates available to the Company for similar debt.
7. INCOME TAXES
The provision for income taxes , excluding the income tax benefit associated
with the extraordinary item in 2000, is summarized as follows:
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
------------------------------------------------------------------------------------
Current:
Federal $ -- $ 7,763 $ 3,604
Foreign 3,984 3,554 2,900
State and local 114 1,016 500
------------------------------------------------------------------------------------
4,098 12,333 7,004
------------------------------------------------------------------------------------
Deferred:
Federal (9,945) 1,756 5,918
Foreign (370) 217 328
State and local (852) 130 900
------------------------------------------------------------------------------------
(11,167) 2,103 7,146
------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (7,069) $ 14,436 $ 14,150
====================================================================================
The components of income (loss) before income taxes are as follows:
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
--------------------------------------------------------
Domestic $(38,116) $ 20,150 $ 21,198
Foreign 12,053 8,692 7,949
--------------------------------------------------------
$(26,063) $ 28,842 $ 29,147
========================================================
F-18
42
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The provision (benefit) for income taxes differs from the amounts computed by
applying the applicable Federal statutory rates due to the following:
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
--------------------------------------------------------------------------------------
Provision (benefit) for Federal income
taxes at statutory rate $ (8,861) $ 9,806 $ 9,910
State and local income taxes, net of
Federal benefit (677) 756 330
Non-deductible goodwill amortization 2,785 2,310 3,765
Foreign tax rates in excess of Federal
tax rate (470) 785 465
Other, net 154 779 (320)
--------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (7,069) $ 14,436 $ 14,150
======================================================================================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
JUNE 29, 2001 June 30, 2000
--------------------------------------------------------------------------------
Current deferred taxes:
Allowance for doubtful accounts $ 582 $ 637
Inventory 1,190 309
Net operating loss carryforwards 3,201 --
Accrued expenses 180 4,051
--------------------------------------------------------------------------------
Total current deferred tax assets $ 5,153 $ 4,997
================================================================================
Long-term deferred taxes:
Net operating loss carryforwards $ 39,593 $ 29,997
Accrued pension and post-retirement 1,457 1,434
Accrued expenses 620 1,108
Unrealized loss on derivative contracts 5,360 --
Difference in book vs. tax basis of assets (3,028) (4,556)
Accelerated tax vs. book depreciation (19,292) (16,885)
--------------------------------------------------------------------------------
Total long-term net deferred tax assets 24,710 11,098
Valuation allowance (5,700) (5,700)
--------------------------------------------------------------------------------
Total long-term net deferred tax assets $ 19,010 $ 5,398
================================================================================
F-19
43
TEKNI-PLEX, INC.
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
Company and its U.S. subsidiaries have net operating loss ("NOL") carryforwards
of approximately $106,578. These NOL's expire at various dates from 2009 through
2021. $86,166 of the NOL's are as a result of the acquisition of PureTec in 1997
(the "PureTec NOL's"). The PureTec NOL's are subject to IRC Section 382 change
of ownership annual limitation of approximately $5,900.
In addition to the domestic NOL balances, the Company has incurred losses
relating to a subsidiary, taxable in Northern Ireland. Through fiscal 2001
losses aggregated $2,500 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 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.
8. EMPLOYEE BENEFIT PLANS
(a) Savings 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 for the year ended July 2, 1999.
F-20
44
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 contributions
amounted to approximately $362 for the year ended July 2, 1999.
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 year ended July 2, 1999.
Effective December 1, 1999 the Dolco, PST and Burlington 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 years
ended June 29, 2001 and June 30, 2000 amounted to approximately $863
and $996, respectively.
F-21
45
TEKNI-PLEX, INC.
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 JUNE 29, Year ended June 30,
2001 2000
------------------------------------------------------------------------------------------------------------
Service cost $ 105 $ 117
Interest cost on projected benefit
obligation 393 390
Expected actual return on plan assets (494) (492)
------------------------------------------------------------------------------------------------------------
Net pension cost $ 4 $ 15
============================================================================================================
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation,
beginning of period $ 5,334 $ 5,292
Service cost 105 117
Interest cost 393 390
Actuarial (gain) loss 38 (230)
Benefits paid (270) (235)
------------------------------------------------------------------------------------------------------------
Projected benefit obligation, end of
period $ 5,600 $ 5,334
============================================================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning
of period $ 5,550 $ 5,431
Actual return on plan assets 3 158
Company contributions 157 196
Benefits paid (270) (235)
------------------------------------------------------------------------------------------------------------
Plan assets at fair value, end of
period $ 5,440 $ 5,550
============================================================================================================
F-22
46
TEKNI-PLEX, INC.
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 29, 2001 June 30, 2000
--------------------------------------------------------
Funded status of the plan $(160) $ 216
Unrecognized net gain 676 147
--------------------------------------------------------
Prepaid pension cost $ 516 $ 363
========================================================
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 29, 2001
and June 30, 2000.
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 JUNE 29, Year ended June 30,
2001 2000
-------------------------------------------------------------------------------
Service cost $ -- $ --
Interest cost on projected benefit
obligation 750 704
Expected actual return on plan assets (978) (986)
-------------------------------------------------------------------------------
Net pension cost $(228) $(282)
===============================================================================
F-23
47
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED Year ended
JUNE 29, 2001 June 30, 2000
----------------------------------------------------------------------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation,
beginning of period $ 9,978 $ 9,555
Interest cost 750 704
Actuarial (gain) loss 204 146
Benefits paid (431) (427)
----------------------------------------------------------------------------
Projected benefit obligation, end of
period $ 10,501 $ 9,978
============================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning
of period $ 11,055 $ 11,113
Actual return on plan assets (79) 369
Benefits paid (431) (427)
----------------------------------------------------------------------------
Plan assets at fair value, end of
period $ 10,545 $ 11,055
============================================================================
The funded status of the Plan and amounts recorded in the Company's balance
sheets are as follows:
JUNE 29, 2001 June 30, 2000
--------------------------------------------------------------
Funded status of the plan $ 44 $1,077
Unrecognized net gain (loss) 1,557 296
--------------------------------------------------------------
Prepaid pension cost $1,601 $1,373
==============================================================
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 29, 2001 and June 30, 2000.
F-24
48
TEKNI-PLEX, INC.
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 29, 2001 and June 30, 2000 amounted to $182
and $130, respectively.
F-25
49
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net periodic post-retirement benefit costs are as follows:
YEAR ENDED Year ended
JUNE 29, 2001 June 30, 2000
---------------------------------------------------------------------------------
Service cost $ 45 $ 45
Interest cost 179 155
Transition obligation 4 --
---------------------------------------------------------------------------------
Net post-retirement benefit cost $ 228 $ 200
=================================================================================
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of
period $ 2,457 $ 2,101
Service cost 45 45
Interest cost 179 155
Actuarial (gain) loss 348 286
Benefits paid (182) (130)
---------------------------------------------------------------------------------
Projected benefit obligation, end of period $ 2,847 $ 2,457
=================================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of
period $ -- $ --
Company contributions 182 130
Benefits paid (182) (130)
---------------------------------------------------------------------------------
Plan assets at fair value, end of period $ -- $ --
=================================================================================
F-26
50
TEKNI-PLEX, INC.
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:
YEAR ENDED Year ended
JUNE 29, 2001 June 30, 2000
----------------------------------------------------------------
Funded status of the plan $(2,847) $(2,457)
Unrecognized gain (loss) 630 286
----------------------------------------------------------------
Accrued post retirement cost $(2,217) $(2,171)
================================================================
The accumulated post-retirement benefit obligation was deter-mined 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
$295 and $254 and increase the service and interest components by $27 and $26 at
June 29, 2001 and June 30, 2000, respectively.
9. RELATED PARTY TRANSACTIONS
The Company had a management consulting agreement with 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 the year ending
July 2, 1999. 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.
F-27
51
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
10. STOCK OPTIONS
In January 1998, the Company adopted an incentive stock plan (the "Stock
Incentive Plan"). Under the Stock Incentive Plan, 41.72948 shares are available
for awards to employees of the Company. Options will be granted at fair market
value on the date of grant. During 2001, 2000, 1999 and 1998, options were
granted to purchase 4.02, 1.26, 7.32 and 28.37 shares of common stock at an
exercise price of $559, $507, $222 and $154 per share, respectively. The options
are subject to vesting provisions, as determined by the Board of Directors, at
date of grant and generally vest 100% five years from grant date and expire 10
years from date of grant. In connection with the Recapitalization 22.88 of the
1998 options were cancelled.
At June 29, 2001, no options were exercisable and no options have been exercised
or forfeited as of June 29, 2001.
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 (loss) before extraordinary items would have been reduced (increased) to
the pro forma amounts indicated below. The calculations were based on a risk
free interest rate of 4.0%, 5.7% and 4.75% for the 2001, 2000 and 1999 options,
respectively, expected volatility of zero, a dividend yield of zero and expected
lives of 8 years.
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
----------------------------------------------------------------------------------------
Income (loss) before extraordinary
item:
As reported $(18,994) $ 14,406 $ 14,997
========================================================================================
Pro forma $(19,154) $ 14,343 $ 14,868
========================================================================================
F-28
52
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES
Commitments
(a) The Company leases building space and certain equipment in
approximately 20 locations throughout the United States, Canada and
Europe. At June 29, 2001, the Company's future minimum lease
payments are as follows:
-----------------------------------------------------------------------------------
2002 $ 4,423
2003 2,504
2004 1,796
2005 1,171
2006 782
Thereafter 5,900
-----------------------------------------------------------------------------------
$16,576
===================================================================================
Rent expense, including escalation charges, amounted to
approximately $4,308, $3,427 and $3,756 for the years ended June 29,
2001, June 30, 2000 and July 2, 1999, respectively.
(b) The Company had employment contracts with two employees, which
provided for combined minimum salaries of $1,800 and bonuses based
on performance and was scheduled to expire in June 2002. Combined
salaries and bonuses for the year ended July 2, 1999 under these
contracts were $15,271. As part of the Recapitalization, the above
employment agreements were amended and restated on June 21, 2000,
providing minimum salaries of $7,500 with no mandatory bonuses. The
salaries will increase 10% annually until the agreements expire on
July 2, 2004. Salaries and bonuses for the year ended June 29, 2001
were $7,500 and for the year ended June 30, 2000 were $8,733.
Contingencies
(a) 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-29
53
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. CONCENTRATIONS OF CREDIT RISKS
Financial instruments that potentially subject the 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 FLOW INFORMATION
(a) Cash Paid
Years ended JUNE 29, 2001 June 30, 2000 July 2, 1999
------------------------------------------------------------------
Interest $ 74,568 $102,359 $ 37,376
==================================================================
Income taxes $ 1,661 $ 7,540 $ 10,185
==================================================================
(b) Non-Cash Financing and Investing Activities
The Company purchased certain assets of RCR International, Inc.
effective November 2000, for approximately $10,226 in cash. In
conjunction with the acquisition, liabilities were assumed as
follows:
----------------------------------------------
Fair value of assets acquired $ 7,314
Goodwill 5,558
Purchase price (10,226)
----------------------------------------------
Liabilities assumed $ 2,646
==============================================
F-30
54
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company purchased certain assets and assumed certain liabilities
of High Voltage, effective April 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
==============================================
The Company purchased certain assets and assumed certain liabilities
of Tri-Seal, effective January 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
==============================================
14. SEGMENT INFORMATION
The Company operates in four industry segments: 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-31
55
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Healthcare
Packaging, Consumer Specialty
Products and Packaging Food Resins and
June 29, 2001 Materials and Products Packaging Compounds TOTALS
------------------------------------------------------------------------------------------------------
Revenues from
external
customers $148,363 $202,038 $124,526 $ 50,910 $525,837
Interest expense 24,029 23,644 18,215 10,681 76,569
Depreciation and
amortization 10,962 13,501 8,385 4,544 37,392
Segment income
(loss) from
operations 21,227 36,914 22,465 (2,986) 77,620
Segment assets 169,410 270,731 75,266 88,894 604,301
Expenditures for
segment fixed
assets 2,710 8,047 3,245 3,114 17,116
======================================================================================================
Healthcare
Packaging, Consumer Specialty
Products and Packaging Food Resins and
June 30, 2000 Materials and Products Packaging Compounds TOTALS
--------------------------------------------------------------------------------------------------------
Revenues from
external
customers $159,116 $195,936 $110,011 $ 59,754 $524,817
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-32
56
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Healthcare
Packaging, Consumer Specialty
Products and Packaging Food Resins and
July 2, 1999 Materials and Products Packaging Compounds TOTALS
--------------------------------------------------------------------------------------------------------
Revenues from
external
customers $142,309 $191,584 $103,858 $ 69,563 $507,314
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
========================================================================================================
F-33
57
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 29, 2001 June 30, 2000 July 2, 1999
-----------------------------------------------------------------------------------------
PROFIT OR LOSS
Total operating profit for
reportable segments before
income taxes $ 77,620 $ 84,696 $ 88,462
Corporate and eliminations (12,618) (12,702) (20,052)
-----------------------------------------------------------------------------------------
$ 65,002 $ 71,994 $ 68,410
=========================================================================================
ASSETS
Total assets from reportable
segments $ 604,301 $ 553,882 $ 546,723
Other unallocated amounts 17,193 20,907 12,713
-----------------------------------------------------------------------------------------
Consolidated total $ 621,494 $ 574,789 $ 559,436
=========================================================================================
DEPRECIATION AND AMORTIZATION
Segment totals $ 37,392 $ 34,538 $ 35,125
Corporate 278 210 218
-----------------------------------------------------------------------------------------
Consolidated total $ 37,670 $ 34,748 $ 35,343
=========================================================================================
REVENUES
-----------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
United States $ 466,804 $ 477,489 $ 463,680
Canada 14,834 5,975 4,996
Europe 44,199 41,353 38,638
-----------------------------------------------------------------------------------------
Total $ 525,837 $ 524,817 $ 507,314
=========================================================================================
LONG-LIVED ASSETS
-----------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
United States $ 307,328 $ 323,691 $ 339,409
Canada 10,035 2,580 2,549
Europe 32,273 26,670 25,779
-----------------------------------------------------------------------------------------
Total $ 349,636 $ 352,941 $ 367,737
=========================================================================================
F-34
58
TEKNI-PLEX, INC.
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.
No customer had sales of 10% or more of total sales during the year ended June
29, 2001. One customer represented 11% of accounts receivable at June 29, 2001.
For the year ended June 30, 2000, one customer represented 10% of sales and
another 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.
F-35
59
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Tekni-Plex, Inc. issued 12 -3/4 % Senior Subordinated Notes in June 2000. These
notes are guaranteed by all domestic subsidiaries of Tekni-Plex. The following
condensed consolidating financial statements present 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 29,
2001
Non-
Issuer Guarantors Guarantors TOTAL
-------------------------------------------------------------------------------------
Sales, net $ 161,854 $ 304,950 $ 59,033 $ 525,837
Cost of sales 121,521 236,723 41,592 399,836
-------------------------------------------------------------------------------------
Gross profit 40,333 68,227 17,441 126,001
Selling, general and
administrative 38,295 17,320 5,384 60,999
-------------------------------------------------------------------------------------
Income from operations 2,038 50,907 12,057 65,002
Interest expense, net 76,958 (318) (71) 76,569
Unrealized loss on
derivative contract 13,891 - - 13,891
Other expense (income) (1,119) 1,063 661 605
-------------------------------------------------------------------------------------
Income (loss) before
provision for income
taxes (87,692) 50,162 11,467 (26,063)
Provision (benefit) for
income taxes (16,574) 6,626 2,879 (7,069)
-------------------------------------------------------------------------------------
Net income (loss) $ (71,118) $ 43,536 $ 8,588 $ (18,994)
======================================================================================
F-36
60
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - at June 29, 2001
Non-
Issuer Guarantors Guarantors Eliminations TOTAL
-------------------------------------------------------------------------------------------------
CURRENT ASSETS $ 80,305 $ 146,839 $ 39,823 $ - $ 266,967
Property, plant and
equipment, net 38,788 79,517 18,703 - 137,008
Intangible assets 13,208 153,960 12,448 - 179,616
Investment in
subsidiaries 457,641 - - (457,641) -
Deferred financing
costs, net 16,607 - - - 16,607
Deferred taxes 19,022 (12) - - 19,010
Other long-term
assets 28,577 261,520 12,510 (300,321) 2,286
-------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 654,148 $ 641,824 $ 83,484 $(757,962) $ 621,494
=================================================================================================
CURRENT LIABILITIES $ 22,370 $ 26,923 $ 18,545 $ - $ 67,838
Long-term debt 665,729 - 4,349 - 670,078
Other long-term
liabilities 92,460 190,399 35,737 (300,321) 18,275
-------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES 780,559 217,322 58,631 (300,321) 756,191
-------------------------------------------------------------------------------------------------
Additional paid-in
capital 120,156 296,784 15,656 (312,420) 120,176
Retained earnings
(deficit) (26,105) 127,685 16,269 (145,221) (27,372)
Cumulative
currency
translation
adjustment - 33 (7,072) - (7,039)
Treasury stock (220,462) - - - (220,462)
-------------------------------------------------------------------------------------------------
TOTAL EQUITY (126,411) 424,502 24,853 (457,523) (134,697)
-------------------------------------------------------------------------------------------------
TOTAL
LIABILITIES
AND EQUITY $ 654,148 $ 641,824 $ 83,484 $(757,844) $ 621,494
=================================================================================================
Condensed Consolidating Statement of Cash Flows-For the year ended June 29, 2001
Issuer Guarantors Non-Guarantors Consolidate
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities: $(47,908) $ 36,694 $ 7,948 $ (3,266)
-------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (9,233) -- (9,233)
Capital expenditures (2,710) (11,208) (3,198) (17,116)
Additions to intangibles (322) (106) -- (428)
Cash proceeds from sale of assets -- -- -- --
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,032) (20,547) (3,198) (26,777)
-------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayment) under
line of credit 35,000 -- -- 35,000
Repayments of long-term debt (7,400) -- (1,420) (8,820)
Proceeds from capital contribution 36,000 -- -- 36,000
Change in intercompany accounts 14,592 (14,592) -- --
-------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 78,192 (14,592) (1,420) 62,180
-------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- -- (17) (17)
-------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27,252 1,555 3,313 32,120
Cash, beginning of period 5,638 3,766 3,121 12,525
-------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 32,890 $ 5,321 $ 6,434 $ 44,645
=============================================================================================================
F-37
61
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Statement of Operations - For the year ended June 30,
2000
Non-
Issuer Guarantors Guarantors TOTAL
-------------------------------------------------------------------------------------
Sales, net $ 151,587 $ 325,902 $ 47,328 $ 524,817
Cost of sales 110,272 251,512 32,696 394,480
-------------------------------------------------------------------------------------
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
provision for income
taxes and
extraordinary item (39,665) 59,815 8,692 28,842
Provision (benefit) 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
62
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - At June 30, 2000
Non-
Issuer Guarantors 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
=================================================================================================
Condensed Consolidating Statement of Cash Flows-For the year ended June 30, 2000
Issuer Guarantors Non-Guarantors Total
---------------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities: $ (25,883) $ 29,834 $ 5,534 $ 9,485
---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- -- -- --
Capital expenditures (7,224) (6,747) (2,287) (16,258)
Additions to intangibles (805) -- -- (805)
Cash proceeds from sale of assets -- -- 158 158
---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,029) (6,747) (2,129) (16,905)
---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under
line of credit (2,030) -- -- (2,030)
Proceeds from long-term debt 645,232 -- -- 645,232
Repayments of long-term debt (446,661) -- (1,970) (448,631)
Proceeds from capital contribution 43,101 -- -- 43,101
Debt financing costs (18,897) -- -- (18,897)
Purchase of treasury stock (220,462) -- -- (220,462)
Change in intercompany accounts 34,880 (26,508) (8,372) --
---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 35,163 (26,508) (10,342) (1,687)
---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- -- (485) (485)
---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 1,251 (3,421) (7,422) (9,592)
Cash, beginning of period 4,387 7,187 10,543 22,117
---------------------------------------------------------------------------------------------------------------
Cash, end of period $ 5,638 $ 3,766 $ 3,121 $ 12,525
===============================================================================================================
F-39
63
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Statement of Operations - For the year ended July 2,
1999
Non-
Issuer Guarantors Guarantors TOTAL
-------------------------------------------------------------------------------------
Sales, net $ 155,141 $ 308,539 $ 43,634 $ 507,314
Cost of sales 114,634 231,928 29,808 376,370
-------------------------------------------------------------------------------------
Gross profit 40,507 76,611 13,826 130,944
Selling, general and
administrative 44,815 13,243 4,476 62,534
-------------------------------------------------------------------------------------
Income (loss) from
operations (4,308) 63,368 9,350 68,410
Interest expense
(income), 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 (benefit) for
income taxes (23,682) 34,604 3,228 14,150
-------------------------------------------------------------------------------------
Net income (loss) $ (20,407) $ 30,683 $ 4,721 $ 14,997
=====================================================================================
F-40
64
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - at July 2, 1999:
Non-
Issuer Guarantors 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
=================================================================================================
Condensed Consolidating Statement of Cash Flows-For the year ended July 2, 1999
Issuer Guarantors Non-Guarantors Total
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities: $(23,064) $ 52,896 $ 8,962 $ 38,794
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired -- (45,139) -- (45,139)
Capital expenditures (3,761) (8,673) (516) (12,950)
Additions to intangibles -- -- -- --
Cash proceeds from sale of assets -- -- -- --
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,761) (53,812) (516) (58,089)
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under
line of credit 22,234 -- -- 22,234
Repayments of long-term debt (5,816) -- (4,361) (10,177)
Change in intercompany accounts 4,592 (4,592) -- --
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 21,010 (4,592) (4,361) 12,057
-----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- -- (8) (8)
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (5,815) (5,508) 4,077 (7,246)
Cash, beginning of period 10,202 12,695 6,466 29,363
-----------------------------------------------------------------------------------------------------------
Cash, end of period $ 4,387 $ 7,187 $ 10,543 $ 22,117
===========================================================================================================
F-41
65
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second* Third* Fourth
2001 Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------
Net sales $ 111,907 $ 105,873 $ 140,681 $ 167,376
Gross profit 26,712 24,123 36,785 38,381
Income from
operations 7,311 9,755 21,127 26,809
Net income
(loss) (5,739) (12,136) (1,473) 354
2000
------------------------------------------------------------------------------
Net sales $ 114,424 $ 106,879 $ 143,370 $ 160,144
Gross profit 29,005 27,498 37,994 35,840
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 $ 112,589 $ 98,524 $ 134,274 $ 161,927
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
==============================================================================
*The second and third quarters reflect adjustments of $(7,229) and $(1,919),
respectively to net income (loss) from previously issued financial statements
related to unrealized losses on derivative instruments. The related 10-Q's are
in the process of being amended.
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-42
66
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL SCHEDULE
Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
The audits referred to in our report dated September 10, 2001 relating to the
consolidated financial statements of Tekni-Plex, Inc. and its wholly owned
subsidiaries (the "Company"), included the audits of the financial statement
schedule for the years ended June 29, 2001, June 30, 2000 and July 2, 1999
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.
BDO Seidman, LLP
Woodbridge, New Jersey
September 20, 2001
F-43
67
TEKNI-PLEX, INC.
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 Deductions END
Period Expenses (1) Accounts (2) OF PERIOD
====================================================================================================
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
====================================================================================================
YEAR ENDED JUNE 29, 2001
Accounts receivable
allowance $1,642 $ 250 $ - $ 392 $1,500
====================================================================================================
(1) To increase accounts receivable allowance.
(2) Uncollectible accounts written off, net of recoveries.
(3) Balances related to acquisitions.
F-44