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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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 or other jurisdiction (IRS Employer Identification Number)\
of incorporation or organization)
260 North Denton Tap Road (972) 304-5077
Coppell, TX 75019 (Registrant's telephone number)
(Address of principal executive office)
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 [ ]
TEKNI-PLEX, INC.
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 26, 2003 and June 27, 2003...................... 3
Consolidated Statements of Operations for the six months and three months ended
December 26, 2003 and December 27, 2002................................................. 4
Consolidated Statements of Comprehensive Income (Loss) for the six months and three
months ended December 26, 2003 and December 27, 2002.................................... 4
Consolidated Statements of Cash Flows for the six months ended December 26, 2003
and December 27, 2002................................................................... 5
Notes to Consolidated Financial Statements................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................... 14
ITEM 4. CONTROLS AND PROCEDURES....................................................................... 14
PART II. OTHER INFORMATION
Item 1. Legal proceedings............................................................................. 15
Item 2. Changes in securities......................................................................... 15
Item 3. Defaults upon senior securities............................................................... 15
Item 4. Submission of matters to a vote of securities holders......................................... 15
Item 5. Subsequent events............................................................................. 15
Item 6. Exhibits and reports on Form 8-K.............................................................. 15
2
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 26, JUNE 27,
2003 2003
(UNAUDITED) (AUDITED)
----------- -----------
ASSETS
CURRENT:
Cash $ 23,136 $ 48,062
Accounts receivable, net of allowances of $9,638 and $8,398 respectively 86,208 135,719
Inventories 195,863 161,333
Deferred income taxes 7,175 6,735
Prepaid expenses and other current assets 7,247 7,939
----------- -----------
TOTAL CURRENT ASSETS 319,629 359,788
PROPERTY, PLANT AND EQUIPMENT, NET 180,664 179,521
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $79,954 AND
$79,332 RESPECTIVELY 213,528 213,152
DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $5,736 AND
$6,899 RESPECTIVELY 9,585 11,851
DEFERRED INCOME TAXES 23,038 19,172
OTHER ASSETS 1,471 1,280
----------- -----------
$ 747,915 $ 784,764
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,088 $ 16,709
Accounts payable - trade 26,825 52,371
Accrued payroll and benefits 9,702 9,525
Accrued interest 6,593 6,317
Accrued liabilities - other 20,375 19,143
Income taxes payable 22 6,058
----------- -----------
TOTAL CURRENT LIABILITIES 65,605 110,123
LONG-TERM DEBT 729,034 712,775
OTHER LIABILITIES 22,472 26,677
----------- -----------
TOTAL LIABILITIES 817,111 849,575
----------- -----------
Commitments and Contingencies
STOCKHOLDERS' DEFICIT:
Common stock -- --
Additional paid-in capital 188,018 188,018
Accumulated other comprehensive income (loss) 532 (1,737)
Accumulated deficit (37,223) (30,569)
Less: Treasury stock (220,523) (220,523)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT (69,196) (64,811)
----------- -----------
$ 747,915 $ 784,764
=========== ===========
See accompanying notes to consolidated financial statements.
3
TEKNI-PLEX, INC. AND SUBSIDIARIES
(Unaudited -- in thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET SALES $ 122,712 $ 118,584 $ 258,770 $ 259,167
COST OF SALES 93,682 87,214 199,912 197,905
---------- ---------- ---------- ----------
GROSS PROFIT 29,030 31,370 58,858 61,262
OPERATING EXPENSES:
Selling, general and administrative 14,434 14,573 29,799 28,484
Integration expense 1,090 1,900 2,264 1,900
---------- ---------- ---------- ----------
OPERATING PROFIT 13,506 14,897 26,795 30,878
OTHER EXPENSES:
Interest expense 23,800 17,587 41,326 35,249
Unrealized (gain) loss on derivative
Contracts (1,744) (3,208) (4,198) 2,136
Other expenses 602 79 720 382
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (9,152) 439 (11,053) (6,889)
PROVISION (benefit) FOR INCOME TAXES (3,640) 160 (4,400) (2,400)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (5,512) $ 279 $ (6,653) $ (4,489)
========== ========== ========== ==========
CONSOLIDATED STATEMENTS OF OTHER
COMPREHENSIVE INCOME
NET INCOME (LOSS) $ (5,512) $ 279 $ (6,653) $ (4,489)
COMPREHENSIVE INCOME, NET OF TAXES
Foreign currency translation adjustment 6,175 1,112 6,049 820
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 663 $ 1,391 $ (604) $ (3,669)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
DECEMBER 26, DECEMBER 27,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,653) $ (4,489)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 17,149 13,851
Unrealized (gain) loss on derivative contracts (4,198) 2,136
Deferred income taxes (4,227) 156
Loss on sale of assets 131 --
Changes in operating assets and liabilities:
Accounts receivable 49,431 48,722
Inventories (34,724) (40,441)
Prepaid expenses and other current assets 1,249 (3,366)
Income taxes (6,036) 1,133
Accounts payable-trade (24,409) (15,643)
Accrued interest 276 1,702
Accrued expenses and other liabilities 2,806 345
----------- -----------
Net cash provided by (used in) operating activities (9,205) 4,106
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,087) (13,609)
Acquisition costs -- (16,806)
Additions to intangibles (886) (503)
Cash proceeds from sale of assets 1,392 --
Deposits and other assets (191) 98
----------- -----------
Net cash used in investing activities (14,772) (30,820)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings of long-term debt (265,990) 14,370
Proceeds from Senior Secured Notes 267,438 --
Receipt of additional paid-in capital -- 392
Debt financing costs (1,738) --
----------- -----------
Net cash provided by (used in) financing activities (290) 14,762
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (659) (39)
----------- -----------
Net decrease in cash (24,926) (11,991)
Cash, beginning of period 48,062 28,199
----------- -----------
Cash, end of period $ 23,136 $ 16,208
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 37,292 $ 32,513
Income taxes 2,551 2,325
See accompanying notes to consolidated financial statements.
5
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 - GENERAL
Nature of Business
Tekni-Plex, Inc. and its subsidiaries ("Tekni-Plex" or the "Company") is a
global, diversified manufacturer of packaging, packaging products, and
materials as well as tubing products. The Company primarily serves the food,
healthcare and consumer markets. 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 two
primary business groups: Packaging and Tubing Products.
The results for the second quarter and first six months of fiscal 2004 are
not necessarily indicative of the results to be expected for the full fiscal
year and have not been audited. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments, consisting primarily of normal recurring accruals, necessary
for a fair statement of the results of operations for the periods presented
and the consolidated balance sheet at December 26, 2003. Certain information
and footnote disclosure normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the SEC rules and regulations. These
financial statements should be read in conjunction with the financial
statements and notes thereto that were included in the Company's latest
annual report on Form 10-K for the fiscal year ended June 27, 2003.
NOTE 2 New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures in
its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard, financial instruments that embody obligations for the issuer are
required to be classified as liabilities. This Statement shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 does not currently apply to the
Company.
NOTE 3 Stock Based Compensation
The Company applies the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock
Based Compensation - Transition and Disclosure," 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. Had
compensation cost been determined based on the fair value at the grant dates
for these awards consistent with the method of SFAS No. 123, the Company's
income (loss) would have been reduced (increased) to the pro forma amounts
indicated below. The calculations were based on a risk yield of zero, and
expected lives of 8 years.
Three Months Ended Six Months Ended
December 26 December 27 December 26 December 27
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss)
As reported $ (5,512) $ 279 $ (6,653) $ (4,489)
Adjustments for
Fair value of
Stock options,
Net of tax (22) (31) (45) (63)
---------- ---------- ---------- ----------
Pro forma $ (5,534) $ 248 $ (6,698) $ (4,552)
6
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 4- INVENTORIES
Inventories as of December 26, 2003 and June 27, 2003 are summarized as follows:
DECEMBER 26, 2003 JUNE 27, 2003
----------------- -------------
Raw materials $ 57,255 $ 51,810
Work-in-process 11,578 10,219
Finished goods 127,030 99,304
---------- -----------
$ 195,863 $ 161,333
---------- -----------
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 5- LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 26, 2003 JUNE 27, 2003
----------------- -------------
Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June
15, 2010 (less unamortized discount of $2,449 and $2,637) $ 272,551 $ 272,363
Senior Subordinated Notes issued May 2002 at 12-3/4% due
June 15, 2010 (plus unamortized premium of $475 and $512) 40,475 40,512
Senior Debt:
Senior Secured Notes issued November 21, 2003 at 8-3/4% due
November 15, 2013 (less unamortized discount of $7,499) 267,501 --
Revolving line of credit, expiring June, 2006. At
December 26, 2003, the interest rates were 4.6875% and 6.50% 73,000 91,000
Term notes due June, 2006 and June, 2008, with an interest
rate at December 26, 2003 of 5.1875% 71,820 319,790
Other, primarily foreign term loans, with interest rates
ranging from 4.44% to 5.44% and maturities from 2004 to 2010 5,775 5,819
---------- -----------
731,122 729,484
Less: Current maturities 2,088 16,709
---------- -----------
$ 729,034 $ 712,775
========== ===========
NOTE 6- CONTINGENCIES
The Company is a party to various 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, results of operations and cash flows.
7
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 7- SEGMENT INFORMATION
Tekni-Plex management reviews its operating plants to evaluate performance and
allocate resources. As a result, Tekni-Plex has aggregated its operating plants
into two industry segments: Packaging and Tubing Products. The Packaging segment
principally produces foam egg cartons, pharmaceutical blister films, poultry and
meat processor trays, closure liners, aerosol and pump packaging components and
foam plates. The Tubing Products segment principally produces garden and
irrigation hose, medical tubing and pool hose. Products that do not fit in
either of these segments, including recycled PET, vinyl compounds and specialty
resins have been reflected in Other. The Packaging and Tubing Products segments
have operations in the United States, Europe and Canada. Other products not
included in either segment are produced in the United States. Financial
information concerning the Company's business segments and the geographic areas
in which it operates are as follows:
TUBING
PACKAGING PRODUCTS OTHER TOTAL
----------- ---------- ---------- -----------
Three Months Ended December 26, 2003
Revenues from external customers $72,002 $24,851 $25,859 $122,712
Interest expense 7,586 11,166 5,048 23,800
Depreciation and amortization 4,388 3,322 2,104 9,814
Segment income (loss) from operations 12,213 6,248 (177) 18,284
Expenditures for segment assets 4,660 846 1,563 7,069
------- ------- ------- --------
Three Months Ended December 27, 2002
Revenues from external customers $68,235 $24,326 $26,023 $118,584
Interest expense 5,596 8,247 3,744 17,587
Depreciation and amortization 3,357 1,501 1,262 6,120
Segment income from operations 15,493 3,170 999 19,662
Expenditures for segment assets 3,303 2,704 1,343 7,350
------- ------- ------- --------
TUBING
PACKAGING PRODUCTS OTHER TOTAL
----------- ---------- ---------- -----------
Six months ended December 26, 2003
Revenues from external Customers $ 140,661 $ 64,244 $ 53,865 $ 258,770
Interest expense 13,169 19,382 8,775 41,326
Depreciation and Amortization 7,776 5,276 3,585 16,637
Segment income (loss) from operations 22,242 14,530 (109) 36,663
Expenditures for segment Assets 9,477 1,179 4,022 14,678
----------- ---------- ---------- -----------
Six months ended December 27, 2002
Revenues from external Customers $ 138,938 $ 67,770 $ 52,459 $ 259,167
Interest expense 11,220 16,538 7,491 35,249
Depreciation and Amortization 7,439 3,292 2,608 13,339
Segment income from operations 27,805 10,728 1,138 39,671
Expenditures for segment Assets 3,965 6,645 2,610 13,220
----------- ---------- ---------- -----------
8
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ---------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26 DECEMBER 27
2003 2002 2003 2002
------------ ------------ ----------- -----------
PROFIT OR LOSS
Total operating profit for reportable
segments before income taxes $ 18,284 $ 19,662 $ 36,663 $ 39,671
Corporate and eliminations (4,778) (4,765) (9,868) (8,793)
---------- ---------- ---------- ----------
$ 13,506 $ 14,897 $ 26,795 $ 30,878
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION
Segment totals $ 9,814 $ 6,120 $ 16,637 $ 13,339
Corporate 256 256 512 512
---------- ---------- ---------- ----------
Consolidated total $ 10,070 $ 6,376 $ 17,149 $ 13,851
========== ========== ========== ==========
EXPENDITURES FOR SEGMENT ASSETS
Total reportable-segment expenditures $ 7,069 $ 7,350 $ 14,678 $ 13,220
Other unallocated expenditures 177 226 409 389
---------- ---------- ---------- ----------
Consolidated total $ 7,246 $ 7,576 $ 15,087 $ 13,609
========== ========== ========== ==========
SEGMENT ASSETS
TUBING
PACKAGING PRODUCTS OTHER TOTAL
--------- -------- ------- -------
December 26, 2003 $278,055 $312,015 $130,462 $720,532
------- ------- ------- -------
June 27, 2003 297,303 322,822 141,638 761,763
------- ------- ------- -------
DECEMBER 26, 2003 JUNE 27, 2003
----------------- -------------
TOTAL ASSETS
Total assets from reportable segments $ 720,532 $ 761,763
Other unallocated amounts 27,383 23,001
----------- -----------
Consolidated total $ 747,915 $ 784,764
=========== ===========
GEOGRAPHIC INFORMATION
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES
United States $ 105,589 $ 103,615 $ 223,763 $ 228,154
International 17,123 14,969 35,007 31,013
------------ ------------ ------------ ------------
Total $ 122,712 $ 118,584 $ 258,770 $ 259,167
============ ============ ============ ============
DECEMBER 26, 2003 JUNE 27, 2003
----------------- -------------
LONG-LIVED ASSETS
United States $ 379,522 $ 377,406
International 48,764 47,570
----------- -----------
Total $ 428,286 $ 424,976
=========== ===========
9
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 8- SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Consolidated Statement of Operations
(in thousands)
(Unaudited)
For the three months ended December 26, 2003
Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and
May 2002 and 8 3/4% Senior Secured Notes in November 2003. These notes are
guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor
subsidiaries are 100% owned by the issuer. The guarantees are full and
unconditional and joint and several. There are no restrictions on the transfer
of funds from guarantor subsidiaries to the issuer. 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").
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ----------- ---------- ----------
Net sales $ 122,712 $ 36,225 $ 69,364 $ 17,123
Cost of goods sold 93,682 26,547 54,272 12,863
----------- ----------- ---------- ----------
Gross profit 29,030 9,678 15,092 4,260
Operating expenses:
Selling, General and administrative 14,434 7,039 5,403 1,992
Integration expense 1,090 -- 1,090 --
----------- ----------- ---------- ----------
Operating profit 13,506 2,639 8,599 2,268
Interest expense (income), net 23,800 23,766 (8) 42
Unrealized gain on derivative contracts (1,744) (1,744) -- --
Other expense (income) 602 (552) 22 1,132
----------- ----------- ---------- ----------
Income (loss) before income taxes (9,152) (18,831) 8,585 1,094
Provision (benefit) for income taxes (3,640) (7,680) 3,411 629
----------- ----------- ---------- ----------
Net income (loss) $ (5,512) $ (11,151) $ 5,174 $ 465
=========== =========== ========== ==========
Consolidated Statement of Operations
(in thousands)
For the six months ended December 26, 2003
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ----------- ---------- ----------
Net sales $ 258,770 $ 69,873 $ 153,890 $ 35,007
Cost of sales 199,912 52,657 120,343 26,912
----------- ----------- ---------- ----------
Gross profit 58,858 17,216 33,547 8,095
Operating expenses:
Selling, General and administrative 29,799 13,731 12,308 3,760
Integration expense 2,264 -- 2,264 --
----------- ----------- ---------- ----------
Operating profit 26,795 3,485 18,975 4,335
Interest expense, net 41,326 41,264 (24) 86
Unrealized gain on derivative contracts (4,198) (4,198) -- --
Other expense (income) 720 (746) (293) 1,759
----------- ----------- ---------- ----------
Income (loss) before income taxes (11,053) (32,835) 19,292 2,490
Provision (benefit) for income taxes (4,400) (13,280) 7,700 1,180
----------- ----------- ---------- ----------
Net income(loss) $ (6,653) $ (19,555) $ 11,592 $ 1,310
=========== =========== ========== ==========
10
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Consolidated Statement of Earnings
(in thousands)
(Unaudited)
For the three months ended December 27, 2002
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
Net sales $ 118,584 $ 35,163 $ 68,452 $ 14,969
Cost of sales 87,214 24,864 51,044 11,306
----------- ---------- ---------- ----------
Gross profit 31,370 10,299 17,408 3,663
Operating expenses:
Selling, General and administrative 14,573 6,634 6,256 1,683
Integration expense 1,900 -- 1,900 --
----------- ---------- ---------- ----------
Operating profit 14,897 3,665 9,252 1,980
Interest expense 17,587 17,568 (20) 39
Unrealized gain on derivative contracts (3,208) (3,208) -- --
Other expense (income) 79 (93) (321) 493
----------- ---------- ---------- ----------
Income (loss) before income taxes 439 (10,602) 9,593 1,448
Provision (benefit) for income taxes 160 (3,768) 3,370 558
----------- ---------- ---------- ----------
Net income (loss) $ 279 $ (6,834) $ 6,223 $ 890
=========== ========== ========== ==========
For the six months ended December 27, 2002
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ---------- ---------- ----------
Net sales $ 259,167 $ 74,360 $ 153,794 $ 31,013
Cost of sales 197,905 52,299 122,767 22,839
----------- ---------- ---------- ----------
Gross profit 61,262 22,061 31,027 8,174
Operating expenses:
Selling, General and administrative 28,484 12,728 12,633 3,123
Integration expense 1,900 -- 1,900 --
----------- ---------- ---------- ----------
Operating profit 30,878 9,333 16,494 5,051
Interest expense 35,249 35,233 (43) 59
Unrealized loss on derivative contracts 2,136 2,136 -- --
Other expense (income) 382 (24) (600) 1,006
----------- ---------- ---------- ----------
Income (loss) before income taxes (6,889) (28,012) 17,137 3,986
Provision (benefit) for income taxes (2,400) (9,858) 6,010 1,448
----------- ---------- ---------- ----------
Net income (loss) $ (4,489) $ (18,154) $ 11,127 $ 2,538
=========== ========== ========== ==========
11
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Condensed Consolidated Balance Sheet - at December 26, 2003
NON-
TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS
--------- ------------ ---------- ---------- ----------
Current assets $ 319,629 $ -- $ 37,774 $ 217,726 $ 64,129
Property, plant and equipment, net 180,664 -- 44,475 109,635 26,554
Intangible assets, net 213,528 -- 10,290 190,774 12,464
Investment in subsidiaries -- (549,578) 549,578 -- --
Deferred income taxes 23,038 -- 29,298 (3,780) (2,480)
Deferred charges, net 9,585 -- 9,469 116 --
Other assets 1,471 (351,426) 55,359 285,312 12,226
--------- ---------- ---------- --------- ---------
Total assets $ 747,915 $ (901,004) $ 736,243 $ 799,783 $ 112,893
========= ========== ========== ========= =========
Current liabilities $ 65,605 $ -- $ 20,557 $ 26,828 $ 18,220
Long-term debt 729,034 -- 724,419 -- 4,615
Other long-term liabilities 22,472 (351,426) 62,094 272,650 39,154
--------- ---------- ---------- --------- ---------
Total liabilities 817,111 (351,426) 807,070 299,478 61,989
--------- ---------- ---------- --------- ---------
Additional paid-in capital 188,018 (313,529) 187,998 296,784 16,765
Retained earnings (deficit) (37,223) (236,049) (37,222) 206,762 29,286
Other comprehensive income (loss) 532 -- (1,080) (3,241) 4,853
Less: Treasury stock (220,523) -- (220,523) -- --
--------- ---------- ---------- --------- ---------
Total stockholders' equity (deficit) (69,196) (549,578) (70,827) 500,305 50,904
--------- ---------- ---------- --------- ---------
$ 747,915 $ (901,004) $ 736,243 $ 799,783 $ 112,893
========= ========== ========== ========= =========
Condensed Consolidated Balance Sheet - at June 27, 2003
NON-
TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS
--------- ------------ ---------- ---------- ----------
Current assets $ 359,788 $ -- $ 56,727 $ 241,910 $ 61,151
Property, plant and equipment, net 179,521 -- 42,411 111,880 25,230
Intangible assets, net 213,152 -- 8,713 192,049 12,390
Investment in subsidiaries -- (535,567) 535,567 -- --
Deferred income taxes 19,172 -- 21,204 64 (2,096)
Deferred charges, net 11,851 -- 11,735 116 --
Other assets 1,280 (358,967) 81,667 266,534 12,046
--------- --------- ---------- --------- ---------
Total assets $ 784,764 $(894,534) $ 758,024 $ 812,553 $ 108,721
========= ========= ========== ========= =========
Current liabilities $ 110,123 $ -- $ 46,758 $ 43,487 $ 19,878
Long-term debt 712,775 -- 708,115 -- 4,660
Other long-term liabilities 26,677 (358,967) 67,887 279,805 37,952
--------- --------- ---------- --------- ---------
Total liabilities 849,575 (358,967) 822,760 323,292 62,490
--------- --------- ---------- --------- ---------
Additional paid-in capital 188,018 (312,420) 187,998 296,784 15,656
Retained earnings (deficit) (30,569) (223,147) (30,569) 195,171 27,976
Other comprehensive income (loss) (1,737) -- (1,642) (2,694) 2,599
Less: Treasury stock (220,523) -- (220,523) -- --
--------- --------- ---------- --------- ---------
Total Stockholders' equity (deficit) (64,811) (535,567) (64,736) 489,261 46,231
--------- --------- ---------- --------- ---------
$ 784,764 $(894,534) $ 758,024 $ 812,553 $ 108,721
========= ========= ========== ========= =========
12
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Condensed Consolidated Cash Flows
(Unaudited)
For the six months ended December 26, 2003
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
---------- --------- ---------- ----------
Net cash provided by (used in) operating activities $ (9,205) $ (40,477) $ 21,352 $ 9,920
---------- --------- ---------- ----------
Cash flows from Investing activities:
Capital expenditures (15,087) (5,470) (6,425) (3,192)
Cash proceeds from sale of assets 1,392 -- 1,392 --
Additions to intangibles (886) (144) (225) (517)
Deposits and other assets (191) (8) -- (183)
---------- --------- ---------- ----------
Net cash used in investing activities $ (14,772) $ (5,622) $ (5,258) $ (3,892)
---------- --------- ---------- ----------
Cash flows from financing activities
(Repayments) borrowings of long term debt 1,448 1,468 -- (20)
Debt financing costs (1,738) (1,738) -- --
Change in intercompany accounts -- 27,507 (31,002) 3,495
---------- --------- ---------- ----------
Net cash flows provided by (used in) financing
activities (290) 27,237 (31,002) 3,475
---------- --------- ---------- ----------
Effect of exchange rate changes on cash (659) -- -- (659)
---------- --------- ---------- ----------
Net increase (decrease) in cash (24,926) (18,862) (14,908) 8,844
Cash, beginning of period 48,062 20,900 19,650 7,512
---------- --------- ---------- ----------
Cash, end of period $ 23,136 $ 2,038 $ 4,742 $ 16,356
========== ========= ========== ==========
For the six months ended December 27, 2002
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
---------- --------- ---------- ----------
Net cash provided by (used in) operating activities $ 4,106 $ (7,765) $ 10,272 $ 1,599
---------- --------- ---------- ----------
Cash flows from Investing activities:
Capital expenditures (13,609) (1,873) (9,161) (2,575)
Acquisition costs (16,806) -- (16,806) --
Additions to intangibles (503) (267) -- (236)
Deposits and other assets 98 74 -- 24
---------- --------- ---------- ----------
Net cash used in investing activities (30,820) (2,066) (25,967) (2,787)
---------- --------- ---------- ----------
Cash flows from financing activities
(Repayment) borrowings of long term debt 14,370 13,933 -- 437
Receipt of additional paid-in capital 392 392 -- --
Change in intercompany accounts -- (5,011) 3,625 1,386
---------- --------- ---------- ----------
Net cash flows provided by financing activities 14,762 9,314 3,625 1,823
---------- --------- ---------- ----------
Effect of exchange rate changes on cash (39) -- -- (39)
---------- --------- ---------- ----------
Net increase (decrease) in cash (11,991) (517) (12,070) 596
Cash, beginning of period 28,199 9,035 10,660 8,504
---------- --------- ---------- ----------
Cash, end of period $ 16,208 $ 8,518 $ (1,410) $ 9,100
========== ========= ========== ==========
13
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 9- ACQUISITIONS
In July 2002, the Company purchased certain assets and assumed certain
liabilities of ELM Packaging "ELM" for approximately $16,806. The acquisition
was recorded under the purchase method, whereby Elm's net assets were recorded
at estimated fair value and its operations have been reflected in the statement
of operations since that date.
In connection with the acquisition, a reserve of $4,500 has been established for
the costs to integrate ELM's operations with the company. The reserve is
included in accrued expenses. The components of the integration reserve and
activity through December 26, 2003 are as follows:
BALANCE COSTS CHARGED TO BALANCE
JULY 2002 RESERVE DECEMBER 26, 2003
--------- ---------------- -----------------
Reduction in personnel and related costs $ 1,000 $ 1,000 $ --
Legal, environmental and other 3,500 1,943 1,557
------- -------- --------
$ 4,500 $ 2,943 $ 1,557
======= ======== ========
The remaining legal, environmental and other costs are expected to be paid over
the next two years.
In October 2001, the Company purchased certain assets and assumed certain
liabilities of Swan Hose for approximately $63,600. The acquisition was recorded
under the purchase method, whereby Swan's net assets were recorded at estimated
fair value and its operations have been reflected in the statement of operations
since that date. The components of the Integration reserve and activity through
December 26, 2003 are as follows:
BALANCE
BALANCE COSTS CHARGED ADJUSTMENTS DECEMBER 26,
OCTOBER 2001 TO RESERVE TO RESERVE 2003
------------ ------------- ----------- ------------
Cost to close duplicate facilities $ 3,500 $ 1,441 $ (2,059) $ --
Reduction in personnel and related costs 2,100 718 (1,382) --
Legal and environmental 1,275 2,188 2,625 1,712
Manufacturing reconfiguration 1,455 175 (1,280) --
Other 1,670 1,766 96 --
---------- --------- --------- ---------
$ 10,000 $ 6,288 $ (2,000)* $ 1,712
========== ========= ========= =========
* $2,000 adjustment was recorded to beginning balance Integration reserve as an
adjustment to the original estimates prepared by the Company. Goodwill was
adjusted for the aforementioned amount. These adjustments were recorded during
the fiscal year ended June 27, 2003.
The remaining legal and environmental costs are expected to extend over the next
two years.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SECOND QUARTER OF FISCAL 2004 COMPARED WITH THE SECOND QUARTER OF FISCAL 2003
Net sales increased by $4.1 million or 3.5% to $122.7 million for the three
months ended December 26, 2003 from $118.6 million for the three months ended
December 27, 2002. The increase in net sales was largely attributable to higher
sales of pharmaceutical packaging, medical tubing and aerosol packaging
components. Net sales for our Packaging Segment increased $3.8 million or 5.5%
to $72.0 million in the current period from $68.2 million in the prior period.
Net sales for our Tubing Segment increased $0.5 million or 2.2% to $24.9 million
in the current period from $24.3 million in the prior period. Other net sales
decreased slightly to $25.9 million in the current period compared to $26.0
million last year.
Cost of sales increased to $93.7 million for the three months ended December 26,
2003 from $87.2 million for the three months ended December 27, 2002. Expressed
as a percentage of net sales, cost of sales increased to 76.3% for the three
months ended December 26, 2003 from 73.5% for the three months ended December
27, 2002. The increase in cost of goods sold was primarily due to the sale of a
lower margin product mix at our food packaging operations as well as higher cost
raw materials.
As a result, gross profit declined to $29.0 million for the three months ended
December 26, 2003 from $31.4 million for the three months ending December 27,
2002. Expressed as a percentage of net sales, gross profit declined to 23.7% in
the current period from 26.5% in the previous year. Gross profit at our
Packaging Segment declined to $18.8 million or 26.1% of net sales in the most
recent period from $21.6 million or 31.7% of net sales in the comparable period
of last year. Our Tubing Segment gross profit increased to $8.9 million or 35.9%
of net sales in the second quarter of fiscal 2004 compared to $7.0 million or
28.9% in the second quarter of the previous year due to improved margins at both
our garden hose and medical tubing businesses. Other gross profit decreased to
$1.3 million in the current period from $2.7 million in the comparable period of
the previous year. Measured as a percentage of net sales, other gross profit
decreased to 5.1% in the second quarter of fiscal 2004 compared to 10.5% in the
same period of the previous year largely due to higher cost raw materials.
Selling, general and administrative expense decreased slightly to $14.4 million
in the three months ended December 26, 2003 compared to $14.6 million in the
three months ended December 27, 2002. The ratio of selling, general and
administrative expense to net sales decreased to 11.8% for the three months
ending December 26, 2003 from 12.3% in the comparable period of last year.
Integration expense of $1.1 million for the three months ended December 26, 2003
represents costs to reconfigure and realign the Elm production facilities to
conform to our current production and product standards. Integration expense of
$1.9 million for the three months ended December 27, 2002 represents costs to
reconfigure and realign the Elm and Swan production facilities.
Operating profit, as a result of the foregoing, decreased to $13.5 million or
11.0% of net sales for the three months ended December 26, 2003 from $14.9
million or 12.6% of net sales for the three months ended December 27, 2002.
Operating Profit for our Packaging Segment decreased to $12.2 million in the
current period from $15.5 million in the prior period. Measured as a percent of
net sales, operating profit for our Packaging Segment decreased to 17.0% in the
current period from 22.7% in the prior period. Operating profit for our Tubing
Segment increased to $6.3 million in the current period from $3.2 million in the
prior period. Measured as a percentage of net sales, operating profit increased
to 25.1% in the current period from 13.0% in the prior period. Other operating
profit decreased to a ($0.2) million loss in the current period compared to $1.0
million the previous year.
Interest expense increased to $23.8 million in the three months ended December
26, 2003 from $17.6 million in the three months ended December 27, 2002.
Approximately $4.5 million of the $6.2 million increase in interest expense is
attributable to non-recurring expenses, primarily write off of deferred
financing costs and bank fees, associated with our recent bank amendment and
issuance of senior secured notes. The balance of the increase is largely due to
higher average interest rates. Measured as a percentage of net sales, interest
expense increased to 19.4% in the current period compared to 14.8% in the
previous period. The unrealized gain in derivative contracts decreased to $1.7
million in the current period compared to $3.2 million for the three months
ended December 27, 2002.
Gain (loss) before income taxes, as a result, was a loss of ($9.2) million for
the three months ended December 26, 2003 compared to a gain of $0.4 million for
the three months ended December 27, 2002.
Benefit for income taxes was ($3.6) million for the three months ended December
26, 2003, compared to an expense of $0.2 million for the three months ended
December 27, 2002. The Company's effective tax rate was 39.8% for the three
months ended December 26, 2003 compared to 36.5% for the three months ending
December 27, 2002.
Net loss, as a result, was a loss of ($5.5) million for the three months ended
December 26, 2003 or (4.5%) of net sales compared with income of $0.3 million or
0.2% of net sales for the three months ended December 27, 2002.
15
FIRST HALF OF FISCAL 2004 COMPARED WITH THE FIRST HALF OF FISCAL 2003
Net sales decreased slightly to $258.8 million for the six months ended December
26, 2003 from $259.2 million for the six months ended December 27, 2002. The
decrease in net sales was attributable to lower garden hose sales in the first
quarter, largely offset by stronger sales of pharmaceutical packaging, medical
tubing and aerosol packaging components in the second quarter. Net sales for our
Packaging Segment increased $1.7 million or 1.2% to $140.7 million in the
current period from $138.9 million in the prior period. Net sales for our Tubing
Segment decreased $3.5 million or 5.2% to $64.2 million in the current period
from $67.8 million in the prior period. Other net sales increased to $53.9
million in the current period compared to $52.5 million last year.
Cost of sales increased to $199.9 million for the six months ended December 26,
2003 from $197.9 million for the six months ended December 27, 2002. Expressed
as a percentage of net sales, cost of sales increased to 77.3% for the six
months ended December 26, 2003 from 76.4% for the six months ended December 27,
2002. The increase in cost of goods sold was primarily due to the sale of a
lower margin product mix at our food packaging operations as well as higher cost
raw materials.
Gross profit, as a result, declined to $58.9 million for the six months ended
December 26, 2003 from $61.3 million for the six months ending December 27,
2002. Expressed as a percentage of net sales, gross profit declined to 22.8% in
the current period from 23.6% in the previous year. Gross profit at our
Packaging Segment declined to $35.3 million or 25.1% of net sales in the most
recent period from $39.0 million or 28.0% of net sales in the comparable period
of last year. Our Tubing Segment gross profit increased to $20.6 million or
32.0% of net sales in the first half of fiscal 2004 compared to $17.8 million or
26.3% in the first half of the previous year due to improved margins at both our
garden hose and medical tubing businesses. Other gross profit decreased to $2.9
million in the current period from $4.5 million in the comparable period of the
previous year. Measured as a percentage of net sales, other gross profit
decreased to 5.5% in the first half of fiscal 2004 compared to 8.5% in the same
period of the previous year largely due to higher cost raw materials.
Selling, general and administrative expense increased slightly to $29.8 million
in the six months ended December 26, 2003 compared to $28.5 million in the six
months ended December 27, 2002. The ratio of selling, general and administrative
expense to net sales increased to 11.5% for the six months ending December 26,
2003 from 11.0% in the comparable period of last year.
Integration expense of $2.3 million for the six months ended December 26, 2003
represents costs to reconfigure and realign the Elm production facilities to
conform to our current production and product standards. Integration expense of
$1.9 million for the six months ended December 27, 2002 represents costs to
reconfigure and realign the Elm and Swan production facilities.
Operating profit, as a result of the foregoing, decreased to $26.8 million or
10.4% of net sales for the six months ended December 26, 2003 from $30.9 million
or 11.9% of net sales for the six months ended December 27, 2002. Operating
Profit for our Packaging Segment decreased to $22.2 million in the current
period from $27.8 million in the prior period. Measured as a percent of net
sales, operating profit for our Packaging Segment decreased to 15.8% in the
current period from 20.0% in the prior period. Operating profit for our Tubing
Segment increased to $14.5 million in the current period from $10.7 million in
the prior period. Measured as a percentage of net sales, operating profit
increased to 22.6% in the current period from 15.8% in the prior period due to
higher margins from both our garden hose and medical tubing operations. Other
operating profit decreased to a ($0.1) million loss in the current period
compared to $1.1 million the previous year.
Interest expense increased to $41.3 million in the six months ended December 26,
2003 from $35.2 million in the six months ended December 27, 2002 due to
non-recurring expenses, primarily write off of deferred financing costs and bank
fees, associated with our recent bank amendment and issuance of senior secured
notes as well as higher average interest rates. Measured as a percentage of net
sales, interest expense increased to 16.0% in the current period compared to
13.6% in the previous period. The unrealized loss (gain) in derivative contracts
increased to a ($4.2) million gain in the current period compared to a $2.1
million loss for the six months ended December 27, 2002.
Loss before income taxes, as a result, was a loss of ($11.1) million for the six
months ended December 26, 2003 compared to a loss of ($6.9) million for the six
months ended December 27, 2002.
Benefit for income taxes was ($4.4) million for the six months ended December
26, 2003, compared to ($2.4) million for the six months ended December 27, 2002.
The Company's effective tax rate was 39.8% for the six months ended December 26,
2003 compared to 34.8% for the six months ending December 27, 2002.
Net loss, as a result, was a loss of ($6.7) million for the six months ended
December 26, 2003 or (2.6%) of net sales compared with a loss of ($4.5) million
or (1.7%) of net sales for the six months ended December 27, 2002.
16
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the six months ended December 26, 2003 was $9.2
million compared with $4.1 million in cash provided by operations in the same
period of the prior year. The $13.3 million decrease was primarily due to a
reduction in accounts payable.
Working capital on December 26, 2003 was $254.0 million compared to $249.7
million on June 27, 2003. During the half, a normal seasonal reduction in
accounts receivable was partially offset by a normal seasonal increase in
inventories, and the proceeds from the issuance of Senior Secured Notes used to
pay down our Term Notes.
On November 21, 2003 the Company issued $275.0 million of 8-3/4% Senior Secured
Notes with a maturity date of November 15, 2013. Interest is payable
semi-annually. The proceeds of $267.4 million were used to repay our Term Loan
A, pay down our Term Loan B, and pay down our revolver.
As of December 26, 2003, the Company had an outstanding balance of $73.0 million
under the $100.0 million revolving credit line.
The Company's capital expenditures for the six months ended December 26, 2003
and December 27, 2002 were $15.1 million and $13.6 million respectively.
The Company continues to expect that its principal uses of cash for the next
several years will be debt service, capital expenditures and working capital
requirements. Management believes that cash generated from operations plus funds
available in the Company's credit facility will be sufficient to meet its needs
and to provide it with the flexibility to make capital expenditures and
acquisitions which management believes will provide an attractive return on
investment. However, the probability exists that the Company may need additional
financing to take advantage of all the acquisition opportunities that might
arise. There can be no assurance that such financing will be available in the
amounts and terms acceptable to the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk inherent in certain debt instruments. At
December 26, 2003, the principal amount of the Company's aggregate outstanding
variable rate indebtedness was $144.8 million. A hypothetical 1% adverse change
in interest rates would have an annualized unfavorable impact of approximately
$0.4 million on the Company's after-tax earnings and cash flows, assuming the
Company's current effective tax rate and assuming no change in the principal
amount. Conversely, a reduction in interest rates would favorably impact the
Company's after-tax earnings and cash flows in a similar proportion.
ITEM 4. Controls and Procedures
The management of the Company, including the Company's principal executive
officer and principal financial officer have evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) of
Exchange Act) as of December 26, 2003. Based on such evaluation, the Company's
principal executive officer and principal financial officer have concluded that
as of December 26, 2003, such disclosure controls and procedures are effective
for the purpose of ensuring that material information required to be in this
Annual Report is made known to them by others on a timely basis. There have not
been any changes in the Company's internal control over financial reporting (as
defined in Exchange Act Rule 13a-15(f) of the Exchange Act) during the quarter
ended December 26, 2003 that have materially affected or are reasonably likely
to materially affect the Company's internal control over financial reporting.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings The Company is party to certain litigation in the
ordinary course of business, none of which the Company believes is likely to
have a material adverse effect on its consolidated financial position or
results of operations.
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Securities holders Not applicable
Item 5. Subsequent Events
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chairman and Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chairman and Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEKNI-PLEX, INC.
February 09, 2004
By: /s/ F. Patrick Smith
----------------------
F. Patrick Smith
Chairman of the Board and
Chief Executive Officer
By: /s/ Kenneth W.R. Baker
----------------------
Kenneth W. R. Baker
President and Chief Operating Officer
By: /s/ James E. Condon
----------------------
James E. Condon
Vice President and Chief Financial Officer
19