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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 JULY 2, 2004
[ ] 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 75019
COPPELL, TEXAS (Zip Code)
(Address of principal executive offices)
(Registrant's telephone number, including area code)
(972) 304-5077
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 joined our company and 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 utilized
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 diversified the end markets served
by this location by developing 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 was a leading manufacturer of
plastic packaging, products, and materials primarily for the healthcare and
consumer markets. PureTec enjoyed leading market positions in its core products,
including garden and irrigation hose, precision tubing and gaskets primarily for
the aerosol packaging industry, vinyl medical tubing, and vinyl compounds for
the production of medical devices. PureTec is a wholly-owned subsidiary of
Tekni-Plex.
In January 1999, we acquired substantially all the assets of Tri-Seal
International, Inc., a leader in sophisticated extruded and co-extruded
capliners and seals. The Tri-Seal operations have been integrated with and into
our closure liner business.
In April 1999, we acquired substantially all the assets of Natvar, a
producer of disposable medical tubing and electrical sheathing. 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 and industrial extrusions businesses.
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.
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 and
into our garden hose business.
2
In October 2001, we acquired substantially all of the assets of the garden
hose business of Mark IV Industries, Inc. which operates under the name Swan
Hose. Swan, which has one manufacturing facility located in Bucyrus, Ohio,
enhanced Tekni-Plex's geographic coverage of the North American garden hose
market. The Swan operations have been integrated with and into our garden hose
business.
In July 2002, we acquired substantially all of the assets of Elm Packaging
Company. Elm produces polystyrene foam plates, bowls, and meat and bakery trays.
The Elm acquisition significantly increases our capacity to produce foamed
polystyrene products primarily for customers in the food packaging and
foodservice markets.
In July 2004, we acquired the egg carton business of Genpak and we have
integrated this business into our food packaging operations.
DESCRIPTION OF SEGMENTS
See footnote 14 of our July 2, 2004 audited financial statements.
DESCRIPTION OF BUSINESS
We are a global, diversified manufacturer of packaging, packaging products
and materials as well as tubing products. We primarily serve the food,
healthcare and consumer markets. We have built leadership positions in our core
markets, and focus on vertically integrated production of highly specialized
products. We have operations in the United States, Europe and Canada. We believe
that our end market and product line diversity has the effect of reducing
overall risk related to any single product or customer. Our operations are
aligned under two business segments: Packaging and Tubing Products. Products
that do not fit in either of these two segments, including recycled PET, vinyl
compounds and specialty resins have been reflected in Other. Representative
product lines in each of our business segments are listed below:
BUSINESS SEGMENT
PACKAGING TUBING PRODUCTS
--------- ---------------
- - Foam egg cartons - Garden and irrigation hose
- - Pharmaceutical blister films - Medical tubing
- - Poultry and meat processor trays - Pool and vacuum hose
- - Closure Liners
- - Aerosol and pump packaging components
- - Foam plates
COMPETITIVE STRENGTHS
We believe that our competitive strengths include:
- Strong customer relationships. We have long-standing relationships
with many of our customers. 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, and Kraft Foods, among others.
- Strong market positions in core businesses. We have a strong market
presence in our core product lines. The following table shows what
we believe to be our market position in the U.S. in our primary
product lines:
PRODUCT MARKET POSITION
Vinyl medical device materials.................................................. 1
Vinyl medical tubing............................................................ 1
Laminated, clear, high barrier pharmaceutical blister packaging................. 1
Multi-layered co-extruded and laminated closure liners.......................... 1
Garden and irrigation hose...................................................... 1
Precision tubing and gaskets for aerosol packaging.............................. 1
Egg cartons..................................................................... 1
Foam processor trays............................................................ 2
3
- Experienced management team. Our management team has been successful
in selecting and integrating strategic acquisitions as well as
improving underlying business fundamentals. After 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, our Brooklyn
operation was successfully merged into our Flemington plant. 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. In 2000, we acquired and integrated all of the
assets of the Super Plastics division of RCR International, Inc. In
2001, we acquired and integrated the Swan Hose business of Mark IV
Industries, Inc. In 2002, we acquired the assets and business of Elm
Packaging. 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. Our 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
economies 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, 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 in June 2000. New investors agreed to $269.6
million in aggregate equity commitments to Tekni-Plex Partners, of
which $167.0 million was contributed to consummate the
recapitalization in June 2000. The remaining $102.6 million was
contributed in conjunction with our acquisitions of Super Plastics,
Mark IV's Swan Division, and Elm Packaging. In fiscal 2004 we raised
an additional $22.5 million of new equity from a combination of new
and existing investors. In connection with the recapitalization, all
members of our current management maintained their entire equity
investment.
EMPLOYEES
We have approximately three thousand two hundred employees. A portion of
our employees are represented by labor unions, and we believe our labor
relations with those unions are good.
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
- 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
4
and materials with specific high performance characteristics through
the development of various unique proprietary materials and
proprietary manufacturing process techniques.
- 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.
- Growth through international expansion. We believe that there is
significant opportunity to expand our international sales, which
currently represent approximately 14.2% of our total revenues. At
present, we have manufacturing operations with attached sales
offices in Belgium, Italy, The United Kingdom, Canada and Argentina.
We have a regional sales office in Singapore covering southeast
Asia, including the People's Republic of China. In addition, we have
manufacturing liaisons and strategic supplier agreements in Japan,
Germany and Italy and a manufacturing licensee in Japan. We have
recently added sales representatives for Jordan, Saudi Arabia and
the United Arab Emirates as well as in the Philippines and India to
our existing representatives in Australia/New Zealand, South Africa,
Central America, Brazil, Mexico, Chile, China (including Hong Kong),
Taiwan, Greece and Turkey. We believe that our growing international
presence, which is a combination of our own regional manufacturing
and sales forces and independent sales representatives, will
continue to generate opportunities to increase our sales.
PACKAGING SEGMENT
The Packaging segment of our business had revenues of $306.1 million
(48.2% of total revenues) for the year ended July 2, 2004 and $291.8 million
(47.8% of total revenues) for the year ended June 27, 2003. Further details of
the major markets served by this segment are given below:
FOAM EGG CARTONS
We believe that we are the leading manufacturer of egg cartons in the
United States. Thermoformed foam polystyrene packaging has been the material of
choice for food packaging cartons 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 into
automated package filling operations. We sell these products through our direct
sales force.
In the egg packaging market, our primary competitor manufactures
pulp-based egg cartons. We believe that we compete effectively based on product
quality, performance and prompt delivery. Our customer base includes most of the
domestic egg packagers (including those owned by egg retailers).
PHARMACEUTICAL BLISTER FILMS
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.
5
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.
POULTRY AND MEAT PROCESSOR TRAYS
Our processor tray operations produce thermoformed foam polystyrene
poultry and meat processor trays. We are a leading supplier of processor trays
to the poultry industry.
As with egg cartons, thermoformed foam polystyrene has been the material
of choice for processor trays for the same reasons noted above.
Within the polystyrene foam processor tray market, we compete principally
with one large competitor, who has significantly greater financial resources
than ours and who controls the largest share of this market.
CLOSURE LINERS
Tekni-Plex is also a 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, performance and
prompt delivery.
AEROSOL AND PUMP PACKAGING COMPONENTS
Our Aerosol and Pump Packaging Components business produces dip tubes,
which transmit the contents of the container to the nozzle, and specialized,
molded or punched rubber-based valve gaskets that serve to control the release
of the product from the container. The group also produces writing instrument
products, including pen barrels and ink tubing as well as ink reservoirs for
felt-tip pens.
Sales are primarily to manufacturers of aerosol valves, dispenser pumps,
and writing instruments. These products are sold throughout the United States
and Europe, as well as selected worldwide markets. Sales are made through our
direct sales force. We believe that we are the leading supplier of aerosol valve
and dispenser pump gaskets and dip tubes in the world.
Our dip tubes and pen barrels 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
rubber 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.
We are the single-source supplier to much of the industry. The principal
competitive pressure in this product line, particularly the dip tube portion, 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.
6
FOAM PLATES
Our foam plate operations produce thermoformed foam polystyrene disposable
plates, bowls, and hinged-lid containers as well as agricultural packaging
products. Our sales are primarily to the consumer, agricultural and foodservice
industries. We compete with numerous participants who use a variety of materials
including foam polystyrene, pulp-based products and various plastic materials.
TUBING SEGMENT
The Tubing Products segment of our business had revenues of $210.2 million
(33.1% of total revenues) for the year ended July 2, 2004 and $209.7 million
(34.3% of total revenues) for the year ended June 27, 2003. Further details of
the major markets served by this segment are given below:
GARDEN AND IRRIGATION HOSE PRODUCTS
We believe that we are the leading producer of garden hose in North
America. We have produced garden hose products for over 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 sales force and also
through independent representatives. Both private label and brand-name products
are sold to the retail market, primarily to home centers, hardware cooperatives,
food, automotive, drug and mass merchandising chains and catalog companies
throughout the United States and Canada. Our customers include some of the
fastest growing and the most widely respected retail chains in North America.
Our market strategy is to provide a complete line of innovative, high-quality
products along with superior customer service.
The garden hose business is highly seasonal with approximately 75% of
sales occurring in the spring and early summer months. This seasonality tends to
have an impact on the Company's financial results from quarter to quarter.
MEDICAL TUBING
We believe we are the leading non-captive supplier of vinyl medical tubing
in North America and Europe. We manufacture medical tubing using proprietary
plastic extrusion processes. The primary raw materials are proprietary
compounds, which we produce. 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 our direct sales force. We remain competitive by focusing on
product quality, performance and prompt delivery.
ITEM 2. FACILITIES
The Company believes that its facilities are suitable for their purposes
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.
7
APPROXIMATE
LOCATION PRIMARY FUNCTION SQUARE FEET
-------- ---------------- -----------
Auburn, Maine(2)........................... Manufacturing 24,000
Belfast, Northern Ireland.................. Manufacturing 47,580
Blauvelt, New York(6)...................... Manufacturing 56,400
Burlington, New Jersey..................... Manufacturing 124,000
Bucyrus, Ohio.............................. Manufacturing 587,649
Buenos Aires, Argentina(4)................. Manufacturing and warehouse 12,900
Cambridge, Ontario, Canada................. Manufacturing and warehouse 40,000
City of Industry, California(7)............ Manufacturing 110,000
Clayton, North Carolina.................... Manufacturing 99,665
Clinton, Illinois.......................... Manufacturing 69,000
Columbus, Ohio(3).......................... Sales Offices 3,761
Coppell, Texas(4).......................... Executive Offices 3,125
Dallas, Texas.............................. Manufacturing 139,000
Decatur, Indiana........................... Manufacturing 187,000
East Farmingdale, New York(4).............. Manufacturing 56,556
East Farmingdale, New York (4)............. Warehouse 11,000
Erembodegem (Aalst), Belgium............... Manufacturing 125,667
Flemington, New Jersey..................... Manufacturing 145,000
Fullerton, California (9).................. Manufacturing and warehouse 60,250
Harrison, New Jersey(5).................... Warehouse 135,501
Huntingdon, Tennessee (3).................. Warehouse 25,000
Lawrenceville, Georgia..................... Manufacturing 150,000
Lawrenceville, Georgia(3).................. Warehouse 13,000
Livonia, Michigan(1)....................... Warehouse 7,240
McKenzie, Tennessee........................ Manufacturing and warehouse 60,000
Memphis, Tennessee(6)...................... Manufacturing and warehouse 149,800
Memphis, Tennessee(2)...................... Warehouse 50,000
Milan (Gaggiano), Italy(4)................. Warehouse 12,920
Milan (Gaggiano), Italy.................... Manufacturing 14,900
Milan (Gaggiano), Italy.................... Manufacturing 25,800
Milan (Rosate), Italy(6)................... Manufacturing 24,000
Mississauga, Ontario, Canada(10)........... Manufacturing 118,196
Mississauga, Ontario, Canada(5)............ Manufacturing 100,000
Piscataway, New Jersey(5).................. Manufacturing 155,000
Ridgefield, New Jersey..................... Manufacturing 330,000
Rockaway, New Jersey....................... Manufacturing 90,550
Schaumburg, Illinois(12)................... Manufacturing 59,100
Schiller Park, Illinois.................... Manufacturing 15,232
Shelby, Ohio(7)............................ Warehouse 350,000
Singapore(1)............................... Sales Office 550
Somerville, New Jersey..................... Manufacturing 172,000
Sparks, Nevada(8).......................... Manufacturing 448,000
Tonawanda, New York(8)..................... Manufacturing 32,000
Troy, Ohio(6).............................. Manufacturing and warehouse 200,000
Waco, Texas................................ Manufacturing 104,600
Wenatchee, Washington...................... Manufacturing 97,000
Wenatchee, Washington(6)................... Warehouse 26,200
Wenatchee, Washington(1)................... Warehouse 8,000
- ------------------
(Years relate to calendar years)
(1) Leased on a month-to-month basis.
(2) Lease expires in 2004.
8
(3) Lease expires in 2005.
(4) Lease expires in 2006.
(5) Lease expires in 2007.
(6) Lease expires in 2008.
(7) Lease expires in 2009.
(8) Lease expires in 2012.
(9) Lease expires in 2013.
(10) Lease expires in 2015.
(11) Lease expires in 2019.
(12) Lease expires in 2020.
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
non-hazardous materials and wastes and the health and safety of employees. We
maintain a primary commitment to employee health and safety, and environmental
responsibility. Our intention and policy are to be at all times a responsible
corporate citizen.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Not Applicable.
9
ITEM 6. SELECTED FINANCIAL DATA
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. Acquisitions the
Company made in certain years result in years not being comparable.
YEARS ENDED
----------------------------------------------------------------
JUNE 30, JUNE 29, JUNE 28, JUNE 27, JULY 2,
2000 2001 2002 2003 2004
---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Net sales............................................. $ 524,817 $ 525,837 $ 577,749 $ 610,663 $ 635,642
Cost of goods sold.................................... 394,480 399,836 430,457 459,471 527,646
Gross profit.......................................... 130,337 126,001 147,292 151,192 107,996
Integration Expense -- -- -- 11,164 7,775
Selling, general and administrative expenses.......... 58,343 60,999 69,444 61,600 69,159
Income from operations................................ 71,994 65,002 77,848 78,428 31,062
Interest expense, net(a).............................. 73,821 76,569 70,934 71,266 84,451
Unrealized loss (gain) on derivative contracts........ -- 13,891 7,830 1,997 (10,654)
Other expense (income)................................ 4,705 605 (6) (531) 605
Pre-tax income (loss)................................. 28,842 (26,063) (910) 5,696 (43,340)
Income tax provision (benefit)........................ 14,436 (7,069) 5,677 2,306 11,121
Net income (loss)..................................... (20,968) (18,994) (6,587) 3,390 (54,461)
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................................... 145,879 199,129 $ 218,919 249,665 229,876
Total Assets.......................................... 574,789 621,494 691,963 784,764 747,682
Total debt (including current portion)................ 651,593 678,150 692,821 729,484 734,007
Stockholders' equity (deficit)........................ (149,150) (134,697) (91,111) (64,811) (101,035)
OTHER FINANCIAL DATA:
Depreciation and amortization......................... 34,748 37,670 $ 39,863 28,342 32,304
Capital expenditures.................................. 16,258 17,116 24,653 32,232 30,128
Cash flows:
From operations....................................... 9,485 (3,266) 7,922 15,029 (7,364)
From investing........................................ (16,905) (26,777) (88,446) (49,994) (34,126)
From financing........................................ (1,687) 62,180 64,092 54,203 23,513
- -------------------
(a) In connection with the adoption of SFAS 145, included in interest expense
for the year ended June 30, 2000 is approximately $35,374 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. For the period ended July 2, 2004, interest expense
included a $5,000 reduction in deferred financing costs.
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.
10
SELECTED FINANCIAL INFORMATION
(PERCENTAGE OF NET SALES)
YEARS ENDED
------------------------------------
JUNE 28, JUNE 27, JULY 2,
2002 2003 2004
-------- -------- -------
Net sales........................................... 100.0% 100.0% 100.0%
Cost of sales....................................... 74.5 75.2 83.0
Gross profit........................................ 25.5 24.8 17.0
Integration Expense................................. 1.8 1.2
Selling, general and administrative expenses........ 12.0 10.1 10.9
Income from operations.............................. 13.5 12.8 4.9
Interest expense.................................... 12.3 11.7 13.3
Provision (Benefit) for income taxes................ 1.0 0.4 1.7
Net income (loss)................................... (1.1) 0.6 (8.6)
Depreciation and amortization....................... 6.9 4.6 5.1
YEAR ENDED JULY 2, 2004 COMPARED TO THE YEAR ENDED JUNE 27, 2003
Net Sales, increased to $635.6 million for the year ended July 2, 2004
from $610.7 million for the year ended June 27, 2003, representing an increase
of $25.0 million or 4.1%. Our Packaging Segment reported a 4.9% increase in Net
Sales to $306.1 million in the fiscal year ended July 2, 2004 compared to $291.8
million in the fiscal year ended June 27, 2003. Our Tubing Products Segment's
Net Sales increased 0.3%, to $210.2 million from $209.7 million last year. Net
Sales for our other products increased to $119.3 million in the current year
from $109.2 million in the previous year, which represents a 9.2% increase.
Cost of Goods Sold, increased to $527.6 million for the year ended July 2,
2004 from $459.5 million for the year ended June 27, 2003. Expressed as a
percentage of Net Sales, Cost of Goods Sold increased to 83.0% of Net Sales for
the year ended July 2, 2004 compared to 75.2% for the year ended June 27, 2003,
primarily due to significantly higher raw material costs.
Gross Profit, as a result, decreased to $108.0 million for the year ended
July 2, 2004 from $151.2 million for the year ended June 27, 2003. The ratio of
Gross Profit to Net Sales decreased to 17.0% for the year ended July 2, 2004
from 24.8% for the year ended June 27, 2003. Our Packaging Segment Gross Profit
decreased by $5.5 million to $82.8 million from $88.3 million in the fiscal year
ended July 2, 2004 primarily due to a lower margin product mix for our foam
products as well as significantly higher raw material costs. This was partially
offset by strong performances by our other packaging businesses. Measured as a
percentage of Net Sales our Packaging Segment Gross Profit decreased to 27.1%
for the year ended July 2, 2004 from 30.3% for the year ended June 27, 2003. Our
Tubing Products Segment Gross Profit decreased to $20.6 million for the year
ended July 2, 2004 from $52.9 million in the fiscal year ended June 27, 2003.
Measured as a percentage of Net Sales our Tubing Products Segment Gross Profit
decreased to 9.8% for the year ended July 2, 2004 from 25.2% for the year ended
June 27, 2003. This decline was largely due to higher raw material cost at our
Garden Hose unit which could not be passed through to our customers during the
fiscal year. In addition, we wrote-down our inventory by $4.6 million to reflect
market values for some garden hoses that were less than our cost and we adjusted
our estimates of accruals for rebates, discounts and sales allowances resulting
in an $8.0 million increase in our reserves. Gross Profit for our other products
declined to $4.5 million in the current fiscal year from $10.0 million in the
previous year. Measured as a percentage of Net Sales, other Gross Profit
decreased to 3.8% in the current fiscal year from 9.2% in the previous year
primarily due to our inability to fully pass through significantly higher raw
material costs.
Selling, General and Administrative Expenses increased to $69.2 million
for the year ended July 2, 2004 from $61.6 million for the year ended June 27,
2003 primarily due to a charge of $10 million from a write-off in goodwill
associated with our specialty resin operations. The resultant ratio to Net Sales
increased to 10.9% for the year ended July 2, 2004 from 10.1% for the year ended
June 27, 2003.
Operating Profit, as a result of the above, decreased to $31.1 million in
the current fiscal year compared to $78.4 million in the previous year. Measured
as a percentage of Net Sales, Operating Profit decreased to 4.9% in fiscal 2004
from 12.8% in fiscal 2003. Our Packaging Segment Operating Profit decreased to
$54.0 million from $60.2 million last year. Measured as a percentage of Net
Sales, Packaging Segment Operating Profit decreased to 17.7% in the year ended
July 2, 2004 compared to 20.6% in the previous year. Our Tubing Products Segment
Operating Profit decreased to $6.5 million from $35.4 million in the year ended
July 2, 2004. Measured as a percentage of Net Sales, Tubing Products Segment
Operating Profit decreased to 3.1% from 16.9% last year. Operating Profit for
our other products declined to a ($11.8) million loss in the current year from a
$3.5 million gain in the previous year largely
11
due to a $10.0 million write-down of goodwill associated with our Specialty
Resin operations. Measured as a percentage of Net Sales, other Operating Profit
declined to a (9.9%) loss in the current fiscal year from a 3.2% gain in the
previous fiscal year.
Interest Expense, increased to $84.5 million for the fiscal year ending
July 2, 2004 from $71.3 million for the fiscal year ending June 27, 2003
primarily due to higher interest rates as well as the write-off of $5.0 million
of deferred financing costs resulting from the early retirement of some of our
term loans. The unrealized (gain) loss on derivative obligations reflected a
($10.7) million gain in the current fiscal year compared to a $2.0 million loss
in the previous fiscal year.
Depreciation and Amortization Expense, increased to $32.3 million or 5.1%
of Net Sales for the fiscal year ending July 2, 2004 from $28.3 million or 4.6%
of Net Sales for the fiscal year ending June 27, 2003.
The provision for income taxes increased to $11.1 million in the current
fiscal year from $2.3 million in the previous year primarily due to $7.0 million
reduction in our deferred tax asset. In addition, the company increased its
reserve on deferred taxes by approximately 15.0 million to reserve for deferred
taxes generated by 4th Quarter losses.
Net Income (loss), as a result, was a loss of ($54.5) million or (8.6%)
of Net Sales for the fiscal year ending July 2, 2004 compared to income of $3.4
million or 0.6% of Net Sales for the year ending June 27, 2003.
YEAR ENDED JUNE 27, 2003 COMPARED TO THE YEAR ENDED JUNE 28, 2002
Net Sales, increased to $610.7 million for the year ended June 27, 2003
from $577.7 million for the year ended June 28, 2002, representing an increase
of $33.0 million or 5.7%. Our Packaging Segment reported a 15.1% increase in Net
Sales to $291.8 million in the fiscal year ended June 27, 2003 compared to
$253.6 million in the fiscal year ended June 28, 2002. (The increase was
primarily due to the inclusion of our Elm acquisition that occurred in July
2002.) Our Tubing Products Segment's Net Sales decreased by $6.9 million or
3.2%, to $209.7 million from $216.6 million last year, primarily due to soft
garden hose sales in our Fourth Quarter resulting from an unusually rainy Spring
and Summer throughout most of North America. Net Sales for our other products
increased to $109.2 million in the current year from $107.6 million in the
previous year primarily due to higher volume.
Cost of Goods Sold, increased to $459.5 million for the year ended June
27, 2003 from $430.5 million for the year ended June 28, 2002. Expressed as a
percentage of Net Sales, Cost of Goods Sold increased to 75.2% of Net Sales for
the year ended June 27, 2003 compared to 74.5% for the year ended June 28, 2002,
primarily due to higher raw material costs.
Gross Profit, as a result, increased to $151.2 million for the year ended
June 27, 2003 from $147.3 million for the year ended June 28, 2002. The ratio of
Gross Profit to Net Sales decreased to 24.8% for the year ended June 27, 2003
from 25.5% for the year ended June 28, 2002. Our Packaging Segment Gross Profit
increased by $16.5 million to $88.3 million from $71.8 million in the fiscal
year ending June 27, 2003 primarily due to our Elm acquisition. Measured as a
percentage of Net Sales our Packaging Segment Gross Profit increased to 30.3%
for the year ended June 27, 2003 from 28.3% for the year ended June 28, 2002.
Our Tubing Products Segment Gross Profit decreased by $7.4 million to $52.9
million from $60.3 million in the fiscal year ending June 27, 2003. Measured as
a percentage of Net Sales our Tubing Products Segment Gross Profit decreased to
25.2% for the year ended June 27, 2003 from 27.9% for the year ended June 28,
2002. This decline was the result of both higher raw material costs as well as
weak garden hose sales in the Fourth Quarter as noted above. Gross Profit for
our other products declined to $10.0 million in the current fiscal year from
$15.1 million in the previous year. Measured as a percentage of Net Sales, other
Gross Profit decreased to 9.2% in the current fiscal year from 14.1% in the
previous year primarily due to our inability to fully pass through higher raw
material costs for our specialty resins business.
Selling, General and Administrative Expenses decreased to $61.6 million
for the year ended June 27, 2003 from $69.4 million for the year ended June 28,
2002 primarily due to the elimination of $12.4 million of goodwill amortization
expense due to a mandated change in accounting for goodwill effective during the
year ended June 27, 2003 offset by an increase in expenses due to the Elm
acquisition. The resultant ratio to Net Sales decreased to 10.1% for the year
ended June 27, 2003 from 12.0% for the year ended June 28, 2002.
Operating Profit, as a result of the above, increased to $78.4 million in
the current fiscal year compared to $77.8 million in the previous year. Measured
as a percentage of Net Sales, Operating Profit decreased to 12.8% in fiscal 2003
from 13.5% in fiscal 2002. Our Packaging Segment Operating Profit increased by
$12.9 million or 27.3% to $60.2 million from $47.3 million last year. Measured
as a percentage of Net Sales, Packaging Segment Operating Profit improved to
20.6% in the year ended June 27, 2003 compared to 18.6% in the previous year.
Our Tubing Products Segment Operating Profit decreased by $5.4 million to $35.4
million from $40.8 million in the year ended June 27, 2003. Measured as a
percentage of Net Sales, Tubing Products Segment Operating Profit decreased
12
to 16.9% from 18.8% last year. Operating Profit for our other products declined
to $3.5 million in the current year from $6.6 million in the previous year.
Measured as a percentage of Net Sales, other Operating Profit declined to 3.2%
in the current fiscal year from 6.2% in the previous fiscal year.
Interest Expense, increased to $71.3 million for the fiscal year ending
June 27, 2003 from $70.9 million for the fiscal year ending June 28, 2002
primarily due to higher average debt levels. The unrealized loss on derivative
obligations decreased to $2.0 million in the current fiscal year compared to a
loss of $7.8 million in the previous fiscal year.
Depreciation and Amortization Expense, decreased to $28.3 million or 4.6%
of Net Sales for the fiscal year ending June 27, 2003 from $39.9 million or 6.9%
of Net Sales for the fiscal year ending June 28, 2002 primarily due to a $12.4
million reduction in goodwill amortization resulting from a mandated change in
the accounting for goodwill effective during the year ended June 27, 2003.
The provision for income taxes decreased to $2.3 million in the current
fiscal year from $5.7 million in the previous year due to lower earnings. Our
effective tax rate declined to 40.4% in 2003 from 623.8% in 2002 due to a large
portion of our goodwill amortization not being tax deductible in 2002.
Net Income (loss), as a result, was income of $3.4 million or 0.6% of Net
Sales for the fiscal year ending June 27, 2003 compared to a loss of ($6.6)
million or (1.1%) of Net sales for the year ending June 28, 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended July 2, 2004, net cash used by operating activities was
$(7.4) million compared to $15.0 million of cash provided by operating
activities in the prior year. The $22.4 million decrease was due primarily to
lower earnings. Various year-over-year changes in operating assets, accrued
expenses, and liabilities are generally due to offsetting timing differences.
Working capital at July 2, 2004 was $229.9 million compared to $249.7
million at June 27, 2003. The decrease was primarily caused by lower borrowings
on the revolver and lower inventories.
As of July 2, 2004, we had an outstanding balance of $76.0 million under
our $100.0 million revolving credit line of our existing credit facility. This
was a decrease of $15.0 million from the $91.0 million outstanding balance as of
June 27, 2003. The decrease in revolver borrowings resulted from the use of cash
to reduce the revolver balance in fiscal 2004 compared to fiscal 2003.
In March of 2004 we raised $10.5 million of equity from a new investor and
in July of 2004 we raised an additional $12 million of equity from an existing
investor.
Our principal uses of cash will be debt service, capital expenditures and
working capital requirements. Our capital expenditures for the years ended July
2, 2004, June 27, 2003 and June 29, 2001 were $30.1 million, $32.2 million and
$24.7 million, respectively.
In June 2000, Tekni-Plex entered into a series of interest rate derivative
transactions designed to protect us from rising interest rates on our senior
term debt facilities while enabling us to partially benefit from falling
interest rates. Accordingly, we recorded an unrealized (gain) loss from
derivative transactions of ($10.7) million and $2.0 million in fiscal years 2004
and 2003, respectively.
Management believes that cash generated from operations plus funds from
our existing 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 our credit facility to meet our anticipated cash needs. To the
extent we pursue future acquisitions, we may be required to obtain additional
financing. We cannot assure you that we will be able to obtain such financing in
amounts and on terms acceptable to us.
Our Senior debt and our Senior Subordinated Notes include various
covenants, the most restrictive of which require a minimum consolidated EBITDA,
as defined in the debt agreement, minimum fixed charge coverage ratio and a
minimum leverage ratio. We have amended certain of such covenants, as a result
of violations, for the period ending July 2, 2004 and future periods. In
connection with that amendment, the interest rate margins of the credit
facilities have been increased by approximately 50 basis points.
At July 2, 2004, the Company's contractual obligations for borrowings are
as follows:
13
LONG-TERM
PAYMENTS DUE BY PERIOD DEBT LEASES TOTAL
---------------------- --------- ----------- ----------
(IN THOUSANDS)
Less than 1 year................. $ 2,121 $ 8,037 $ 10,158
Year 2........................... 77,076 7,844 84,920
Year 3........................... 35,145 7,411 42,556
Year 4........................... 35,161 6,028 41,189
Year 5........................... 380 4,577 4,957
After 5 years.................... 584,124 16,822 600,946
Not included in this table is interest expense and a contractural
obligation under a derivative contract with a liability of $13.1 million at
July 2, 2004.
CRITICAL ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States. Preparing
financial statements in accordance with generally accepted accounting principles
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The following paragraphs
include a discussion of some critical areas where estimates are required. You
should also review Note 1 to the financial statements for further discussion of
significant accounting policies.
The Company records revenue when products are shipped. Legal title and
risk of loss with respect to the products pass to customers at the point of
shipment. The Company provides an allowance for returned product and volume
sales rebates on an estimated basis based on written agreements and past
experience.
The Company evaluates its long-lived assets for impairment based on the
undiscounted future cash flows of such assets. If a long-lived asset is
identified as impaired, the value of the asset will be reduced to its fair
value.
The Company records inventories at the lower of cost (weighted average) or
market. We record inventory reserves to reduce the carrying value of inventory
for estimated obsolescence or unmarketable inventory equal to the difference
between the cost of inventory and estimated market value based on assumptions
about future demand and market conditions. If actual market conditions are less
favorable than those projected by management, additional inventory reserves may
be required. At the end of fiscal 2004, we reduced our inventory by
approximately $4.6 million to reflect market values that were lower than cost.
The Company extends credit based upon evaluations of a customer's
financial condition and provide for any anticipated credit losses in our
financial statements based upon management's estimates and ongoing reviews of
recorded allowances. If the financial conditions of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional reserves may be required. Conversely, reserves are deducted to
reflect credit and collection improvements.
The Company has intangible assets related to acquired intangibles. The
determination of related estimated useful lives and whether or not these assets
are impaired involves management judgments. Changes in strategy and/or market
conditions could significantly impact these judgments and required adjustments
to recorded asset balances. We adopted SFAS 142, which requires us to cease
amortization of goodwill, but instead be tested for impairment at least
annually or earlier if there are impairment indicators. The Company performs a
two-step process for impairment testing of goodwill as required by SFAS No.
142. The first step of this test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying amount. The
second step (if necessary) measures the amount of the impairment. As a result
of impairment tests being performed at the end of 2004, the Company recorded an
impairment charge of $10.0 million associated with its Specialty Resin
operations.
In performing the above noted goodwill impairment testing, the Company
uses a measure of fair value based on an evaluation of future discounted cash
flows. This evaluation utilized what management believes to be the best
information available in the circumstances, including what management believes
to reasonable and supportable assumptions and projections. Such assumptions are
consistent with those utilized in the Company's annual planning process and
appropriately take into account managements' initiatives to improve operational
efficiencies. If these turnaround initiatives do not achieve their earning
objectives, the assumptions and estimates underlying this goodwill impairment
evaluation could be modified in the future leading to further impairment in the
recorded value of goodwill.
The Company records a valuation allowance to reduce the amount of our
deferred tax assets to the amount that is more likely than not to be realized.
While we have considered future taxable income and ongoing tax planning
strategies in assessing the need for the valuation allowance, in the event that
we determined that we would not be able to realize our deferred tax assets in
the future in excess of the net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made.
Likewise, if it were determined that we would not be able to realize all or part
of the net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made.
Based on our recent financial performance, In fiscal 2004 we created a valuation
allowance that reduced our deferred tax asset by approximately $7.0 million.
The Company makes estimates of sales rebates and allowances related to
current period product revenue. Management analyzes historical trends, current
economic conditions, and compliance with written agreements when evaluating the
adequacy of the reserve for sales rebates and allowances. Management judgments
and estimates must be made and used in connection with establishing the
14
sales rebates and allowances in any accounting period. Based on investigation
and review of charge backs, at the end of fiscal 2004 we modified our estimates
for sales rebates and allowances, increasing this accrual by $8.0 million.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments With Characteristics of Both Liabilities and Equity." SFAS 150
requires the shares that are mandatorily redeemable for cash or other assets at
a specified or determinable date or upon an event certain to occur, be
classified as liabilities, not as part of shareholders equity. SFAS 150 does not
currently apply to the Company.
INFLATION
During fiscal 2004, we contended with significant and rapidly rising raw
material prices. Over, the long term, 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.
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
July 2, 2004 and June 27, 2003 the principal amount of the Company's aggregate
outstanding variable rate indebtedness was $153.0 million and $416.6 million
respectively. A hypothetical 1% adverse change in interest rates would have had
an annualized unfavorable impact of approximately $1.5 million and $4.2 million
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 for a notional amount of $344.0 million.
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
ITEM 9a. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company maintains
disclosure controls and procedures designed to ensure that information required
to be disclosed in its Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the completion of its audit of and the issuance of an
unqualified report on the Company's consolidated financial statements for the
fiscal year ended July 2, 2004, the Company's independent auditors, BDO Seidman,
LLP ("BDO"), communicated to the Company's Audit Committee that the following
matters involving the Company's internal controls and operations were considered
to be "reportable conditions", as defined under standards established by the
American Institute of Certified Public Accountants or AICPA:
o Lack of quantity of staff which led to issues related to timeliness of
financial reporting and year end closing process.
o Lack of quantity of staff which led to issues related to process
related to estimating chargeback reserves and inventory lower of cost
or market analysis, including preparation and review of analysis.
Reportable conditions are matters coming to the attention of the independent
auditors that in their judgment, relate to significant deficiencies in the
design or operation of internal controls and could adversely affect the
Company's ability to record, process, summarize and report financial data
consistent with the assertions of management in the financial statements. In
addition, BDO has advised the Company that they consider these matters, which
are listed above, to be "material weaknesses" that, by themselves or in a
combination, may increase the possibility that a material misstatement in our
financial statements might not be prevented or detected by our employees in the
normal course of performing their assigned functions.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation under
the supervision and with the participation of its management, including its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operations of the Company's disclosure controls and procedures as of
July 2, 2004. Based on the foregoing, the Company's Chief Executive Officer and
Chief Financial Officer determined that the deficiencies identified by BDO could
cause the Company's disclosure controls and procedures to be less effective at a
reasonable assurance level than was desirable. However, the Chief Executive
Officer and Chief Financial Officer noted that the Company is actively seeking
to remedy the deficiencies identified herein including hiring additional staff
to assure timeliness of financial reporting as well as reviewing our estimates
of chargeback reserves and inventory on a more frequent basis. The Company's
Chief Executive Officer and Chief Financial Officer did not note any other
material weakness or significant deficiencies in the Company's disclosure
controls and procedures during their evaluation. The Company continues to
improve and refine its internal controls. This process is ongoing.
Other than for the matters discussed above, the Company's Chief Executive
Officer and Chief Financial Officer have determined that the Company's internal
controls and procedures were effective as of the end of the period covered by
this report. In the fourth quarter of fiscal 2004, there were no significant
changes in the Company's internal control over financial reporting or in other
factors that materially affected, or are reasonably likely to materially affect,
the Company's internal controls over financial reporting.
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.
15
Pursuant to our by-laws, we indemnify our officers and directors to the fullest
extent permitted by the General Corporation Law of the State of Delaware and our
certificate of incorporation.
The board of directors is composed of six directors. A nominating
committee composed of Dr. Smith and Mr. Cronin designate two directors, Dr.
Smith designates three directors, and Mr. Cronin designates one director.
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................................. 56 Chairman of the Board and Chief Executive Officer
Kenneth W.R. Baker................................... 60 President, Chief Operating Officer and Director
Arthur P. Witt....................................... 74 Corporate Secretary and Director
John S. Geer......................................... 58 Director
J. Andrew McWethy.................................... 63 Director
Michael F. Cronin.................................... 50 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. Since 2000, Dr. Smith has been a
general partner of Eastport Operating Partners L.P.
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.
J. 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.
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
16
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 two next most highly compensated executive
officers of Tekni-Plex
SUMMARY COMPENSATION TABLE
FISCAL STOCK OTHER ANNUAL
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(a)
------------------------- ------ ------ ----- ------- ---------------
Dr. F. Patrick Smith.................................... 2004 $ 6,655,000 $ -- -- $ 16,000
Chairman and Chief Executive Officer 2003 6,050,000 -- -- 16,000
2002 5,500,000 -- -- 16,000
Mr. Kenneth W.R. Baker.................................. 2004 $ 3,327,500 $ -- -- $ 9,000
President and Chief Operating Officer 2003 3,025,000 -- -- 9,000
2002 2,750,000 -- -- 9,000
Mr. James E. Condon..................................... 2004 $ 540,000 $ 175,000 -- $ 7,200
Vice President and Chief Financial 2003 500,000 140,000 -- 7,200
Officer 2002 400,000 105,000 -- 7,200
(a) Includes amounts reimbursed during the fiscal year for payment of taxes,
auto expense, membership fees, etc.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL EXERCISE STOCK PRICE
SECURITIES OPTIONS/SARS OR BASE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM
OPTIONS/SARS EMPLOYEES IN PER EXPIRATION --------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
---- ------------ ------------ -------- ---------- ------ ----
Dr. F. Patrick Smith................... -- --% -- -- -- --
Kenneth W.R. Baker..................... -- --% -- -- -- --
James E. Condon........................ -- --% -- -- -- --
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE ($000)
UNDERLYING OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END AT FY-END
SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
---- --------------- -------------- ------------- --------------
Dr. F. Patrick Smith.............................. -- -- -- --/--
Kenneth W.R. Baker................................ -- -- -- --/--
James E. Condon................................... -- -- -- --/--
EMPLOYMENT AGREEMENTS
In June 2000, Dr. Smith and Mr. Baker entered into amended and restated
employment agreements that currently expire June 29, 2007 and contain renewal
provisions. The employment agreements provide for a 10% annual salary increase.
17
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.
Neither Dr. Smith's nor Mr. Baker's amended and restated employment
agreement provides for any mandatory bonus compensation.
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 levels and bonus awards for all other employees are
controlled by Dr. Smith and Mr. Baker.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Tekni-Plex Partners LLC holds approximately 94.0% (approximately 91.7% on
a fully diluted basis) and MST/TP Partners LLC holds approximately 6.0%
(approximately 5.8% 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
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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and
the Audit Committee's charter, all audit and audit-related work and all
non-audit work performed by our independent accountants, BDO Seidman LLP, is
approved in advance by the Audit Committee, including the proposed fees for such
work. The Audit Committee is informed of each service actually rendered.
Audit and audit-related fees billed or expected to be billed to us by BDO
Seidman LLP for the audit of the financial statements included in our Annual
Report on Form 10-K and reviews of the financial statements included in our
Quarterly Reports on Form 10-Q, for the fiscal years ended July 2, 2004 and June
27, 2003 totaled approximately $740,000 and $63,500 and $720,000 and $50,000,
respectively. Audit related fees include reviews of Form 10-Q, offering and SEC
comment letters.
Tax preparation, review, and advisory services billed or expected to be
billed to us by BDO for the fiscal years ended July 2, 2004 and June 27, 2003
totaled approximately $411,000 and $367,000, respectively.
PART IV
ITEM 15. 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
18
None
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 15, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ JAMES E. CONDON
----------------------------
James E. Condon
Chief Financial Officer
Dated: October 15, 2004
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 August , 2004.
SIGNATURE TITLE
- --------------------------- --------------------- ---------------------------
/s/ F. PATRICK SMITH Chairman of the Board and Chief Executive Officer
- ---------------------------
F. Patrick Smith
/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
19
EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ------------------------------------------------------------------------------------- ----
3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc.*
3.2 Amended and Restated By-laws of Tekni-Plex, Inc.*
3.3 Certificate of Incorporation of PureTec Corporation.*
3.4 By-laws of PureTec Corporation.*
3.5 Certificate of Incorporation of Tri-Seal Holdings, Inc.*
3.6 By-laws of Tri Seal Holdings, Inc.*
3.7 Certificate of Incorporation of Natvar Holdings, Inc.*
3.8 By-laws of Natvar Holdings.*
3.9 Certificate of Incorporation of Plastic Specialties and Technologies, Inc.*
3.10 By-laws of Plastic Specialties and Technologies, Inc.*
3.11 Certificate of Incorporation of Plastic Specialties and Technologies Investments, Inc.*
3.12 By-laws of Plastic Specialties and Technologies Investments, Inc.*
3.13 Certificate of Incorporation of Burlington Resins, Inc.*
3.14 By-laws of Burlington Resins, Inc.*
3.15 Certificate of Incorporation of Pure Tech APR, Inc.*
3.16 By-laws of Pure Tech APR, Inc.*
3.17 Certificate of Incorporation of TPI Acquisition Subsidiary, Inc.*
3.18 By-laws of TPI Acquisition Subsidiary, Inc.*
3.19 Certificate of Incorporation of Coast Recycling North, Inc.*
3.20 By-laws of Coast Recycling North, Inc.*
3.21 Certificate of Incorporation of Distributors Recycling, Inc.*
3.22 By-laws of Distributors Recycling, Inc.*
3.23 Certificate of Incorporation of REI Distributors, Inc.*
3.24 By-laws of REI Distributors, Inc.*
3.25 Certificate of Incorporation of Pure Tech Recycling of California.*
3.26 By-laws of Pure Tech Recycling of California.*
3.27 Certificate of Incorporation of Alumet Smelting Corp.*
3.28 By-laws of Alumet Smelting Corp.*
3.29 Certificate of Incorporation of TP/Elm Acquisition Subsidiary, Inc.*
3.30 By-laws of TP/Elm Acquisition Subsidiary, Inc.*
4.1 Indenture, dated as of June 21, 2000 among Tekni-Plex, Inc.,
the Guarantors listed therein and HSBC Bank USA, as Trustee.*
4.2 First Supplemental Indenture, dated as of May 6, 2002 among
Tekni-Plex, Inc., TPI Acquisition Subsidiary, Inc. and HSBC
Bank USA, as Trustee*
4.3 Second Supplemental Indenture, dated as of August 22, 2002
among Tekni-Plex, Inc., TP/Elm Acquisition Subsidiary, Inc.
and HSBC Bank USA, as Trustee*
4.4 Senior Subordinated Note and Guarantee (original not
included; form of Note and Guarantee included in Exhibit 4.1)
4.5 Purchase Agreement, dated as of May 1, 2002 among
Tekni-Plex, Inc., the Guarantors listed therein, and Lehman
Brothers Inc.*
4.6 Registration Right Agreement, dated as of May 6, 2002 among
Tekni-Plex, Inc., the Guarantors listed therein and
Lehman Brothers Inc.*
31.1 Certification of Chief Executive Officer, as required
by Section 302 of the Sabanes-Oxley Act of 2002**
31.2 Certification of Chief Financial Officer, as required
by Section 302 of the Sabanes-Oxley Act of 2002**
32.1 Certification of Chief Executive Officer and Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
- --------------------------------
* Filed previously as an Exhibit to the Form S-4 (File No. 333-43800) filed
on August 15, 2000.
** Filed herewith.
TEKNI-PLEX, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 2, 2004, JUNE 27, 2003, JUNE 28, 2002
F-1
TEKNI-PLEX, INC.
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets 4
Statements of operations 5
Statements of stockholders' deficit 6
Statements of cash flows 7
Notes to financial statements 8-53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SUPPLEMENTAL SCHEDULE 54
SUPPLEMENTAL SCHEDULE:
Valuation and qualifying accounts and reserves 55
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc.
and its subsidiaries (the "Company") as of July 2, 2004 and June 27, 2003, and
the related consolidated statements of operations, stockholders' deficit and
cash flows for each of the three years in the period ended July 2, 2004. 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 of the Public
Company Accounting Oversight Board (United States). 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 subsidiaries as of July 2, 2004 and June 27, 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
July 2, 2004, in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1, the Company changed its policy of accounting for
goodwill in 2002 as required by Financial Accounting Standards Board Statement
Number 142, "Goodwill and Other Intangible Assets."
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
October 3, 2004
F-3
TEKNI-PLEX, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JULY 2, 2004 June 27, 2003
------------ -------------
ASSETS
CURRENT:
Cash and cash equivalents $ 29,735 $ 48,062
Accounts receivable, net of an allowance of $8,408 and $8,398 for
possible losses and sales allowances 138,109 135,719
Inventories 153,807 161,333
Deferred income taxes - 6,735
Prepaid expenses and other current assets 6,355 7,939
------------ -------------
TOTAL CURRENT ASSETS 328,006 359,788
PROPERTY, PLANT AND EQUIPMENT, NET 182,749 179,521
INTANGIBLE ASSETS, NET INCLUDING GOODWILL OF $198,532 AND $209,189
RESPECTIVELY 207,278 213,152
DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $9,122 AND $6,899 9,652 11,851
DEFERRED INCOME TAXES 18,793 19,172
OTHER ASSETS 1,204 1,280
------------ -------------
$ 747,682 $ 784,764
============ =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long term debt $ 2,121 $ 16,709
Accounts payable 54,312 52,371
Accrued payroll and benefits 10,945 9,525
Accrued interest 6,763 6,317
Accrued integration reserve 2,444 5,000
Accrued liabilities - other 19,692 14,143
Income taxes payable 1,853 6,058
------------ -------------
TOTAL CURRENT LIABILITIES 98,130 110,123
LONG-TERM DEBT, LESS CURRENT PORTION 731,886 712,775
OTHER NON-CURRENT LIABILITIES 18,701 26,677
------------ -------------
TOTAL LIABILITIES 848,717 849,575
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value, authorized 20,000 shares, issued 1,008
at July 2, 2004 and June 27, 2003 - -
Additional paid-in capital 210,518 188,018
Accumulated other comprehensive loss (6,000) (1,737)
Accumulated deficit (85,030) (30,569)
Less treasury stock at cost, 431 shares (220,523) (220,523)
------------ -------------
TOTAL STOCKHOLDERS' DEFICIT (101,035) (64,811)
------------ -------------
$ 747,682 $ 784,764
============ =============
See accompanying notes to consolidated financial statements.
F-4
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Years ended JULY 2, 2004 June 27, 2003 June 28, 2002
----------- ------------ ------------- -------------
NET SALES $ 635,642 $ 610,663 $ 577,749
COST OF SALES 527,646 459,471 430,457
---------- ---------- ----------
GROSS PROFIT 107,996 151,192 147,292
OPERATING EXPENSES:
Selling, general and administrative 69,159 61,600 69,444
Integration expenses 7,775 11,164 -
---------- ---------- ----------
INCOME FROM OPERATIONS 31,062 78,428 77,848
OTHER (INCOME) EXPENSES:
Interest, net 84,451 71,266 70,934
Unrealized loss (gain) on derivative contracts (10,654) 1,997 7,830
Other 605 (531) (6)
---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (43,340) 5,696 (910)
PROVISION FOR INCOME TAXES 11,121 2,306 5,677
---------- ---------- ----------
NET INCOME (LOSS) $ (54,461) $ 3,390 $ (6,587)
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(DOLLARS IN THOUSANDS)
Accumulated
Additional Other
Paid-In Comprehensive Accumulated Treasury
Common stock Capital Loss Deficit Stock TOTAL
------------ ---------- ------------ ----------- -------- -----
BALANCE, JUNE 29, 2001 - 120,176 (7,039) (27,372) (220,462) (134,697)
Net loss - - - (6,587) - (6,587)
Foreign currency translation - - 3,319 - - 3,319
Unrealized loss on pension plan, net of tax - - (3,085) - - (3,085)
-----------
Comprehensive loss - - - - - (6,353)
Acquisition of shares - - - - (61) (61)
Capital contributions - 50,000 - - - 50,000
----- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 28, 2002 170,176 (6,805) (33,959) (220,523) (91,111)
Net income - - - 3,390 - 3,390
Foreign currency translation - - 6,320 - - 6,320
Unrealized loss on pension plan - - (1,252) - - (1,252)
-----------
Comprehensive income - - - - - 8,458
Capital contributions - 17,842 - - - 17,842
----- ----------- ----------- ----------- ----------- -----------
BALANCE, JUNE 27, 2003 - 188,018 (1,737) (30,569) (220,523) (64,811)
Net loss - - - (54,461) - (54,461)
Foreign currency translation - - (771) - - (771)
Unrealized loss on pension plan - - (3,492) - - (3,492)
-----------
Comprehensive loss - - - - - (58,724)
Capital contributions - 22,500 - - - 22,500
----- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 2, 2004 - $ 210,518 $ (6,000) $ (85,030) $ (220,523) $ (101,035)
===== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-6
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Years ended JULY 2, 2004 June 27, 2003 June 28, 2002
----------- ------------ ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (54,461) $ 3,390 $ (6,587)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 25,377 24,615 20,981
Amortization 6,927 3,727 18,882
Goodwill impairments 10,000 - -
Unrealized (gain) loss on derivative contracts (10,654) 1,997 7,830
Provision for bad debts 2,316 2,350 484
Deferred income taxes 7,290 (2,547) 1,234
Loss on sale of assets 177 - -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (4,806) 4,388 (35,632)
Inventories 7,305 (40,372) 4,226
Prepaid expenses and other current assets 129 (567) 866
Other assets 76 (202) (50)
Accounts payable and other current liabilities 2,600 13,630 (6,136)
Income taxes payable (2,318) 4,625 5,419
Other liabilities 2,678 (5) (3,595)
------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (7,364) 15,029 7,922
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (5,780) (16,762) (63,624)
Capital expenditures (29,472) (32,232) (24,653)
Cash proceeds from sale of assets 1,346 - -
Additions to intangibles (220) (1,000) (169)
------------ ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (34,126) (49,994) (88,446)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (15,000) 45,000 (19,000)
Proceeds from long-term debt 267,438 1,116 40,747
Repayments of long-term debt (248,658) (9,755) (7,440)
Proceeds from capital contributions 22,500 17,842 50,000
Debt financing costs (2,767) - (154)
Purchase of treasury stock - - (61)
------------ ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,513 54,203 64,092
------------ ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (350) 625 (14)
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,327) 19,863 (16,446)
CASH, BEGINNING OF PERIOD AND CASH EQUIVALENTS 48,062 28,199 44,645
------------ ----------- -----------
CASH, END OF PERIOD AND CASH EQUIVALENTS $ 29,735 $ 48,062 $ 28,199
============ =========== ===========
See accompanying notes to consolidated financial statements.
F-7
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
1. SUMMARY OF ACCOUNTING POLICIES 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 three primary
business groups: Packaging, Tubing
Products, and other.
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.
Accounts Receivable and Allowance for
Possible Losses
Accounts receivable are customer
obligations due under normal trade terms.
The Company sells its products primarily
to large manufacturers, retailers, and
pharmaceutical companies. The Company
performs continuing credit evaluations of
its customers' financial condition and
although the Company generally does not
require collateral, letters of credit may
be required from its customers in certain
circumstances.
Management reviews accounts receivable on
a monthly basis to determine if any
receivables will potentially be
uncollectible. The Company includes any
accounts receivable balances that are
determined to be uncollectible, along with
a general reserve, in its overall
allowance for possible losses. After all
attempts to collect a receivable have
failed, the receivable is written off
against the allowance. Based on the
information available, the Company
believes its allowance for possible losses
as of July 02, 2004 is adequate. However,
actual write-offs might exceed the
recorded allowance.
Inventories
Inventories are stated at the lower of
cost (weighted average) or market.
F-8
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
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 (other than goodwill)
The cost of acquiring certain patents,
trademarks, and customer lists is
amortized over seventeen, ten and five
years, respectively.
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 title
and risk of loss has transferred to the
customer which is generally when goods are
shipped to customers. The Company provides
for returned goods and volume rebates on
an estimated basis based upon agreements
and past experience.
Sales Allowances
The Company accounts for sales allowances,
including volume rebates and advertising
programs, on an accrued basis as a
reduction in net revenue according to
Emerging, Task Force Issue ("EITF") 01-09
"Accounting for consideration given by a
vendor to a customer or a reseller of the
vendor's products" in the period in which
the sales are recognized.
Shipping and Handling Costs
Shipping and handling costs are recorded
to cost of sales.
F-9
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Research and Development
Research and development expenditures for
the Company's projects are expensed as
incurred.
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 27, 2003 and June
28, 2002 each contained 52 weeks, and July
2, 2004 contained 53 weeks.
Reclassifications
Certain items in the prior year financial
statements have been reclassified to
conform to the current year presentation.
Foreign Currency Translation
Assets and liabilities of international
subsidiaries are translated at year-end
exchange rates and related translation
adjustments are reported as a component of
accumulated other comprehensive income
(loss). The statement of operations
accounts are translated at the average
rates during the period.
Long-Lived Assets
Long-lived assets, excluding goodwill, are
evaluated annually 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 which would
be determined based on the net present
value of estimated future cash flows. No
impairment losses have been recorded
through July 2, 2004.
F-10
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
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," 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 net
income (loss) would have been reduced to
the pro forma amounts indicated below. The
calculations were based on a risk free
interest rate of 4.0%, expected volatility
of zero, a dividend yield of zero, and
expected lives of 8 years.
Years ended JULY 2, 2004 June 27, 2003 June 28, 2002
------------ ------------- -------------
Net income (loss):
As reported $(54,461) $3,390 $(6,587)
======== ====== =======
Adjustment for
fair value of
stock options,
net of tax $ (88) $ (124) $ (138)
======== ====== =======
Pro forma $(54,549) $3,266 $(6,725)
======== ====== =======
F-11
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Derivative Instruments
The Company applies the provision of
Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and
Hedging Activities," as amended and
interpreted by SFAS 149 "Amendment of
Statement 133 on Derivative Instruments
and Hedging Activities." SFAS 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 SFAS 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 gain or loss
from derivative instruments in the
Consolidated Statements of Operations.
These are the only derivative instruments
held by Tekni-Plex as of July 2, 2004. The
fair value of derivative contracts are
determined based on quoted market values
obtained from a third party.
F-12
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Tekni-Plex has 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
$290,000 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
$(13,065), $(23,719) and $(21,721) on July
2, 2004, June 27, 2003 and June 28, 2002,
respectively, and is included in other
liabilities on the Consolidated Balance
Sheet. For the years ended July 2, 2004,
June 27, 2003 and June 28, 2002,
Tekni-Plex incurred realized gain (losses)
of $10,654, $(8,677) and $(7,939),
respectively, which have been reflected in
interest expense.
Goodwill and Business Combinations
On June 29, 2002 the Company adopted SFAS
142 which 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.
The Company's business combinations were
accounted for using the purchase method
and goodwill was amortized over 15 years.
In accordance with SFAS 142 no
amortization expense was recorded during
the year ended July 2, 2004. During the
year ended June 28, 2002 the acquisition
of the Swan garden hose division of Mark
IV Industries, Inc. resulted in customer
lists and goodwill of $3,900 and $36,200
respectively. In accordance with SFAS 142,
the Swan goodwill was not amortized during
the year ended July 2, 2004.
F-13
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
If the Company had adopted SFAS 142 on
July 2, 1999, the Company's net income
(loss) for each of the three years in the
period ended July 2, 2004 would have been
as follows:
JULY 2, June 27, June 28,
2004 2003 2002
-------- -------- --------
Net income (loss) as
previously reported $(54,461) $3,390 $(6,587)
Add amortization, net of tax - - 9,299
Adjusted net income (loss) $(54,461) $3,390 $ 2,712
======== ====== =======
The Company completed its year-end
analysis of goodwill, and has concluded an
impairment charge of $10.0 million was
required in accordance with SFAS 142. The
impaired goodwill resulted from the recent
losses of our Specialty Resin operations
of our Other Segment.
New Accounting Pronouncements
In July 2003, the FASB issued SFAS 150,
"Accounting for Certain Financial
Instruments With Characteristics of Both
Liabilities and Equity." SFAS 150 requires
the shares that are mandatorily redeemable
for cash or other assets at a specified or
determinable date or upon an event certain
to occur, be classified as liabilities,
not as part of shareholders equity. SFAS
150 does not currently apply to the
Company.
F-14
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
2. RECAPITALIZATION In June 2000, the Company entered into a
Recapitalization (the "Recapitalization")
with certain of its stockholders, whereby
the Company purchased approximately 51% of
the outstanding stock for approximately
$220,500 including related transaction
fees. This stock has been reflected as
treasury stock in the accompanying balance
sheet.
As a result of provisions in the Company's
Senior Debt and Subordinated Note
Agreements, the Company redeemed it's
$200,000 9 1/4% Senior Subordinated Notes,
its $75,000 11 1/4% Senior Subordinated
Notes and repaid its Senior Debt in the
amount of approximately $153,000 during
2000.
These transactions were funded by $43,101
of new equity, $275,000 12 3/4% Senior
Subordinated Notes (see Note 7(b)) and
initial borrowings of $374,000 on a
$444,000 Senior Credit Facility (see Note
7(a)).
F-15
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
3. ACQUISITIONS a) In July 2004, the Company acquired
substantially all the net assets of
the egg carton business of Genpak
("Genpak") for $5,780. Genpak produces
a variety of foam products, including
foam egg cartons. The financial
results of the Genpak transaction are
included in the Packaging Segment. The
proforma results of operation of the
Genpak assets as though the
acquisition occurred on June 28, 2002
are immaterial. The acquisition was
recorded under the purchase method,
whereby the acquired Genpak net assets
were recorded at estimated fair value,
and its operations have been reflected
in the statement of operations since
that date. The allocation of purchase
price is as follows:
Assets:
Inventory $ 303
Plant property and equipment 1,044
Customer list and covenant not to compete 4,433
-------
Total Assets 5,780
Liabilities --
-------
Net Investment $ 5,780
=======
b) In July 2002, the Company acquired
substantially all the net assets of
Elm Packaging Company ("ELM") for
$16,762. Elm produces polystyrene foam
plates, bowls, and meat and bakery
trays. The financial results of Elm
are included in the Packaging segment.
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. The
allocation of purchase price is as
follows:
Assets:
Accounts receivable $ 3,449
Inventory 1,829
Deferred taxes 1,695
Fixed assets 12,487
Goodwill 10,051
Other assets 334
-------
Total Assets 29,845
=======
F-16
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Liabilities:
Accounts payable and accrued expenses 8,583
Integration reserve 4,500
-------
Net investment $16,762
=======
The components of the Integration reserve
and activity through July 2, 2004 was as
follows:
Costs Costs
Balance charged to Balance charged to Balance
July 2002 reserve July 2003 reserve July 2, 2004
--------- ---------- --------- ---------- ------------
Reduction in
personnel and
related costs $1,000 1,000 $ - $ - $ -
Legal and
environmental
liability $3,500 1,000 2,500 1,337 1,163
------ ---------- ---------- --------- -----------
$4,500 $ 2,000 $ 2,500 $ 1,337 $ 1,163
====== ========== ========== ========= ===========
The remaining legal and environmental
costs are expected to extend over the next
four years.
The following table represents the
unaudited proforma results of operations
as though the acquisition of Elm occurred
on June 29, 2001. The proforma effect on
the year ended July 2, 2004 would be
immaterial.
Year ended
June 28, 2002
-------------
Net sales $617,892
Income from operations 75,553
Loss before income taxes (4,794)
========
F-17
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
In October 2001, the Company purchased
certain assets and assumed certain
liabilities of Swan for approximately
$63,600. Swan is a manufacturer of garden
hose. The financial results of Swan are
included in the tubing segment. 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 allocation of the purchase price is as
follows:
Assets:
Accounts Receivable $ 7,184
Inventory 15,600
Deferred Taxes 3,570
Fixed Assets 17,568
Customer lists 3,900
Goodwill 35,008
----------
Total Assets 82,830
Liabilities:
Accounts Payable and accrued expenses 11,230
Integration reserve 8,000
----------
Net Investment $ 63,600
==========
F-18
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
In connection with the acquisition, the
Company incurred an integration reserve of
$10 million. The components of the
Integration reserve and activity through
July 2, 2004 was as follows:
Costs Cost Balance Costs
charged Balance charged June charged Adjustments Balance
October to June 28, to Adjustments 27, to to July 2,
2001 Reserve 2002 Reserve to Reserve 2003 Reserve Reserve 2004
------- ------- -------- ------- ----------- ------- ------- ----------- -------
Cost to close duplicate facilities $ 3,500 $1,340 $ 2,160 $ 101 $(2,059) $ - $ - $ - $ -
Reduction in personnel and related costs 2,100 718 1,382 - (1,382) - - - -
Legal and environmental 1,275 40 1,235 1,360 2,625 2,500 1,219 - 1,281
Manufacturing reconfiguration 1,455 175 1,280 - (1,280) - - - -
Other 1,670 972 698 794 96 - - - -
------- ------ ------- ------ ------- ------ ------ --- ------
$10,000 $3,245 $ 6,755 $2,255 $(2,000)* $2,500 $1,219 $ - $1,281
======= ====== ======= ====== ======= ====== ====== === ======
*$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.
The remaining legal and environmental
costs are expected to extend over the next
four years.
The following table represents the
unaudited proforma results of operations
as though the acquisition of Swan occurred
on June 29, 2001.
Year ended June
28, 2002
---------------
Net sales $ 589,045
Income from operations 75,863
---------
Loss before income taxes (2,895)
=========
F-19
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
In November 2000, the Company purchased
certain assets of Super Plastics Division
("Super Plastics") of RCR International,
Inc., for approximately $10,226. 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.
4. INVENTORIES Inventories are summarized as follows:
JULY 2, 2004 June 27, 2003
------------ -------------
Raw materials $ 58,881 $ 51,810
Work-in-process 12,668 10,219
Finished goods 82,258 99,304
---------- ---------
$ 153,807 $ 161,333
========== =========
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of
the following:
Estimated
JULY 2, 2004 June 27, 2003 useful lives
------------ ------------- ------------
Land $ 15,663 $ 16,315
Building and improvements 57,097 54,072 25-40 years
Machinery and equipment 221,552 199,645 5 - 10 years
Furniture and fixtures 9,581 7,837 5 - 10 years
Construction in progress 20,660 17,366
---------- ----------
324,553 295,235
Less accumulated depreciation 141,804 115,714
---------- ----------
$ 182,749 $ 179,521
========== ==========
F-20
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
6. INTANGIBLE ASSETS Intangible assets consist of the
following:
JULY 2, 2004 June 27, 2003
------------ -------------
Goodwill $ 276,182 $286,839
Customer list and non-compete agreement 9,680 3,900
Patents 1,966 1,745
--------- --------
287,828 292,484
Less accumulated amortization 80,550 79,332
--------- --------
$ 207,278 $213,152
========= ========
As a result of the adoption of SFAS 142,
the Company discontinued amortizing
goodwill effective June 29, 2002. Patents
and customer list continue to be
amortized. Amortization of customer list
will be $780 annually through the first
quarter of 2007. Patents will be amortized
$439 annually. Amortization is expected to
continue at this amount until 2010 when it
will begin to decline. Accumulated
amortization for Goodwill, customer list
and Patents at July 2, 2004 and June 27,
2003 were $77,650, $2,144, $756 and
$77,650, $1,365, and $317, respectively.
During the Company's SFAS 142 impairment
tests, it was noted that $10,000 of
goodwill related to the Specialty Resin
operation of our Other Segment was
impaired due to this units recent
performance. This amount was written off
as of July 2, 2004.
F-21
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
7. LONG-TERM DEBT Long-term debt consists of the following:
JULY 2, 2004 June 27, 2003
------------ -------------
Senior Debt (a):
Revolving line of credit $ 76,000 $ 91,000
Term notes 71,263 319,790
Senior Subordinated Notes issued June 21,
2000 at 12-3/4%, due June 15, 2010 (less
unamortized discount of $2,260 and
$2,637) (b). 272,740 272,363
Senior Subordinated Notes issued May 2002 at
12-3/4%, due June 15, 2010 (less
unamortized premium of $437 and $512 (b). 40,437 40,512
Senior Secured Notes issued November 21,
2003 at 8-3/4 %, due November 15, 2013
(less unamortized discount of $7,121) 267,879 -
Other, primarily foreign term loans, with
interest rates ranging from 4.44% to
5.44% and maturities from 2003 to 2010. 5,688 5,819
------------ ------------
734,007 729,484
Less: Current maturities 2,121 16,709
------------ ------------
$ 731,886 $ 712,775
============ ============
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 aggregate
amount of $344,000. These loans are
senior to all other indebtedness and
are collateralized by substantially
all the assets of the Company. The
amended debt agreement includes
various covenants which include a
limitation on capital expenditures and
compliance with customary financial
ratios. The Company paid off one of
the term loans with the issuance of
the Senior Secured Notes. The Company
was in violation of certain financial
covenants as of July 2, 2004 which
were subsequently waived and amended
for future periods.
F-22
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Revolving Credit Agreement
Borrowings under the agreement may be
used for general corporate purposes
with $24 million of additional
borrowings available at July 2, 2004.
Interest, at the Company's option, is
charged at the Prime Rate (4.25% at
July 2, 2004), plus the Applicable
Base Rate Margin (currently 2.5%) or
the Adjusted LIBOR Rate, as defined,
plus the Applicable Euro-Dollar Margin
(currently 3.5%). At July 2, 2004 the
balance of $76,000 outstanding was
borrowed at various rates ranging from
4.8% to 6.5%. At June 27, 2003, the
rate charged was 4.875%. The Revolving
Credit Agreement expires in June 2006.
The Company also had approximately
$2.2 million of outstanding letters of
credit as of July 2, 2004.
Term Loan A
This loan, in the original amount of
$100,000, with interest payable
quarterly at the same rates and
margins discussed above under the
Revolving Credit Agreement, 4.4% at
June 27, 2003, was repaid with
proceeds from the issuance of the
Senior Secured Notes.
Term Loan B
This loan, in the original amount of
$244,000, bears interest payable
quarterly at the same rate discussed
above, except the Applicable Base Rate
Margin is currently 3.0% and the
Applicable Euro-Dollar Margin is
currently 4.0%. Rates of 5.6% and 4.9%
were charged at July 2, 2004 and June
27, 2003, respectively. This loan was
paid down by $164,250 with the
proceeds of the issuance of the Senior
Secured Notes. Principal is currently
payable in quarterly installments of
$186. The quarterly installments
subsequently increase with payments
totaling $69,778 due in the final two
years in the period ending in June
2008.
F-23
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
b) Senior Subordinated Notes Issued June
2000 and May 2002
In June 2000, the Company issued
$275,000 of 12-3/4% ten year Senior
Subordinated Notes less a discount of
$3,768. The discount is being
amortized over the term of the notes
on the straight line method. Interest
is payable semi-annually and the notes
are unsecured obligations and rank
subordinate to existing and future
senior debt, including the 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. 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.
On May 6, 2002, the Company issued an
additional $40,000 of 12-3/4% Senior
Subordinated Notes plus a premium of
$600, the proceeds of which were used
to repay borrowings under the
revolving credit facility. The premium
is being amortized over the term of
the notes on the interest method.
These notes have the same terms and
maturity as the June 2000 notes
discussed above.
F-24
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Senior Secured Notes
On November 21, 2003, the Company
issued $275,000 of 8-3/4 % Senior
Secured Notes less a discount of
$7,563. The proceeds were used to pay
off Term Loan A and pay down Term Loan
B. The discount is being amortized
over the term of the notes on the
straight line method. Interest is
payable semi-annually and the notes
are secured obligations and rank
subordinate to the Senior Debt. Up to
35% of the Notes are callable by the
Company prior to November 15, 2006 at
a premium of 8.75%. All the notes are
callable by the Company after November
15, 2008 at a premium of 4.375% which
decreases to par after November 2011.
Upon a change in control, the holders
have the right to require the Company
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.
Scheduled principal payments on debt
over the next five years and
thereafter are as follows:
2005 $ 2,121
2006 77,076
2007 35,145
2008 35,161
2009 380
Thereafter 584,124
The Company believes the recorded value of
long-term debt approximates fair value
based on current rates available to the
Company for similar debt.
F-25
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
8. INCOME TAXES The provision for income taxes is
summarized as follows:
JULY 2, June 27, June 28,
Years ended 2004 2003 2002
--------- --------- -------
Current:
Federal $ - $ - $ 259
Foreign 3,781 4,504 2,180
State and local 50 349 2,004
-------- --------- -------
3,831 4,853 4,443
-------- --------- -------
Deferred:
Federal 7,000 (2,072) 474
Foreign 290 (89) 676
State and local - (386) 84
-------- --------- -------
7,290 (2,547) 1,234
-------- --------- -------
Provision (benefit) for
income taxes $ 11,121 $ 2,306 $ 5,677
======== ========= =======
The components of income (loss) before
income taxes are as follows:
JULY 2, June 27, June 28,
Years ended 2004 2003 2002
--------- --------- -------
Domestic $(51,586) $ (5,918) $(9,448)
Foreign 8,246 11,614 8,538
-------- --------- -------
$(43,340) $ 5,696 $ (910)
======== ========= =======
F-26
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The provision (benefit) for income taxes
differs from the amounts computed by
applying the applicable Federal statutory
rates due to the following:
JULY 2, June 27, June 28,
Years ended 2004 2003 2002
---------- -------- -------
Provision (benefit) for Federal
income taxes at statutory rate $ (14,736) $ 1,937 $ (309)
State and local income taxes, net
of Federal benefit (1,655) (24) 1,427
Non-deductible goodwill
impairment 3,400 - 3,647
Foreign tax rates in excess of
Federal tax rate 1,262 406 874
Increase in Valuation Allowance 23,319 - -
Other, net (469) (13) 38
---------- -------- -------
Provision (benefit) for income taxes $ 11,121 $ 2,306 $ 5,677
========== ======== =======
F-27
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Significant components of the Company's
deferred tax assets and liabilities are as
follows:
JULY 2, June 27,
2004 2003
---------- ----------
Current deferred taxes:
Allowance for doubtful accounts $ 1,961 $ 1,302
Inventory 2,103 1,877
Net operating loss carryforwards 1,009 557
Accrued expenses 1,365 2,999
---------- ----------
Total current deferred tax assets $ 6,438 $ 6,735
---------- ----------
Long-term deferred taxes:
Net operating loss carryforwards $ 54,400 $ 33,983
Accrued pension and post-retirement 2,657 1,265
Unrealized loss on derivative contracts 4,965 9,013
Unrealized loss of pension plan 3,265 2,657
Difference in book and tax basis of assets (609) (848)
Difference in depreciation (16,139) (18,720)
Goodwill - deductible for tax purposes (5,202) (2,768)
Other expenses 309 190
---------- ----------
Total long-term net deferred tax
assets 43,646 24,772
---------- ----------
Total current and long term deferred
tax assets 50,084 31,507
Valuation allowance (31,291) (5,600)
---------- ----------
Total long-term net deferred tax assets $ 18,793 $ 19,172
========== ==========
F-28
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND 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
$150,000. These NOL's expire at various dates
from 2009 through 2024. Approximately $82,000
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 $5,600. As a
result of this limitation the Company can
utilize a maximum of $79,600 of PureTec
NOL's.
The Company and its U.S. subsidiaries would
need to generate income of $150,000 through
2023, of which $82,000 is limited as
discussed above, in order to fully realize
the benefit of the NOL carry forwards. The
net long-term domestic deferred tax assets
have been subjected to a valuation allowance
of $21,300 which relates to Federal NOL's
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. Net deferred tax asset on the balance
sheet has been recognized based on our
projected usage of NOL's over the next three
years.
In addition to the domestic NOL balances, the
Company has incurred losses relating to a
subsidiary, taxable in Northern Ireland.
Through fiscal 2004 losses aggregated $597
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.
9. EMPLOYEE BENEFIT PLANS (a) Savings Plans
i. The Company maintains a
discretionary 401(k) plan covering
all eligible employees (excluding
Elm employees) with at least one
year of service. Contributions to
the plan are determined annually by
the Board of Directors.
F-29
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
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 July 2,
2004, June 27, 2003 and June 28,
2002, amounted to 1,043, $1,207,
$1,130, respectively.
ii. The Company maintains a 401(k) plan
covering all eligible Elm employees
with at least sixty days of service
and who have attained the age of
twenty-one. The Company matches 50%
of employee contributions up to 6%
of the employee's eligible
compensation. Contributions for the
fiscal year ended July 2, 2004
amounted to $94.
(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.
F-30
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The components of net periodic
pension costs are as follows:
YEAR ENDED Year ended Year ended
JULY 2, June 27, June 28,
2004 2003 2002
------------ ------------ ------------
Service cost $ 127 $ 107 $ 105
Interest cost on projected benefit obligation 421 420 400
Expected actual return on plan assets (443) (451) (494)
Amortization of unrecognized:
Prior service cost 12 12 -
Net loss 182 105 -
------------ ------------ ------------
Net pension cost $ 299 $ 193 $ 11
============ ============ ============
YEAR ENDED Year ended
JULY 2, June 27,
2004 2003
------------ ------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of period $ 6,835 $ 6,034
Service cost 127 107
Interest cost 421 420
Actuarial loss 71 612
Benefits paid (340) (338)
------------ ------------
Projected benefit obligation, end of period $ 7,114 $ 6,835
============ ============
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of period $ 5,013 $ 5,167
Actual return on plan assets 311 158
Company contributions 154 26
Benefits paid (340) (338)
------------ ------------
Plan assets at fair value, end of period $ 5,138 $ 5,013
============ ============
F-31
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The funded status of the Plan and
amounts recorded in the Company's
balance sheets are as follows:
JULY 2, 2004 June 27, 2003
------------ -------------
Funded status of the plan $ (1,976) $ (1,822)
Unrecognized prior service cost 87 99
Unrecognized net loss 2,316 2,294
------------ ------------
Prepaid pension cost $ 427 $ 571
============ ============
The expected long-term rate of return
on plan assets was 9% for the periods
presented and the discount rate was
6.25% and 6.25% at July 2, 2004 and
June 27, 2003.
The Company recorded an unrecognized
pension liability of $2,316 and
$2,294 at July 2, 2004 and June 27,
2003, respectively, as an accumulated
other comprehensive loss adjustment
to stockholders' equity. These
amounts represent a portion of the
unrecognized net actuarial loss for
the years ending July 2, 2004 and
June 27, 2003 as a result of an
investment return less than the
actuarial assumption.
The Company maintains a
non-contributory defined benefit
pension plan that covers
substantially all non-collective
bargaining unit employees of
Plastics, Specialties and Technology
("PS&T") and Burlington, who have
completed one year of service and are
not participants in any other pension
plan required by applicable
regulations. 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.
F-32
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The components of net periodic
pension cost are as follows:
YEAR ENDED Year ended Year ended
JULY 2, June 27, June 28,
2004 2003 2002
------------ ------------ ------------
Service cost $ - $ - $ -
Interest cost on projected benefit obligation 792 790 762
Expected actual return on plan assets (816) (839) (931)
Amortization of unrecognized
Net loss 280 178 25
------------ ------------ ------------
Net pension cost $ 256 $ 129 $ (144)
============ ============ ============
YEAR ENDED Year ended
JULY 2, June 27,
2004 2003
------------ ------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of period $ 12,932 $ 11,274
Interest cost 792 790
Actuarial loss (32) 1,370
Benefits paid (482) (502)
------------ ------------
Projected benefit obligation, end of period $ 13,210 $ 12,932
============ ============
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of period $ 9,303 $ 9,539
Actual return on plan assets 839 266
Benefits paid (482) (502)
------------ ------------
Plan assets at fair value, end of period $ 9,660 $ 9,303
============ ============
F-33
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The funded status of the Plan and
amounts recorded in the Company's
balance sheets are as follows:
JULY 2, 2004 June 27, 2003
------------ -------------
Funded status of the plan $ (3,551) $ (3,628)
Unrecognized net loss 4,912 5,245
------------ ------------
Prepaid pension cost $ 1,361 $ 1,617
============ ============
The expected long-term rate of
return on plan assets was 9% for the
periods presented and the discount
rate 6.25% and 6.25% at July 2, 2004
and June 27, 2003.
The Company recorded an unrecognized
pension liability of $4,912 and
$5,245 as of July 2, 2004 and June
27, 2003, respectively, as an
accumulated other comprehensive loss
adjustment to stockholders' equity.
These amounts represent a portion of
the unrecognized net actuarial loss
for the years ending July 2, 2004
and June 27, 2003 as a result of an
investment return less than the
actuarial assumption.
ii. The Company also has a defined
benefit pension plan for the benefit
of all employees having completed
one year of service with Dolco. The
funding policy of the Company is to
make the minimum required
contribution for the plan year
required by applicable regulations.
Dolco's Board of Directors approved
a plan to freeze this defined
benefit 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.
F-34
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The components of net periodic
pension costs are as follows:
YEAR ENDED Year ended Year ended
JULY 2, June 27, June 28,
2004 2003 2002
------------ ------------ ------------
Service cost $ - $ - $ -
Interest cost on projected benefit
obligation 251 261 257
Expected actual return on plan assets (234) (285) (301)
Amortization of unrecognized net loss 111 79 28
------------ ------------ ------------
Net pension cost $ 128 $ 55 $ (16)
============ ============ ============
YEAR ENDED Year ended
JULY 2, June 27,
2004 2003
------------ ------------
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of period $ 4,205 $ 4,049
Interest cost 251 261
Actuarial loss (gain) (126) 365
Benefits paid (378) (470)
------------ ------------
Projected Benefit Obligation, end of period $ 3,952 $ 4,205
============ ============
CHANGE IN PLAN ASSETS
Plan assets at Fair Value, beginning of period $ 3,144 $ 3,388
Actual return on plan assets 271 226
Company contributions 343
Benefits paid (378) (470)
------------ ------------
Plan assets at Fair Value, end of period $ 3,380 $ 3,144
============ ============
F-35
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The funded status of the Plan and
amounts reconciled in the Company's
balance sheets are as follows:
JULY 2, 2004 June 27, 2003
------------ -------------
Funded status of the Plan $ (571) $ (1,061)
Unrecognized net loss 1,367 1,642
------------ ------------
Prepaid pension cost $ 796 $ 581
============ ============
The expected long term rate of return on
plan assets was 7.5% and the discount
rate was 6.0% for the periods presented.
The Company recorded an unrecognized
pension liability of $1,367 and $1,642
as of July 2, 2004 and June 27, 2003,
respectively, an accumulated other
comprehensive loss and adjustment to
stockholders equity. These amounts
represent a portion of the unrecognized
net loss for the years ending July 2,
2004 and June 27, 2003.
(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 July 2, 2004, June 27,
2003 and June 28, 2002 amounted to $407,
$337 and $177, respectively, net of
retiree contributions.
F-36
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Net periodic post-retirement benefit
costs are as follows:
YEAR ENDED Year ended Year ended
JULY 2, 2004 June 27, 2003 June 28, 2002
------------ ------------- -------------
Service cost $ 154 $ 82 $ 55
Interest cost 409 247 206
Prior service cost 141 - -
Net loss 246 91 34
------------ ------------ ------------
Net post-retirement benefit cost $ 950 $ 420 $ 295
============ ============ ============
YEAR ENDED Year ended
CHANGE IN PROJECTED BENEFIT OBLIGATION JULY 2, 2004 June 27, 2003
------------ -------------
Projected benefit obligation, beginning of period $ 6,699 $ 3,621
Service cost 154 82
Interest cost 409 247
Plan amendments - 1,198
Actuarial loss (1,267) 1,888
Benefits paid (407) (337)
------------ ------------
Projected benefit obligation, end of period $ 5,588 $ 6,699
============ ============
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of period $ - $ -
Company contributions 407 337
Benefits paid (407) (337)
------------ ------------
Plan assets at fair value, end of period $ - $ -
============ ============
F-37
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The funded status of the Plan and
amounts recorded in the Company's
balance sheets are as follows:
YEAR ENDED Year ended
JULY 2, 2004 June 27, 2003
------------ -------------
Funded status of the plan $ (5,588) $ (6,699)
Unrecognized loss 1,569 3,081
Unrecognized service cost 1,057 1,198
------------ ------------
Accrued post retirement cost $ (2,962) $ (2,420)
============ ============
The accumulated post-retirement benefit
obligation was determined using a 6.25%
and 6.25% discount rate for the periods
presented. The healthcare cost trend
rate for medical benefits was changed
from a flat 6.00% as of June 28, 2002 to
a graded trend started at 12% for 2003
and decreasing 1% each year to 6.00% in
2009 and then to an ultimate rate of
5.50% for 2010 and beyond. 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 $378 and $518 and increase
the service and interest components by
$47 and $33 at July 2, 2004 and June 27,
2003, respectively.
The Company's plan asset allocation at
2004 and 2003 and target allocations for
2005 are as follows:
Security Percentage of Target
Type Plan Assets Allocation
- -------- --------------- ----------
2004 2003 2005
---- ---- ----
Guaranteed Investment
Contract 6% 7% 5%
Equity Securities 57% 52% 55%
Debt Securities 37% 41% 40%
---- ---- ----
Total Plan Assets 100% 100% 100%
==== ==== ====
The Company's investment policy is to
invest in stock and balanced funds of
mutual fund and insurance companies to
preserve principal while at the same
time establish a minimum rate of return
of approximately 5%. No more than
one-third of the total plan assets are
placed in any one fund.
The expected long-term
rate-of-return-on-assets is 8.5%. This
return is based upon the historical
performance of the currently invested
funds.
The benefits expected to be paid for
each of the next five years and in the
aggregate for the following five years
are:
2005 $1,239
2006 1,324
2007 1,418
2008 1,512
2009 1,589
2010-2014 8,616
10. STOCK OPTIONS In January 1998, the Company adopted an incentive
stock plan (the "Stock Incentive Plan"). Under the
Stock Incentive Plan, 45.75206 shares are
available for awards to employees of the Company.
Options are granted at fair market value on the
date of grant. As of July 2, 1999 options to
purchase 38.17 shares of common stock were
outstanding at weighted-average exercise price of
$177. During 2001 options were granted to purchase
4.02 shares of common stock at weighted average
exercise prices of $559 per share. During 2003
options to purchase 2.01 shares of common stock at
a weighted average exercise price of $177 were
forfeited and options to purchase 2.01 shares of
common stock at a weighted average exercise price
of $680 were issued. The options are subject to
vesting provisions, as determined by the Board of
Directors, and generally vest 100% five years from
grant date and expire 10 years from date of grant.
F-38
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
At July 2, 2004, 18.29 options were outstanding,
5.49 options were exercisable and no options have
been exercised.
11. COMMITMENTS AND Commitments
CONTINGENCIES
(a) The Company leases building space and certain
equipment in approximately 20 locations
throughout the United States, Canada and
Europe. At July 2, 2004, the Company's
future minimum lease payments are as
follows:
2005 $ 8,037
2006 7,844
2007 7,411
2008 6,028
2009 4,577
Thereafter 16,822
--------
$ 50,719
========
Rent expense, including escalation charges,
amounted to approximately $10,964, $10,941
and $8,259 for the years ended July 2, 2004,
June 27, 2003 and June 28, 2002,
respectively.
(b) The Company has employment contracts with
two officers, providing minimum annual
salaries of $7,500 with no mandatory
bonuses. The salaries will increase 10%
annually until the agreements expire on June
29, 2007. Salaries and bonuses to these
officers for the years ended July 2, 2004,
June 27, 2003 and June 28, 2002 amounted to
$9,983, $9,075 and $8,250.
Contingencies
(a) 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 or
cash flows.
F-39
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
12. CONCENTRATIONS OF Financial instruments that potentially subject the of
CREDIT RISKS Company to significant concentrations of credit risk
consist principally 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, Canada
and Europe. As part of its cash management
process, the Company periodically reviews the
credit standing of these banks.
13. SUPPLEMENTAL CASH (a) Cash Paid
FLOW INFORMATION
JULY 2, June 27, June 28,
Years ended 2004 2003 2002
- ----------- ------------ ------------ ------------
Interest $ 78,547 $ 69,642 $ 65,831
============ ============ ============
Income taxes $ 3,880 $ 1,027 $ 2,771
============ ============ ============
(b) Non-Cash Financing and Investing Activities
The Company purchased certain customer lists
of GenPak effective July 2, 2004, for $5,780
in cash. In conjunction with the
acquisition, a non-compete agreement was
executed.
The Company purchased certain assets of ELM
effective July 2002, for $16,762 in cash. In
conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 19,794
Goodwill 10,051
Purchase price (16,762)
--------
Liabilities assumed $ 13,083
========
F-40
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
The Company purchased certain assets of Swan
effective October 2001, for $63,600 in cash.
In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired $ 48,728
Goodwill 36,228
Purchase price (63,600)
--------
Liabilities assumed $ 21,356
========
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
=========
14. SEGMENT INFORMATION Tekni-Plex management reviews its operating plants
to evaluate performance and allocate resources.
Tekni-Plex has aggregated its operating plants
into three primary industry segments: Tubing
Products, Packaging and Other. The Tubing Products
segment principally produces garden and irrigation
hose, medical tubing and pool hose. 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. Products
that do not fit in either of these segments,
including recycled PET, vinyl compounds and
specialty resins, have been reflected in Other.
The Tubing Products and Packaging segments have
operations in the United States, Europe and
Canada. The Other segment has operations in the
United States.
F-41
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Financial information concerning the Company's
business segments and the geographic areas in
which it operates are as follows:
Year end July 2, 2004 Tubing Products Packaging Other TOTALS
--------------------- --------------- --------- -------- --------
Revenues from external customers $210,239 $306,131 $119,272 $635,642
Interest expense 39,633 26,889 17,929 84,451
Depreciation and amortization 9,426 15,021 6,833 31,280
Segment income (loss) from operations 6,489 54,044 (11,798) 48,735
Segment assets 326,882 271,432 138,705 737,019
Expenditures for segment fixed assets 4,878 17,226 7,323 29,427
Year end June 27, 2003 Tubing Products Packaging Other TOTALS
---------------------- --------------- --------- -------- -------
Revenues from external customers $209,655 $291,794 $109,214 $610,663
Interest expense 33,420 22,698 15,148 71,266
Depreciation and amortization 6,769 14,243 6,482 27,494
Segment income from operations 35,361 60,175 3,540 99,076
Segment assets 322,822 297,303 141,638 761,763
Expenditures for segment fixed assets 5,371 18,603 7,460 31,434
Year end June 28, 2002 Tubing Products Packaging Other TOTALS
---------------------- --------------- --------- ------- --------
Revenues from external customers $216,564 $253,624 $107,561 $577,749
Interest expense 31,851 24,703 14,380 70,934
Depreciation and amortization 11,674 20,097 7,046 38,817
Segment income from operations 44,802 47,277 6,622 98,701
Segment assets 326,520 222,798 130,050 679,368
Expenditures for segment fixed assets 5,669 13,717 4,473 23,859
F-42
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Years ending JULY 2, 2004 June 27, 2003 June 28, 2002
------------ ------------ ------------- -------------
OPERATING PROFIT
Total operating profit for reportable segments
before income taxes $ 48,735 $ 99,076 $ 98,701
Corporate and eliminations (17,673) (20,648) (20,853)
---------- --------- ---------
Consolidated total $ 31,062 $ 78,428 $ 77,848
========== ========= =========
ASSETS
Total assets from reportable segments $ 737,019 $ 761,763 $ 679,368
Other unallocated amounts 10,663 23,001 12,595
---------- --------- ---------
Consolidated total $ 747,682 $ 784,764 $ 691,963
========== ========= =========
DEPRECIATION AND AMORTIZATION
Segment totals $ 31,280 $ 27,494 $ 38,817
Corporate 1,024 848 1,046
---------- --------- ---------
Consolidated total $ 32,304 $ 28,342 $ 39,863
========== ========= =========
EXPENDITURES FOR SEGMENT FIXED ASSETS
Segment totals $ 29,427 $ 31,434 $ 23,859
Other unallocated expenditures 701 798 794
---------- --------- ---------
Consolidated total $ 30,128 $ 32,232 $ 24,653
========== ========= =========
REVENUES
GEOGRAPHIC INFORMATION
United States $ 545,597 $ 531,556 $ 516,873
Canada 17,991 12,361 10,078
Europe, primarily Belgium 72,054 66,746 50,798
---------- --------- ---------
Total $ 635,642 $ 610,663 $ 577,749
========== ========= =========
LONG-LIVED ASSETS
GEOGRAPHIC INFORMATION
United States $ 385,120 $ 390,099 $ 361,487
Canada 10,469 11,555 9,876
Europe 24,087 23,322 22,706
---------- --------- ---------
Total $ 419,676 $ 424,976 $ 394,069
========== ========= =========
F-43
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Income from operations is total net sales less cost of
goods sold and operating expenses of each segment before
deductions for general corporate expenses not directly
related to an individual segment and interest.
Identifiable assets by industry are those assets that
are used in the Company's operation in each industry
segment, including assigned value of goodwill. Corporate
identifiable assets consist primarily of cash, prepaid
expenses, deferred income taxes and fixed assets.
For each of the three years in the period ended July 2,
2004 no single customer represented at least 10% of
sales.
Garden hose products represented 30%, 33%, 33% of sales
in fiscal years 2004, 2003 and 2002, respectively. Foam
egg cartons represented 13%, 17% and 18% of sales in
fiscal year 2004, 2003 and 2002, respectively. It is
impractical for the Company to provide further product
line information. However, no other product lines
represented 10% or more of revenues in any years
presented.
15. SUPPLEMENTAL Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated
CONDENSED Notes in June 2000 and May 2002 and 8 3/4% Senior
CONSOLIDATING Secured Notes in November 2003. These notes are
FINANCIAL guaranteed by all domestic subsidiaries of Tekni-Plex.
STATEMENTS The guarantor subsidiaries are 100% owned by the issuer.
The guaranties 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").
F-44
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Statement of Operations - For the year ended July 2,
2004
Non-
Issuer Guarantors Guarantors TOTAL
---------- ---------- ---------- ----------
Sales, net $ 147,923 $ 397,674 $ 90,045 $ 635,642
Cost of sales 109,294 350,831 67,521 527,646
---------- ---------- ---------- ----------
Gross profit 38,629 46,843 22,524 107,996
Selling, general and
administrative 36,056 24,552 8,551 69,159
Integration expense 1,717 6,058 -- 7,775
---------- ---------- ---------- ----------
Income from operations 856 16,233 13,973 31,062
Interest expense, net 84,363 (36) 124 84,451
Unrealized loss (gain)
on derivative contract (10,654) -- -- (10,654)
Other expense (income) (847) (1,734) 3,186 605
---------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes (72,006) 18,003 10,663 (43,340)
Provision for income
taxes 6,417 1,605 3,099 11,121
---------- ---------- ---------- ----------
Net income (loss) $ (78,423) $ 16,398 $ 7,564 $ (54,461)
========== ========== ========== ==========
F-45
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - at July 2, 2004
Non-
Issuer Guarantors Guarantors Eliminations TOTAL
------------ ------------ ------------ ------------ ------------
CURRENT ASSETS $ 38,357 $ 218,542 $ 71,107 $ - $ 328,006
Property, plant and
equipment, net 43,178 113,335 26,236 - 182,749
Intangible assets (19,936) 216,404 10,810 - 207,278
Investment in
subsidiaries 560,638 - - (560,638) -
Deferred financing
costs, net 9,536 116 - - 9,652
Deferred taxes 30,032 (9,205) (2,034) - 18,793
Other long-term
assets 339,165 257,456 (456) (594,961) 1,204
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 1,000,970 $ 796,648 $ 105,663 $ (1,155,599) $ 747,682
============ ============ ============ ============ ============
CURRENT LIABILITIES 26,277 47,577 24,276 - 98,130
Long-term debt 727,577 - 4,309 - 731,886
Other long-term
liabilities 343,537 247,947 22,178 (594,961) 18,701
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES 1,097,391 295,524 50,763 (594,961) 848,717
------------ ------------ ------------ ------------ ------------
Additional paid-in capital 210,499 296,783 16,765 (313,529) 210,518
Retained earnings
(accumulated deficit) (85,030) 211,569 35,540 (247,109) (85,030)
Accumulated other
comprehensive
loss (1,367) (7,228) 2,595 - (6,000)
Treasury stock (220,523) - - - (220,523)
------------ ------------ ------------ ------------ ------------
TOTAL
STOCKHOLDERS'
DEFICIT (96,421) 501,124 54,900 (560,638) (101,035)
------------ ------------ ------------ ------------ ------------
TOTAL
LIABILITIES
AND
STOCKHOLDERS'
DEFICIT $ 1,000,970 $ 796,648 $ 105,663 $ (1,155,599) $ 747,682
============ ============ ============ ============ ============
F-46
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Cash Flows - For the year ended July 2, 2004
Non-
Issuer Guarantors Guarantors TOTAL
---------- ---------- ---------- ----------
Net cash provided by (used
in) operating activities: $ (13,327) $ (942) $ 6,905 $ (7,364)
---------- ---------- ---------- ----------
Cash flows from investing
activities:
Acquisitions - (5,780) - (5,780)
Capital expenditures (7,459) (16,851) (5,162) (29,472)
Cash proceeds on sale of
assets - 1,222 124 1,346
Additions to intangibles
(220) - - (220)
---------- ---------- ---------- ----------
Net cash used in investing
activities (7,679) (21,409) (5,038) (34,126)
---------- ---------- ---------- ----------
Cash flows from financing
activities:
Net borrowings (repayment)
under line of credit (15,000) - - (15,000)
Proceeds from long-term
debt 267,438 - - 267,438
Repayment of long-term debt (248,511) - (147) (248,658)
Proceeds from capital
contribution 22,500 - - 22,500
Debt financing (2,767) - - (2,767)
Change in intercompany
accounts (11,664) 11,624 40 -
---------- ---------- ---------- ----------
Net cash provided by (used
in) financing activities 11,996 11,624 (107) 23,513
---------- ---------- ---------- ----------
Effect of exchange rate
changes on cash - - (350) (350)
---------- ---------- ---------- ----------
Net increase (decrease) in
cash (9,010) (10,727) 1,410 (18,327)
Cash, beginning of year 20,900 19,650 7,512 48,062
---------- ---------- ---------- ----------
Cash, end of year $ 11,890 $ 8,923 $ 8,922 $ 29,735
========== ========== ========== ==========
F-47
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Statement of Operations - For the year ended June 27,
2003
Non-
Issuer Guarantors Guarantors TOTAL
---------- ---------- ---------- ----------
Sales, net $ 149,202 $ 382,354 $ 79,107 $ 610,663
Cost of sales 104,251 296,519 58,701 459,471
---------- ---------- ---------- ----------
Gross profit 44,951 85,835 20,406 151,192
Selling, general and
administrative 28,709 25,835 7,056 61,600
Integration expense - 11,164 - 11,164
---------- ---------- ---------- ----------
Income from operations 16,242 48,836 13,350 78,428
Interest expense, net 71,168 (61) 159 71,266
Unrealized loss on
derivative contract 1,997 - - 1,997
Other expense (income) (825) (1,851) 2,145 (531)
---------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes (56,098) 50,748 11,046 5,696
Provision (benefit) for
income taxes (22,439) 20,330 4,415 2,306
---------- ---------- ---------- ----------
Net income (loss) $ (33,659) $ 30,418 $ 6,631 $ 3,390
========== ========== ========== ==========
F-48
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - at June 27, 2003
Non-
Issuer Guarantors Guarantor Eliminations TOTAL
---------- ---------- ---------- ------------ --------
CURRENT ASSETS $ 56,727 $241,910 $ 61,151 $ - $359,788
Property, plant and
equipment, net 42,411 111,880 25,230 - 179,521
Intangible assets 8,713 192,049 12,390 - 213,152
Investment in
subsidiaries 535,567 - - (535,567) -
Deferred financing
costs, net 11,735 116 - - 11,851
Deferred taxes 21,204 64 (2,096) - 19,172
Other long-term
assets 81,667 279,227 (647) (358,967) 1,280
---------- -------- ---------- ---------- --------
TOTAL ASSETS $ 758,024 825,246 $ 96,028 $ (894,534) $784,764
========== ======== ========== ========== ========
CURRENT LIABILITIES $ 46,758 $ 43,487 $ 19,878 $ - $110,123
Long-term debt 708,115 - 4,660 - 712,775
Other long-term
liabilities 67,886 292,499 25,259 (358,967) 26,677
---------- -------- ---------- ---------- --------
TOTAL LIABILITIES 822,759 335,986 49,797 (358,967) 849,575
---------- -------- ---------- ---------- --------
Additional paid-in
capital 187,999 296,783 15,656 (312,420) 188,018
Retained earnings
(accumulated
deficit) (30,569) 195,171 27,976 (223,147) (30,569)
Accumulated other
comprehensive
loss (1,642) (2,694) 2,599 - (1,737)
Treasury stock (220,523) - - - (220,523)
---------- -------- ---------- ---------- --------
TOTAL STOCKHOLDERS'
DEFICIT (64,735) 489,260 46,231 (535,567) (64,811)
---------- -------- ---------- ---------- --------
TOTAL LIABILITIES
AND
STOCKHOLDERS'
DEFICIT $ 758,024 $825,246 $ 96,028 $ (894,534) $784,764
========== ======== ========== ========== ========
F-49
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Cash Flows - For the year ended June 27, 2003
Non-
Issuer Guarantors Guarantors TOTAL
------ ---------- ---------- -----
Net cash provided by (used in) operating activities: $(33,777) $42,558 $6,248 $15,029
-------- ------- ------ -------
Cash flows from investing activities:
Acquisitions - (16,762) - (16,762)
Capital expenditures (11,726) (15,865) (4,641) (32,232)
Additions to intangibles (149) - (851) (1,000)
-------- ------- ------ -------
Net cash used in investing activities (11,875) (32,627) (5,492) (49,994)
-------- ------- ------ -------
Cash flows from financing activities:
Net borrowings (repayment) under line of credit 45,000 - - 45,000
Proceeds from long-term debt - - 1,116 1,116
Repayment of long-term debt (9,330) - (425) (9,755)
Proceeds from capital contribution 17,842 - - 17,842
Change in intercompany accounts 4,229 (941) (3,288) -
-------- ------- ------ -------
Net cash provided by financing activities 57,741 (941) (2,597) 54,203
-------- ------- ------ -------
Effect of exchange rate changes on cash - - 625 625
-------- ------- ------ -------
Net increase (decrease) in cash 12,089 8,990 (1,216) 19,863
Cash, beginning of period 9,035 10,660 8,504 28,199
-------- ------- ------ -------
Cash, end of period $21,124 $19,650 $ 7,288 $48,062
======= ======= ======= =======
F-50
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Statement of Operations - For the year ended June 28,
2002
Non-
Issuer Guarantors Guarantors TOTAL
------ ---------- ---------- -----
Sales, net $ 160,252 $ 356,621 $ 60,876 $ 577,749
Cost of sales 116,130 270,380 43,947 430,457
--------- --------- -------- ---------
Gross profit 44,122 86,241 16,929 147,292
Selling, general and administrative 39,610 23,464 6,370 69,444
--------- --------- -------- ---------
Income from operations 4,512 62,777 10,559 77,848
Interest expense, net 70,881 (101) 154 70,934
Unrealized loss on derivative contract 7,830 - - 7,830
Other expense (income) (756) (1,155) 1,905 (6)
--------- --------- -------- ---------
Income (loss) before provision for income taxes (73,443) 64,033 8,500 (910)
Provision (benefit) for income taxes (25,979) 28,597 3,059 5,677
--------- --------- -------- ---------
Net income (loss) $ (47,464) $ 35,436 $ 5,441 $ (6,587)
========= ========= ======== =========
F-51
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PERCENTAGES AND SHARE AMOUNTS)
Condensed Consolidating Cash Flows - For the year ended June 28, 2002
Non-
Issuer Guarantors Guarantors TOTAL
------ ---------- ---------- -----
Net cash provided by (used in) operating activities: $(31,450) $ 35,167 $ 4,205 $ 7,922
-------- -------- -------- --------
Cash flows from investing activities:
Acquisitions - (63,624) - (63,624)
Capital expenditures (11,147) (11,421) (2,085) (24,653)
Additions to intangibles (169) - - (169)
-------- -------- -------- --------
Net cash used in investing activities (11,316) (75,045) (2,085) (88,446)
-------- -------- -------- --------
Cash flows from financing activities:
Net borrowings (repayment) under line of credit (19,000) - - (19,000)
Proceeds from long-term debt 40,600 - 147 40,747
Repayment of long-term debt (7,440) - - (7,440)
Proceeds from capital contribution 50,000 - - 50,000
Deferred financing costs (154) - - (154)
Purchase of Treasury Stock (61) - - (61)
Change in intercompany accounts (45,034) 45,217 (183) -
-------- -------- -------- --------
Net cash provided by financing activities 18,911 45,217 (36) 64,092
-------- -------- -------- --------
Effect of exchange rate changes on cash - - (14) (14)
-------- -------- -------- --------
Net increase (decrease) in cash (23,855) 5,339 2,070 (16,446)
Cash, beginning of year 32,890 5,321 6,434 44,645
-------- -------- -------- --------
Cash, end of year $ 9,035 $ 10,660 $ 8,504 $ 28,199
======== ======== ======== ========
F-52
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second
Quarter Quarter Third Quarter Fourth Quarter
------- ------- ------------- --------------
2004
Net sales $ 136,058 $122,712 $ 169,133 $ 207,739
Gross profit 29,828 29,030 44,456 4,682
Income (loss) from operations 13,286 13,506 25,590 (21,320)
Net income (loss) (1,141) (5,512) 3,226 (51,034)(1)
2003
Net sales $ 140,583 $118,584 $ 166,091 $ 185,405
Gross profit 29,892 31,370 44,125 45,805
Income from operations 15,981 14,897 23,199 24,351
Net income (loss) (4,768) 279 4,352 3,527
========= ======== ========== ==========
Fluctuations in net sales are due primarily to seasonality in
a number of product lines, particularly garden hose and
irrigation hose products. Income from operations in the fourth
quarter was adversely impacted by rapidly rising raw material
costs, particularly at our garden hose operations where we
could not pass these increased costs through to our customers.
As a result, we recorded a $4.6 million write-off of garden
hose inventory to reflect market values that were below cost
at year-end. In addition, the Company increased its reserve on
deferred taxes by approximately $15,000 to reserve for
deferred taxes generated by 4th quarter losses of 2004.
(1) The fourth quarter of 2004 includes certain fourth quarter
adjustments including the following;
(a) a $10.0 million impairment of goodwill
associated with our other operations; and
(b) a change in our estimates of our sales allowances
that increased our allowances
by $8.0 million;
(c) a $7.0 million reduction in our deferred tax
asset.
F-53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON SUPPLEMENTAL SCHEDULE
Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
The audits referred to in our report dated October 3, 2004 relating to the
consolidated financial statements of Tekni-Plex, Inc. and its subsidiaries (the
"Company"), included the audits of the financial statement schedule for the
years ended July 2, 2004, June 27, 2003, and June 28, 2002 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.
/s/ BDO Seidman, LLP
Woodbridge, New Jersey
October 3, 2004
F-54
TEKNI-PLEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
Charged to
Balance at Costs and BALANCE AT END
Beginning of Period Expenses (1) Deductions (2) OF PERIOD(3)
--------------------- ------------ -------------- --------------
YEAR ENDED JUNE 28, 2002
Accounts receivable allowance for possible
losses $1,500 $ 484 $313 $1,671
====== ====== ==== ======
YEAR ENDED JUNE 27, 2003
Accounts receivable allowance for possible
losses $1,671 $2,350 $223 $3,798
====== ====== ==== ======
YEAR ENDED JULY 2, 2004
Accounts receivable allowance for possible
losses $3,798 $2,316 $786 $5,328
====== ====== ==== ======
(1) To increase accounts receivable allowance.
(2) Uncollectible accounts written off, net of recoveries.
(3) Amounts do not include certain accounts receivable reserves that are
disclosed as "allowances" on the Consolidated Balance Sheets since they
are not valuation reserves.
F-55