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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 333-28157
TEKNI-PLEX, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3286312
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
260 North Denton Tap Road (972) 304-5077
Coppell, TX 75019 (Registrant's telephone number)
(Address of principal executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
1st Quarter 10Q 2005
TEKNI-PLEX, INC.
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of October 1, 2004 and July 2, 2004... 3
Consolidated Statements of Operations for the three months ended
October 1, 2004 and September 26, 2003............................. 4
Consolidated Statements of Comprehensive Net Income (Loss) for the
three months ended October 1, 2004 and September 26, 2003.......... 4
Consolidated Statements of Cash Flows for the three months ended
October 1, 2004 and September 26, 2003............................. 5
Notes to Consolidated Financial Statements........................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 14
ITEM 4. CONTROLS AND PROCEDURES.............................................. 14
PART II. OTHER INFORMATION
Item 1. Legal proceedings.................................................... 15
Item 2. Changes in securities................................................ 15
Item 3. Defaults upon senior securities...................................... 15
Item 4. Submission of matters to a vote of securities holders................ 15
Item 5. Subsequent events.................................................... 15
Item 6. Exhibits............................................................. 15
2
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
OCTOBER 1, JULY 2,
2004 2004
(UNAUDITED) AUDITED
---------- ----------
ASSETS
CURRENT:
Cash $ 39,024 $ 29,735
Accounts receivable, net of allowance for doubtful accounts of $8,730 and
$8,408 respectively 90,173 138,109
Inventories 175,857 153,807
Prepaid expenses and other current assets 8,007 6,355
---------- ----------
TOTAL CURRENT ASSETS 313,061 328,006
PROPERTY, PLANT AND EQUIPMENT, NET 183,400 182,749
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION
OF $81,040 AND $80,550 RESPECTIVELY INCLUDING GOODWILL OF $198,532 205,720 207,278
DEFERRED CHARGES, NET OF ACCUMULATED
AMORTIZATION OF $9,634 AND $9,122 RESPECTIVELY 9,640 9,652
DEFERRED INCOME TAXES 18,951 18,793
OTHER ASSETS 1,166 1,204
---------- ----------
$ 731,938 $ 747,682
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,960 $ 2,121
Accounts payable - trade 33,984 54,312
Accrued payroll and benefits 12,416 10,945
Accrued interest 23,104 6,763
Accrued liabilities - other 18,750 22,136
Income taxes payable 2,982 1,853
---------- ----------
TOTAL CURRENT LIABILITIES 93,196 98,130
LONG-TERM DEBT 731,819 731,886
OTHER LIABILITIES 15,243 18,701
---------- ----------
TOTAL LIABILITIES 840,258 848,717
---------- ----------
STOCKHOLDERS' DEFICIT:
Common stock -- --
Additional paid-in capital 210,518 210,518
Accumulated other comprehensive income (4,361) (6,000)
Retained deficit (93,954) (85,030)
Less: Treasury stock (220,523) (220,523)
---------- ----------
TOTAL STOCKHOLDERS' DEFICIT (108,320) (101,035)
---------- ----------
$ 731,938 $ 747,682
========== ==========
See accompanying notes to consolidated financial statements.
3
TEKNI-PLEX, INC. AND SUBSIDIARIES
(in thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
OCTOBER 1, 2004 SEPTEMBER 26, 2003
---------------- ------------------
NET SALES $ 143,461 $ 136,058
COST OF GOODS SOLD 114,086 106,230
---------------- ----------------
GROSS PROFIT 29,375 29,828
OPERATING EXPENSES:
Selling, general and administrative 15,843 15,365
Integration expense 2,603 1,174
---------------- ----------------
OPERATING PROFIT 10,929 13,289
OTHER EXPENSES
Interest expense, net 21,803 17,526
Unrealized (gain) loss on derivative contracts (3,176) (2,454)
Other expense 362 118
---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (8,060) (1,901)
Provision (benefit)for income tax 864 (760)
---------------- ----------------
NET (LOSS) $ (8,924) $ (1,141)
================ ================
THREE MONTHS ENDED
OCTOBER 1, 2004 SEPTEMBER 26, 2003
---------------- ------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE NET INCOME (LOSS) $ (8,924) $ (1,141)
COMPREHENSIVE (LOSS), NET OF TAXES
Foreign currency translation adjustment 1,639 (126)
---------------- ----------------
COMPREHENSIVE (LOSS) $ (7,285) $ (1,267)
================ ================
See accompanying notes to consolidated financial statements.
4
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
THREE MONTHS ENDED
OCTOBER 1, SEPTEMBER 26,
2004 2003
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (8,924) $ (1,141)
Adjustment to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 7,578 7,079
Unrealized (gain) loss on derivative contracts (3,176) (2,454)
Deferred income taxes (145) (556)
Changes in operating assets and liabilities:
Accounts receivable 48,701 43,609
Inventories (21,706) (10,197)
Prepaid expenses and other current assets (935) (416)
Income taxes 1,129 (6,034)
Accounts payable-trade (20,099) (23,729)
Accrued interest 16,344 9,926
Accrued expenses and other liabilities (2,174) 3,828
------------ ------------
Net cash provided by operating activities 16,593 19,915
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,918) (7,841)
Acquisition costs (39) --
Additions to intangibles (240) (297)
Deposits and other assets 38 (4)
------------ ------------
Net cash (used in) investing activities (6,159) (8,142)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments/borrowings of long-term debt (467) (3,224)
Debt financing costs (500) --
------------ ------------
Net cash (used in) financing activities (967) (3,224)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (178) (17)
------------ ------------
Net increase in cash 9,289 8,532
Cash, beginning of period 29,735 48,062
------------ ------------
Cash, end of period $ 39,024 $ 56,594
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 5,040 $ 7,142
Income taxes 19 141
See accompanying notes to consolidated financial statements.
5
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 1 - GENERAL
Nature of Business
Tekni-Plex, Inc. and its subsidiaries ("Tekni-Plex" or the "Company") is a
global, diversified manufacturer of packaging, packaging products, and
materials as well as tubing products. The Company primarily serves the
food, healthcare and consumer markets. The Company has built a leadership
position in its core markets, and focuses on vertically integrated
production of highly specialized products. The Company's operations are
aligned under two primary business groups: Packaging and Tubing Products.
The results for the first quarter of fiscal 2005 are not necessarily
indicative of the results to be expected for the full fiscal year and have
not been audited. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting
primarily of normal recurring accruals, necessary for a fair statement of
the results of operations for the periods presented and the consolidated
balance sheet at October 1, 2004. Certain information and footnote
disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the SEC rules and regulations. These
financial statements should be read in conjunction with the financial
statements and notes thereto that were included in the Company's latest
annual report on Form 10-K for the fiscal year ended July 2, 2004.
NOTE 2 Stock Based Compensation
The Company applies the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure," which allows the
Company to apply APB Opinion 25 and related interpretations in accounting
for its stock options and present pro forma effects of the fair value of
such options. Had compensation cost been determined based on the fair
value at the grant dates for these awards consistent with the method of
SFAS No. 123, the Company's income (loss) would have been reduced
(increased) to the pro forma amounts indicated below. The calculations
were based on a risk yield of zero, and expected lives of 8 years.
THREE MONTHS ENDED
---------------------------
OCTOBER 1, SEPTEMBER 26
2004 2003
------------ ------------
Net (loss)
As reported $ (8,924) $ (1,141)
Adjustments for
Fair value of
Stock options,
Net of tax (3) (22)
------------ ------------
Pro forma $ (8,927) $ (1,163)
6
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 3 - INVENTORIES
Inventories as of October 1, 2004 and July 2, 2004 are summarized as follows:
OCTOBER 1, 2004 JULY 2, 2004
---------------- ----------------
Raw materials $ 60,184 $ 58,881
Work-in-process 14,679 12,668
Finished goods 100,994 82,258
---------------- ----------------
$ 175,857 $ 153,807
---------------- ----------------
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
OCTOBER 1, 2004 JULY 2, 2004
---------------- ----------------
Senior Subordinated Notes issued June 21, 2000 at 12-3/4%
due June 15, 2010. (less unamortized discount of $2,166
and $2,260) $ 272,834 $ 272,740
Senior Subordinated Notes issued May 2002 at 12-3/4% due
June 15, 2010 (plus unamortized premium of $418 and $437) 40,418 40,437
Senior Debt:
Senior Secured Notes issued November 21, 2003 at 8-3/4% due
November 15, 2013 (less unamortized discount of $6,932 and
(7,121) 268,068 267,879
Revolving line of credit, expiring June, 2006. At
October 1, 2004, the interest rates were 5.84% and 5.79% and at
July 2, 2004 the interest rates ranged from 4.80% to 6.50% 76,000 76,000
Term notes due June, 2008, with interest
rates at October 1, 2004 and July 2, 2004 of 6.08% and 5.60% 71,077 71,263
Other, primarily foreign term loans, with interest rates
ranging from 4.44% to 5.44% and maturities from 2004 to 2010 5,382 5,688
---------------- ----------------
733,779 734,007
Less: Current maturities 1,960 2,121
---------------- ----------------
$ 731,819 $ 731,886
================ ================
NOTE 5 - CONTINGENCIES
The Company is a party to various legal proceedings arising in the normal
conduct of business. Management believes that the final outcome of these
proceedings will not have a material adverse effect on the Company's financial
position.
7
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 6 - SEGMENT INFORMATION
Tekni-Plex management reviews its operating plants to evaluate performance and
allocate resources. As a result, Tekni-Plex has aggregated its operating plants
into two industry segments: Packaging and Tubing Products. The Packaging segment
principally produces foam egg cartons, pharmaceutical blister films, poultry and
meat processor trays, closure liners, aerosol and pump packaging components and
foam plates. The Tubing Products segment principally produces garden and
irrigation hose, medical tubing and pool hose. Products that do not fit in
either of these segments, including recycled PET, vinyl compounds and specialty
resins have been reflected in Other. The Packaging and Tubing Products segments
have operations in the United States, Europe and Canada. Other products not
included in either segment are produced in the United States. Financial
information concerning the Company's business segments and the geographic areas
in which it operates are as follows:
TUBING
PACKAGING PRODUCTS OTHER TOTAL
------------ ------------ ------------ ------------
Three Months Ended October 1, 2004
Revenues from external customers $ 81,762 $ 31,036 $ 30,663 $ 143,461
Interest expense 6,951 10,231 4,621 21,803
Depreciation and amortization 3,657 2,073 1,592 7,322
Segment income from operations 13,602 2,413 364 16,379
Expenditures for segment assets 3,342 1,103 1,244 5,689
Segment assets as of
October 1, 2004 $ 287,499 $ 294,443 $ 139,306 $ 721,248
------------ ------------ ------------ ------------
Three Months Ended
September 26, 2003
Revenues from external customers $ 68,659 $ 39,393 $ 28,006 $ 136,058
Interest expense 5,583 8,216 3,727 17,526
Depreciation and amortization 3,388 1,954 1,481 6,823
Segment income from operations 10,029 8,282 68 18,379
Expenditures for segment assets 4,817 333 2,459 7,609
Segment assets as of July 2, 2004 $ 271,432 $ 326,882 $ 138,705 $ 737,019
------------ ------------ ------------ ------------
8
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
THREE MONTHS ENDED
OCTOBER 1, 2004 SEPTEMBER 26, 2003
---------------- ------------------
OPERATING PROFIT OR LOSS
Total operating profit for reportable segments
before income taxes $ 16,379 $ 18,379
Corporate and eliminations (5,450) (5,090)
---------------- ----------------
$ 10,929 $ 13,289
================ ================
DEPRECIATION AND AMORTIZATION
Segment totals $ 7,322 $ 6,823
Corporate 256 256
---------------- ----------------
Consolidated total $ 7,578 $ 7,079
================ ================
EXPENDITURES FOR SEGMENT ASSETS
Total expenditures from reportable segments $ 5,689 $ 7,609
Other unallocated expenditures 229 232
---------------- ----------------
Consolidated total $ 5,918 $ 7,841
================ ================
OCTOBER 1, 2004 JULY 2, 2004
---------------- ----------------
ASSETS
Total assets from reportable segments $ 721,248 $ 737,019
Other unallocated amounts 10,690 10,663
---------------- ----------------
Consolidated total $ 731,938 $ 747,682
================ ================
GEOGRAPHIC INFORMATION
THREE MONTHS ENDED
OCTOBER 1, 2004 SEPTEMBER 26, 2003
---------------- ------------------
REVENUES
United States $ 122,110 $ 118,174
International 21,351 17,884
---------------- ----------------
Total $ 143,461 $ 136,058
================ ================
OCTOBER 1, 2004 JULY 2, 2004
---------------- ----------------
LONG-LIVED ASSETS
United States $ 384,214 $ 385,120
International 34,663 34,556
---------------- ----------------
Total $ 418,877 $ 419,676
================ ================
9
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 7 - SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Tekni-Plex, Inc. issued 12 3/4% Senior Subordinated Notes in June 2000 and
May 2002 and 8 3/4% Senior Secured Notes in November 2003. These notes are
guaranteed by all domestic subsidiaries of Tekni-Plex. The guarantor
subsidiaries are 100% owned by the issuer. The guarantees are full and
unconditional and joint and several. There are no restrictions on the transfer
of funds from guarantor subsidiaries to the issuer. The following condensed
consolidating financial statements present separate information for Tekni-Plex
(the "Issuer") and its domestic subsidiaries (the "Guarantors") and the foreign
subsidiaries (the "Non-Guarantors"). The following condensed consolidation
financial statements do not have debt and interest expense allocated to
guarantors and non-guarantors.
Consolidated Statement of Operations
(in thousands)
(Unaudited)
For the three months ended October 1, 2004
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
------------ ------------ ------------ ------------
Net sales $ 143,461 $ 42,235 $ 79,875 $ 21,351
Cost of goods sold 114,086 30,908 67,165 16,013
------------ ------------ ------------ ------------
Gross profit 29,375 11,327 12,710 5,338
Operating expenses:
Selling, General and administrative 15,843 7,563 6,228 2,052
Integration expense 2,603 555 2,048 --
------------ ------------ ------------ ------------
Operating profit 10,929 3,209 4,434 3,286
Interest expense, net 21,803 21,783 (16) 36
Unrealized gain on derivative contracts (3,176) (3,176) -- --
Other expense 362 (235) (203) 800
------------ ------------ ------------
Income (loss) before income taxes
Provision (benefit) for income taxes (8,060) (15,163) 4,653 2,450
Net income (loss) 864 (1,600) 1,600 864
------------ ------------ ------------ ------------
$ (8,924) $ (13,563) $ 3,053 $ 1,586
============ ============ ============ ============
Consolidated Statement of Operations
(in thousands)
For the three months ended September 26, 2003
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
------------ ------------ ------------ ------------
Net sales $ 136,058 $ 33,648 $ 84,526 $ 17,884
Cost of sales 106,230 26,110 66,071 14,049
------------ ------------ ------------ ------------
Gross profit 29,828 7,538 18,455 3,835
Operating expenses:
Selling, General and administrative 15,365 6,692 6,905 1,768
Integration Expense 1,174 -- 1,174 --
------------ ------------ ------------ ------------
Operating profit 13,289 846 10,376 2,067
Interest expense, net 17,526 17,498 (16) 44
Unrealized loss on derivative contracts (2,454) (2,454) -- --
Other expense (income) 118 (194) (315) 627
------------ ------------ ------------ ------------
Income (loss) before provision (benefit)
for income taxes (1,901) (14,004) 10,707 1,396
Provision (benefit) for income taxes (760) (5,600) 4,289 551
------------ ------------ ------------ ------------
Net income(loss) $ (1,141) $ (8,404) $ 6,418 $ 845
============ ============ ============ ============
10
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Condensed Consolidated Balance Sheet - at October 1, 2004
NON-
TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS
---------------- ---------------- ---------------- ---------------- ----------------
Current assets $ 313,061 $ -- $ 45,268 $ 196,073 $ 71,720
Property, plant and
equipment, net 183,400 -- 43,818 113,831 25,751
Intangible assets 205,720 -- 15,190 179,799 10,731
Investment in subsidiaries -- (565,277) 565,277 -- --
Deferred income taxes 18,951 -- 30,032 (9,030) (2,051)
Deferred financing costs 9,640 -- 9,524 116 --
Other assets 1,166 (608,583) 331,724 277,793 232
---------------- ---------------- ---------------- ---------------- ----------------
Total assets $ 731,938 $ (1,173,860) $ 1,040,833 $ 758,582 $ 106,383
================ ================ ================ ================ ================
Current liabilities $ 93,196 $ -- $ 43,407 $ 28,059 $ 21,730
Long-term debt 731,819 -- 727,655 -- 4,164
Other long-term liabilities 15,243 (608,583) 375,116 226,361 22,349
---------------- ---------------- ---------------- ---------------- ----------------
Total liabilities 840,258 (608,583) 1,146,178 254,420 48,243
---------------- ---------------- ---------------- ---------------- ----------------
Additional paid-in capital 210,518 (313,529) 210,499 296,783 16,765
Retained earnings (deficit) (93,954) (251,748) (93,954) 214,622 37,126
Cumulative currency
translation adjustment (4,361) -- (1,367) (7,243) 4,249
Less: Treasury stock (220,523) -- (220,523) -- --
---------------- ---------------- ---------------- ---------------- ----------------
Total equity (108,320) (565,277) (105,345) 504,162 58,140
---------------- ---------------- ---------------- ---------------- ----------------
Total liabilities and deficit $ 731,938 $ (1,173,860) $ 1,040,833 $ 758,582 $ 106,383
================ ================ ================ ================ ================
Condensed Consolidated Balance Sheet - at July 2, 2004
NON-
TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS
---------------- ---------------- ---------------- ---------------- ----------------
Current assets $ 328,006 $ -- $ 38,357 $ 218,542 $ 71,107
Property, plant and
equipment, net 182,749 -- 43,178 113,335 26,236
Intangible assets 207,278 -- 16,471 179,997 10,810
Investment in subsidiaries -- (560,638) 560,638 -- --
Deferred financing costs, net 9,652 -- 9,536 116 --
Deferred taxes 18,793 -- 30,032 (9,205) (2,034)
Other long-term assets 1,204 (594,961) 339,165 257,456 (456)
---------------- ---------------- ---------------- ---------------- ----------------
Total assets $ 747,682 $ (1,155,599) $ 1,037,377 $ 760,241 $ 105,663
================ ================ ================ ================ ================
Current liabilities 98,130 -- 26,277 47,577 24,276
Long-term debt 731,886 -- 727,577 -- 4,309
Other long-term liabilities 18,701 (594,961) 379,944 211,540 22,178
---------------- ---------------- ---------------- ---------------- ----------------
Total liabilities 848,717 (594,961) 1,133,798 259,117 50,763
---------------- ---------------- ---------------- ---------------- ----------------
Additional paid-in capital 210,518 (313,529) 210,499 296,783 16,765
Retained earnings (deficit) (85,030) (247,109) (85,030) 211,569 35,540
Other comprehensive loss (6,000) -- (1,367) (7,228) 2,595
Less: Treasury stock (220,523) -- (220,523) -- --
---------------- ---------------- ---------------- ---------------- ----------------
Total Stockholders' deficit (101,035) (560,638) (96,421) 501,124 54,900
---------------- ---------------- ---------------- ---------------- ----------------
Total liabilities and deficit $ 747,682 $ (1,155,599) $ 1,037,377 $ 760,241 $ 105,663
================ ================ ================ ================ ================
11
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Condensed Consolidated Cash Flows
(Unaudited)
For the three months ended October 1, 2004
NON-
TOTAL ISSUER GUARANTOR GUARANTORS
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) operating activities $ 16,593 $ (7,130) $ 17,038 $ 6,685
---------------- ---------------- ---------------- ----------------
Cash flows from Investing activities:
Capital expenditures (5,918) (1,112) (4,552) (254)
Additions to intangibles (240) (92) -- (148)
Deposits and other assets 38 38 -- --
Acquisition costs (39) (39) -- --
---------------- ---------------- ---------------- ----------------
Net cash used in investing activities (6,159) (1,205) (4,552) (402)
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities
Borrowing / (Repayment) of long term debt (467) 78 -- (545)
Debt Financing costs (500) (500) -- --
Change in intercompany accounts -- 7,444 (17,278) 9,834
---------------- ---------------- ---------------- ----------------
Net cash flows provided by (used in) financing
activities (967) 7,022 (17,278) 9,289
Effect of exchange rate changes on cash (178) -- -- (178)
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash 9,289 (1,313) (4,792) 15,394
Cash, beginning of period 29,735 11,890 8,923 8,922
---------------- ---------------- ---------------- ----------------
Cash, end of period $ 39,024 $ 10,577 $ 4,131 $ 24,316
================ ================ ================ ================
For the three months ended September 26, 2003
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) operating activities $ 19,915 $ (13,771) $ 22,604 $ 11,082
---------------- ---------------- ---------------- ----------------
Cash flows from Investing activities:
Capital expenditures (7,841) (3,754) (3,367) (720)
Additions to intangibles (297) (50) (193) (54)
Deposits and other assets (4) (4) -- --
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) provided
by investing activities (8,142) (3,808) (3,560) (774)
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities
Repayment of long term debt (3,224) (3,034) -- (190)
Payment for treasury stock -- 33,086 (30,687) (2,399)
---------------- ---------------- ---------------- ----------------
Change in intercompany accounts
Net cash flows provided by (used in) (3,224) 30,052 (30,687) (2,589)
---------------- ---------------- ---------------- ----------------
financing activities (17) -- -- (17)
---------------- ---------------- ---------------- ----------------
Effect of exchange rate changes on cash 8,532 12,473 (11,643) 7,702
Net increase (decrease) in cash 48,062 20,900 19,650 7,512
---------------- ---------------- ---------------- ----------------
Cash, beginning of period $ 56,594 $ 33,373 $ 8,007 $ 15,214
================ ================ ================ ================
Cash, end of period
12
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 8 - ACQUISITIONS
In July 2002, the Company purchased certain assets and assumed certain
liabilities of ELM Packaging "ELM" for approximately $16,806. The acquisition
was recorded under the purchase method, whereby Elm's net assets were recorded
at estimated fair value and its operations have been reflected in the statement
of operations since that date.
In connection with the acquisition, a reserve of $4,500 has been established for
the costs to integrate ELM's operations with the company. The reserve is
included in accrued expenses. The components of the integration reserve and
activity through October 1, 2004.
BALANCE COSTS CHARGED TO BALANCE
JULY 2004 RESERVE OCTOBER 1, 2004
------------ ---------------- ---------------
Legal, environmental and other $ 1,161 $ 13 1,148
------------ ------------ ---------------
$ 1,161 $ 13 $ 1,148
============ ============ ===============
The remaining legal and environmental costs are expected to be paid over the
next four years.
In October 2001, the Company purchased certain assets and assumed certain
liabilities of Swan Hose for approximately $63,600. The acquisition was recorded
under the purchase method, whereby Swan's net assets were recorded at estimated
fair value and its operations have been reflected in the statement of operations
since that date. The components of the Integration reserve and activity through
October 1, 2004 is as follows:
BALANCE
BALANCE COSTS CHARGED OCTOBER 1,
JULY 2004 TO RESERVE 2004
------------ ------------- ---------------
Legal and environmental $ 1,281 $ 90 1,191
------------ ------------- ---------------
$ 1,281 $ 90 $ 1,191
============ ============= ===============
* $2,000 adjustment was recorded to beginning balance Integration reserve as an
adjustment to the original estimates prepared by the Company. Goodwill was
adjusted for the aforementioned amount. These adjustments were recorded during
the fiscal year ended June 27, 2003.
The remaining legal and environmental costs are expected to extend over the next
four years.
13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIRST QUARTER OF FISCAL 2005 COMPARED WITH THE FIRST QUARTER OF FISCAL 2004
Net sales increased by $7.4 million or 5.4% to $143.5 million for the three
months ended October 1, 2004 from $136.1 million for the three months ended
September 26, 2003. The increase in net sales was largely attributable to higher
selling prices and higher volumes for our packaging products, partially offset
by weaker volumes at our garden hose unit. Net sales for our Tubing Segment
decreased 21.2% to $31.0 million in the current period from $39.4 million in the
prior period due to weather related weak demand for garden hose in July and
August. Net sales for our Packaging Segment increased 19.1% to $81.8 million in
the current period from $68.7 million in the prior period due higher prices and
higher volumes. Other net sales increased 9.5% to $30.7 million in the current
period compared to $28.0 million last year, primarily due to higher volumes.
Cost of sales increased to $114.1 million for the three months ended October 1,
2004 from $106.2 million for the three months ended September 26, 2003.
Expressed as a percentage of net sales, cost of sales increased to 79.5% for the
three months ended October 1, 2004 from 78.1% for the three months ended
September 26, 2003 primarily due to our inability to pass through higher
material costs to our garden hose customers.
Gross profit, as a result, remained essentially flat at $29.4 million for the
three months ended October 1, 2004 from $29.8 million for the three months
ending September 26, 2003. Expressed as a percentage of net sales, gross profit
declined to 20.5% in the current period from 21.9% in the previous year. Our
Tubing Segment gross profit decreased to $5.7 million or 18.4% of net sales in
the first quarter of fiscal 2005 compared to $11.6 million or 29.6% in the first
quarter of the previous year largely due to our inability to pass through higher
raw material cost to our garden hose customers. Gross profit at our Packaging
Segment increased to $21.7 million in the most recent period from $16.6 million
in the comparable period of last year as we were successful in passing through
rising raw material costs to our packaging customers. In addition, our Packaging
Segment benefited from an improved product mix at our food packaging operations.
Measured as a percentage of net sales, Packaging gross profit improved to 26.6%
in fiscal 2005 from 24.1% in fiscal 2004. Other gross profit increased to $1.9
million in the current period from $1.6 million in the comparable period of the
previous year as we realized improvements at our recycling operations. Measured
as a percentage of net sales, Other gross profit increased to 6.3% in the first
quarter of fiscal 2005 compared to 5.7% in the same period of the previous year.
Selling, general and administrative expense increased slightly to $15.8 million
in the three months ended October 1, 2004 compared to $15.4 million in the three
months ended September 26, 2003. The ratio of selling, general and
administrative expense to net sales decreased to 11.0% for the three months
ending October 1, 2004 from 11.3% in the comparable period of last year.
Integration expense increased to $2.6 million in the current period from $1.2
million last year due to the inclusion of expenses associated with the closing
of our Rockaway, New Jersey facility and consolidating Rockaway's operations
into our Clayton, North Carolina and our Clinton, Illinois facilities as well as
the integration expenses associated with our recent acquisition of Genpak's egg
carton business.
Operating profit, as a result of the foregoing, decreased to $10.9 million or
7.6% of net sales for the three months ended October 1, 2004 from $13.3 million
or 9.8% of net sales for the three months ended September 26, 2003. Operating
profit for our Tubing Segment decreased to $2.4 million in the current period
from $8.3 million in the prior period. Measured as a percentage of net sales,
Tubing operating profit decreased to 7.8% in the current period from 21.0% in
the prior period due to weak garden hose sales and higher raw material costs
that we were unable to pass through to our garden hose customers. Despite a
rapid run-up in material costs, our operating Profit for our Packaging Segment
increased to $13.6 million in the current period from $10.0 million in the prior
period due higher volumes and higher selling prices as well as improved sales
mix. Measured as a percent of net sales, operating profit for our Packaging
Segment increased to 16.6% in the current period from 14.6% in the prior period.
Other operating profit increased slightly to $0.4 million in the current period
compared to $0.1 million in the previous year. Measured as a percentage of net
sales, Other Operating profit increased to 1.2% in the first quarter of fiscal
2005 compared to 0.2% in the same period of the previous year.
Interest expense increased to $21.8 million for the three months ended October
1, 2004 from $17.5 million in the three months ended September 26, 2003,
primarily due to higher interest rates. Measured as a percentage of net sales,
interest expense increased to 15.2% in the current period compared to 12.9% in
the previous period. The unrealized gain on derivative contracts increased to
$3.2 million in the current period as compared to $2.5 million for the three
months ended September 26, 2003.
Loss before income taxes, as a result, was a loss of $8.1 million for the three
months ended October 1, 2004 compared to a loss of $1.9 million for the three
months ended September 26, 2003.
Provision for income taxes was $0.9 million for the three months ended October
1, 2004, compared to a benefit of $0.8 million for the
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three months ended September 26, 2003, primarily attributable to reserving
losses generated in the three months ended October 1, 2004.
Net loss, as a result, was a loss of $8.9 million for the three months ended
October 1, 2004 compared with a loss of $1.1 million for the three months ended
September 26, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for the three months ended October 1, 2004 was
$16.6 million compared with $19.9 million in the same period of the prior year.
The $3.3 million decrease was due primarily to lower earnings as well as a
larger increase in inventories in fiscal 2005 compared to fiscal 2004,
particularly at our garden hose operations where we built seasonal inventories
early in the year in anticipation of rising raw material costs later in the
year.
Working capital on October 1, 2004 was $219.9 million compared to $229.9 million
on June 27, 2003. The $10.0 million decrease in working capital is largely
attributable to a normal seasonal decline in accounts receivable partially
offset by a normal seasonal increase in inventories as well as a decline in
accounts payable. This seasonal fluctuation also resulted in a $9.4 million
increase in cash.
As of October 1, 2004, the Company had an outstanding balance of $76.0 million
under the $100.0 million revolving credit line.
The Company's capital expenditures for the three months ended October 1, 2004
and September 26, 2003 were $5.9 million and $7.8 million respectively.
The Company continues to expect that its principal uses of cash for the next
several years will be debt service, capital expenditures and working capital
requirements. Management believes that cash generated from operations plus funds
available in the Company's credit facility will be sufficient to meet its needs
and to provide it with the flexibility to make capital expenditures and
acquisitions which management believes will provide an attractive return on
investment. However, the probability exists that the Company may need additional
financing to take advantage of all the acquisition opportunities that might
arise. There can be no assurance that such financing will be available in the
amounts and terms acceptable to the Company.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk inherent in certain debt instruments. At
October 1, 2004, the principal amount of the Company's aggregate outstanding
variable rate indebtedness was $147.1 million. A hypothetical 1% adverse change
in interest rates would have an annualized unfavorable impact of approximately
$0.9 million on the Company's after-tax earnings and cash flows, assuming the
Company's current effective tax rate and assuming no change in the principal
amount. Conversely, a reduction in interest rates would favorably impact the
Company's after-tax earnings and cash flows in a similar proportion. To mitigate
these risks, in June 2000, the Company entered into interest rate Swap and Cap
Agreements for a notional amount of $344.0 million.
ITEM 4. 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:
- Lack of quantity of staff which led to issues related to timeliness
of financial reporting and year end closing process.
- 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.
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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
October 1, 2004. Because of the foregoing material weakness identified by BDO
in conjunction with our annual audit for fiscal year ending July 2, 2004, the
Company's Chief Executive Officer and Chief Financial Officer determined that
the Company's disclosure controls and procedures are not effective. 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.
In the first quarter of fiscal 2005, 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 II. OTHER INFORMATION
Item 1. Legal Proceedings The Company is party to certain litigation in the
ordinary course of business, none of which the Company believes is
likely to have a material adverse effect on its consolidated financial
position or results of operations.
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote of Securities holders Not applicable
Item 5. Subsequent Events None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chairman and Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chairman and Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEKNI-PLEX, INC.
November 15, 2004
By: /s/ F. Patrick Smith
----------------------------------
F. Patrick Smith
Chairman of the Board and
Chief Executive Officer
By: /s/ James E.Condon
----------------------------------
James E.Condon
Vice President and Chief Financial
Officer
17