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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 April 1, 2005
[ ] 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 [ ]
Indicate by check mark whether the registrant is an a accelerated filer (as
defined in rule 126-2 of the exchange act) Yes [ ] No [X]
TEKNI-PLEX, INC.
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of April 1, 2005 and July 2, 2004 3
Consolidated Statements of Operations for the nine months and three months ended 4
April 1, 2005 and March 26, 2004
Consolidated Statements of Comprehensive Income (Loss) for the nine months and three 4
months ended April 1, 2005 and March 26, 2004
Consolidated Statements of Cash Flows for the nine months ended April 1, 2005 5
and March 26, 2004
Notes to Consolidated Financial Statements 6-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15-17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17-18
ITEM 4. CONTROLS AND PROCEDURES 18-19
PART II. OTHER INFORMATION 19
Item 1. Legal proceedings 19
Item 2. Changes in securities 19
Item 3. Defaults upon senior securities 19
Item 4. Submission of matters to a vote of securities holders 19
Item 5. Subsequent events 19
Item 6. Exhibits 19
2
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
APRIL 1, JULY 2,
2005 2004
(UNAUDITED) (AUDITED)
----------- ---------
ASSETS
CURRENT:
Cash $ 12,709 $ 29,735
Accounts receivable, net of allowances of $9,054 and $8,408 respectively 128,056 138,109
Inventories 188,218 153,807
Prepaid expenses and other current assets 9,246 6,355
----------- ---------
TOTAL CURRENT ASSETS 338,229 328,006
PROPERTY, PLANT AND EQUIPMENT, NET 179,042 182,749
GOODWILL 198,532 198,532
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $4,425 AND
$2,900 RESPECTIVELY 7,010 8,746
DEFERRED CHARGES, NET OF ACCUMULATED AMORTIZATION OF $10,781 AND
$9,122 RESPECTIVELY 9,056 9,652
DEFERRED INCOME TAXES 19,149 18,793
OTHER ASSETS 1,259 1,204
----------- ---------
$ 752,277 $ 747,682
=========== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,900 $ 2,121
Accounts payable - trade 52,006 54,312
Accrued payroll and benefits 13,398 10,945
Accrued interest 24,423 6,763
Accrued liabilities - other 22,968 22,136
Income taxes payable 3,105 1,853
----------- ---------
TOTAL CURRENT LIABILITIES 117,800 98,130
LONG-TERM DEBT 751,201 731,886
OTHER LIABILITIES 11,228 18,701
----------- ---------
TOTAL LIABILITIES 880,229 848,717
----------- ---------
Commitments and Contingencies
STOCKHOLDERS' DEFICIT:
Common stock -- --
Additional paid-in capital 210,518 210,518
Accumulated other comprehensive income (loss) (3,911) (6,000)
Retained earnings (deficit) (114,036) (85,030)
Treasury stock (220,523) (220,523)
----------- ---------
TOTAL STOCKHOLDERS' DEFICIT (127,952) (101,035)
----------- ---------
$ 752,277 $ 747,682
=========== =========
See accompanying notes to consolidated financial statements.
3
TEKNI-PLEX, INC. AND SUBSIDIARIES
(Unaudited -- in thousands)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
APRIL 1, MARCH 26, APRIL 1, MARCH 26,
2005 2004 2005 2004
----------- ----------- ----------- -----------
NET SALES $ 194,215 $ 169,133 $ 475,923 $ 427,903
COST OF SALES 165,994 124,677 392,305 324,589
----------- ----------- ----------- -----------
GROSS PROFIT 28,221 44,456 83,618 103,314
OPERATING EXPENSES:
Selling, general and administrative 15,499 16,399 45,542 46,198
Integration expense 2,008 2,467 6,830 4,731
----------- ----------- ----------- -----------
OPERATING PROFIT 10,714 25,590 31,246 52,385
OTHER (INCOME) EXPENSES:
Interest expense 23,896 20,896 66,053 62,222
Unrealized (gain) loss on derivative
contracts (3,078) (788) (7,262) (4,986)
Other (income) expenses (3,055) 136 (2,273) 856
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (7,049) 5,346 (25,272) (5,707)
PROVISION (BENEFIT) FOR INCOME TAXES 2,210 2,120 3,734 (2,280)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (9,259) $ 3,226 $ (29,006) $ (3,427)
============ =========== =========== ===========
CONSOLIDATED STATEMENTS OF OTHER
COMPREHENSIVE INCOME
NET INCOME (LOSS) $ (9,259) $ 3,226 $ (29,006) $ (3,427)
COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment (4,280) (4,062) 2,089 1,987
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (13,539) $ (836) $ (26,917) $ (1,440)
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
TEKNI-PLEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
NINE MONTHS ENDED
------------------------
APRIL 1, MARCH 26,
2005 2004
------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (29,006) $ (3,427)
Adjustment to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 22,975 24,322
Unrealized loss (gain) on derivative contracts (7,262) (4,986)
Deferred income taxes (348) (2,133)
Loss on sale of assets -- 169
Changes in operating assets and liabilities:
Accounts receivable 10,374 10,134
Inventories (33,926) (41,578)
Prepaid expenses and other current assets (1,577) 2,269
Income taxes 1,252 (6,056)
Accounts payable-trade (2,132) (18,526)
Accrued interest 17,669 16,408
Accrued expenses and other liabilities 3,258 2,407
------------ ---------
Net cash used in operating activities (18,723) (20,997)
------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,247) (22,718)
Acquisition costs (39) --
Additions to intangibles (1,097) (481)
Cash proceeds from sale of assets -- 1,354
Deposits and other assets (55) (208)
------------ ---------
Net cash used in investing activities (15,438) (22,053)
------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings/(repayments) of long-term debt 18,339 (261,292)
Proceeds from senior secured notes -- 267,438
Receipt of additional paid-in capital -- 10,500
Debt financing costs (1,063) (2,745)
------------ ---------
Net cash provided by financing activities 17,276 13,901
------------ ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (141) (491)
------------ ---------
Net decrease in cash (17,026) (29,640)
Cash, beginning of period 29,735 48,062
------------ ---------
Cash, end of period $ 12,709 $ 18,422
============ =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 47,030 $ 41,547
Income taxes 3,028 3,042
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 third quarter and first nine months 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 April 1, 2005. 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 NINE MONTHS ENDED
------------------- --------------------
APRIL 1 MARCH 26 APRIL 1 MARCH 26
2005 2004 2005 2004
-------- -------- --------- --------
Net income (loss) As reported $ (9,259) $ 3,226 $ (29,006) $ (3,427)
Adjustments for Fair value of Stock options, Net of tax (8) (22) (24) (67)
-------- -------- --------- --------
Pro forma $ (9,267) $ 3,204 $ (29,030) $ (3,494)
6
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
NOTE 3- INVENTORIES
Inventories as of April 1, 2005 and July 2, 2004 are summarized as follows:
APRIL 1, 2005 JULY 2, 2004
------------- ------------
Raw materials $ 65,436 $ 58,881
Work-in-process 15,820 12,668
Finished goods 106,962 82,258
------------- ------------
$ 188,218 $ 153,807
------------- ------------
NOTE 4- LONG-TERM DEBT
Long-term debt consists of the following:
APRIL 1, 2005 JULY 2, 2004
------------- ------------
Senior Subordinated Notes issued June 21, 2000 at 12-3/4% due June
15, 2010 (less unamortized discount of $1,977 and $2,260) $ 273,022 $ 272,740
Senior Subordinated Notes issued May 2002 at 12-3/4% due
June 15, 2010 (plus unamortized premium of $381 and $437) 40,381 40,437
Senior Debt:
Senior Secured Notes issued November 21, 2003 at 8-3/4% due
November 15, 2013 (less unamortized discount of $6,554 and $7,121) 268,446 267,879
Revolving line of credit, expiring June, 2006. At
April 1, 2005, the interest rates ranged from 6.86% to 8.75% 95,200 76,000
Term notes due June, 2006 and June, 2008, with an interest
rate at April 1, 2005 of 7.21% 70,706 71,263
Other, primarily foreign term loans, with interest rates
ranging from 4.44% to 5.44% and maturities from 2005 to 2010 5,346 5,688
------------- ------------
753,101 734,007
Less: Current maturities 1,900 2,121
------------- ------------
$ 751,201 $ 731,886
============= ============
Significant increases in raw material costs, combined with soft demand in our
garden hose business brought about by unfavorable weather conditions, have
negatively impacted our recent financial performance. As a result, we were not
in compliance with the minimum consolidated EBITDA and minimum fixed charge
coverage ratio covenants contained in our credit agreement for the fiscal
quarters ended December 31, 2004 and April 1, 2005. The lenders under our credit
agreement have waived compliance with these covenants until June 10, 2005, by
which time we are required to have raised $30.0 million of equity financing. In
addition, our liquidity position has been constrained, causing us to draw down
substantially all of our available revolving credit capacity.
On April 19, 2005, we received the consents required to amend the covenant in
the indenture for our senior subordinated notes which places limitations on
indebtedness. The terms of the consents allow us, among other things, to incur
incremental debt, not to exceed $90.0 million at any one time outstanding, in
ratio of 1.5:1.0 for every dollar of equity received after April 1, 2005. The
amendment to our senior subordinated note indenture will not become effective
until the Company receives $30.0 million in additional equity. In May, 2005, we
received commitments for $30.0 million in new equity contributions from existing
equity investors, $19.1 million of which has already been obtained by the
Company.
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, results of operations and cash flows.
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 April 1, 2005
Revenues from external customers $ 92,214 $ 64,214 $ 37,787 $ 194,215
Interest expense 7,624 11,223 5,049 23,896
Depreciation and amortization 3,635 2,155 1,676 7,466
Segment income (loss) from operations 14,488 258 (12) 14,734
Expenditures for segment capital assets 307 341 238 886
----------- ---------- ---------- -----------
Three Months Ended March 26, 2004
Revenues from external customers $ 78,414 $ 61,320 $ 29,399 $ 169,133
Interest expense 6,655 9,810 4,431 20,896
Depreciation and amortization 3,369 2,013 1,535 6,917
Segment income from operations 13,840 16,333 874 31,047
Expenditures for segment capital assets 3,826 1,816 1,842 7,484
----------- ---------- ---------- -----------
TUBING
PACKAGING PRODUCTS OTHER TOTAL
----------- ---------- ---------- -----------
Nine months ended April 1, 2005
Revenues from external customers $ 257,286 $ 120,572 $ 98,065 $ 475,923
Interest expense 21,051 31,005 13,997 66,053
Depreciation and Amortization 10,911 6,351 4,945 22,207
Segment income (loss) from operations 40,429 4,829 (521) 44,737
Expenditures for segment capital assets 8,460 2,170 3,231 13,861
----------- ---------- ---------- -----------
Nine months ended March 26, 2004
Revenues from external customers $ 219,075 $ 125,564 $ 83,264 $ 427,903
Interest expense 19,824 29,192 13,206 62,222
Depreciation and Amortization 11,145 7,289 5,120 23,554
Segment income from operations 36,082 30,863 765 67,710
Expenditures for segment capital assets 13,303 2,995 5,864 22,162
----------- ---------- ---------- -----------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
APRIL 1, MARCH 26, APRIL 1 MARCH 26
2005 2004 2005 2004
---------- ---------- ---------- ----------
PROFIT OR LOSS
Total operating profit for reportable
segments before income taxes $ 14,734 $ 31,047 $ 44,737 $ 67,710
Corporate and eliminations (4,020) (5,457) (13,491) (15,325)
---------- ---------- ---------- ----------
$ 10,714 $ 25,590 $ 31,246 $ 52,385
========== ========== ========== ==========
DEPRECIATION AND AMORTIZATION
Segment totals $ 7,466 $ 6,917 $ 22,207 $ 23,554
Corporate 256 256 768 768
---------- ---------- ---------- ----------
Consolidated total $ 7,722 $ 7,173 $ 22,975 $ 24,322
========== ========== ========== ==========
EXPENDITURES FOR SEGMENT CAPITAL ASSETS
Total reportable-segment expenditures $ 886 $ 7,484 $ 13,861 $ 22,162
Other unallocated expenditures 4 147 386 556
---------- ---------- ---------- ----------
Consolidated total $ 890 $ 7,631 $ 14,247 $ 22,718
========== ========== ========== ==========
8
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
SEGMENT ASSETS
TUBING
PACKAGING PRODUCTS OTHER TOTAL
------------ ---------- ----------- ----------
April 1, 2005 $ 283,278 $ 324,552 $ 135,937 $ 743,767
------------ ---------- ----------- -----------
July 2, 2004 271,432 326,882 138,705 737,019
------------ ---------- ----------- -----------
APRIL 1, 2005 JULY 2, 2004
------------- ------------
TOTAL ASSETS
Total assets from reportable segments $ 743,767 $ 737,019
Other unallocated amounts 8,510 10,663
------------- ------------
Consolidated total $ 752,277 $ 747,682
============= ============
GEOGRAPHIC INFORMATION
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
APRIL 1, MARCH 26, APRIL 1, MARCH 26,
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUES
United States $ 164,848 $ 143,917 $ 404,686 $ 367,680
International 29,367 25,216 71,237 60,223
----------- ----------- ----------- -----------
Total $ 194,215 $ 169,133 $ 475,923 $ 427,903
=========== =========== =========== ===========
APRIL 1, 2005 JULY 2, 2004
------------- ------------
LONG-LIVED ASSETS
United States $ 379,109 $ 385,120
International 34,939 34,556
------------- ------------
Total $ 414,048 $ 419,676
============= ============
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.
9
Consolidated Statement of Operations
(in thousands)
(Unaudited)
For the three months ended April 1, 2005
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ----------- ------------ -----------
Net sales $ 194,215 $ 48,613 $ 116,235 $ 29,367
Cost of goods sold 165,994 36,798 107,702 21,494
----------- ----------- ------------ -----------
Gross profit 28,221 11,815 8,533 7,873
Operating expenses:
Selling, General and administrative 15,499 6,405 6,439 2,655
Integration expense 2,008 610 1,398 --
----------- ----------- ------------ -----------
Operating profit 10,714 4,800 696 5,218
Interest expense (income), net 23,896 23,888 (10) 18
Unrealized gain on derivative contracts (3,078) (3,078) -- --
Other expense (income) (3,055) (3,286) (530) 761
----------- ----------- ------------ -----------
Income (loss) before income taxes (7,049) (12,724) 1,236 4,439
Provision (benefit) for income taxes 2,210 (400) 400 2,210
----------- ----------- ------------ -----------
Net income (loss) $ (9,259) $ (12,324) $ 836 $ 2,229
=========== =========== ============ ===========
Consolidated Statement of Operations
(in thousands)
For the nine months ended April 1, 2005
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ----------- ------------ ----------
Net sales $ 475,923 $ 135,574 $ 269,112 $ 71,237
Cost of sales 392,305 101,365 236,357 54,583
----------- ----------- ------------ ----------
Gross profit 83,618 34,209 32,755 16,654
Operating expenses:
Selling, General and administrative 45,542 20,086 18,497 6,959
Integration expense 6,830 1,776 5,054 --
----------- ----------- ------------ ----------
Operating profit 31,246 12,347 9,204 9,695
Interest expense, net 66,053 66,011 (43) 85
Unrealized loss on derivative contracts (7,262) (7,262) -- --
Other expense (income) (2,273) (3,745) (1,399) 2,871
----------- ----------- ------------ ----------
Income (loss) before income taxes (25,272) (42,657) 10,646 6,739
Provision (benefit) for income taxes 3,734 (3,700) 3,700 3,734
----------- ----------- ------------ ----------
Net income(loss) $ (29,006) $ (38,957) $ 6,946 $ 3,005
=========== =========== ============ ==========
10
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Consolidated Statement of Earnings
(in thousands)
(Unaudited)
For the three months ended March 26, 2004
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ----------- ----------- ----------
Net sales $ 169,133 $ 38,211 $ 105,706 $ 25,216
Cost of sales 124,677 27,247 79,159 18,271
----------- ----------- ----------- ----------
Gross profit 44,456 10,964 26,547 6,945
Operating expenses:
Selling, General and administrative 16,399 6,850 7,244 2,305
Integration expense 2,467 1,190 1,277 --
----------- ----------- ----------- ----------
Operating profit 25,590 2,924 18,026 4,640
Interest expense 20,896 20,874 (6) 28
Unrealized gain on derivative contracts (788) (788) -- --
Other expense (income) 136 308 (829) 657
----------- ----------- ----------- ----------
Income (loss) before income taxes 5,346 (17,470) 18,861 3,955
Provision (benefit) for income taxes 2,120 (6,820) 7,735 1,205
----------- ----------- ----------- ----------
Net income (loss) $ 3,226 $ (10,650) $ 11,126 $ 2,750
=========== =========== =========== ==========
For the nine months ended March 26, 2004
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
----------- ----------- ----------- ----------
Net sales $ 427,903 $ 108,084 $ 259,596 $ 60,223
Cost of sales 324,589 79,904 199,502 45,183
----------- ----------- ----------- ----------
Gross profit 103,314 28,180 60,094 15,040
Operating expenses:
Selling, General and administrative 46,198 20,581 19,552 6,065
Integration expense 4,731 1,190 3,541 --
----------- ----------- ----------- ----------
Operating profit 52,385 6,409 37,001 8,975
Interest expense 62,222 62,138 (30) 114
Unrealized loss on derivative contracts (4,986) (4,986) -- --
Other expense (income) 856 (438) (1,122) 2,416
----------- ----------- ----------- ----------
Income (loss) before income taxes (5,707) (50,305) 38,153 6,445
Provision (benefit) for income taxes (2,280) (20,100) 15,435 2,385
----------- ----------- ----------- ----------
Net income (loss) $ (3,427) $ (30,205) $ 22,718 $ 4,060
=========== =========== =========== ==========
11
TEKNI-PLEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Condensed Consolidated Balance Sheet - at April 1, 2005
NON-
TOTAL ELIMINATIONS ISSUER GUARANTORS GUARANTORS
---------- ------------ ----------- ---------- ----------
Current assets $ 338,229 $ -- $ 42,156 $ 234,230 $ 61,843
Property, plant and
equipment, net 179,042 -- 42,818 110,522 25,702
Intangible assets, net 205,542 -- 15,255 179,406 10,881
Investment in subsidiaries -- (570,589) 570,589 -- --
Deferred income taxes 19,149 -- 30,032 (9,033) (1,850)
Deferred charges, net 9,056 -- 8,940 116 --
Other assets 1,259 (592,288) 327,723 265,618 206
---------- ----------- ----------- ---------- ----------
Total assets $ 752,277 $ (1,162,877) $ 1,037,513 $ 780,859 $ 96,782
========== ============ =========== ========== ==========
Current liabilities $ 117,800 $ -- $ 46,997 $ 43,676 $ 27,127
Long-term debt 751,201 -- 747,013 -- 4,188
Other long-term liabilities 11,228 (592,288) 368,930 230,157 4,429
---------- ------------ ----------- ---------- ----------
Total liabilities 880,229 (592,288) 1,162,940 273,833 35,744
---------- ------------ ----------- ---------- ----------
Additional paid-in capital 210,518 (313,529) 210,499 296,783 16,765
Retained earnings (deficit) (114,036) (257,060) (114,036) 218,515 38,545
Other comprehensive income
(loss) (3,911) -- (1,367) (8,272) 5,728
Less: Treasury stock (220,523) -- (220,523) -- --
---------- ------------ ----------- ---------- ----------
Total stockholders' equity
(deficit) (127,952) (570,589) (125,427) 507,026 61,038
---------- ------------ ----------- ---------- ----------
Total liabilities and deficit $ 752,277 $ (1,162,877) $ 1,037,513 $ 780,859 $ 96,782
========== ============ =========== ========== ==========
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, net 207,278 -- 16,471 179,997 10,810
Investment in subsidiaries -- (560,638) 560,638 -- --
Deferred income taxes 9,652 -- 9,536 116 --
Deferred charges, net 18,793 -- 30,032 (9,205) (2,034)
Other 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 income
(loss) (6,000) -- (1,367) (7,228) 2,595
Less: Treasury stock (220,523) -- (220,523) -- --
---------- ------------ ----------- ---------- ----------
Total Stockholders' equity
(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
========== ============ =========== ========== ==========
12
TEKNI-PLEX, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Condensed Consolidated Cash Flows
(Unaudited)
For the nine months ended April 1, 2005
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities $ (18,723) $ (33,663) $ 6,634 $ 8,306
---------- ---------- ---------- ----------
Cash flows from Investing activities:
Capital expenditures (14,247) (1,533) (10,527) (2,187)
Acquisitions (39) (39) -- --
Additions to intangibles (1,097) (244) (44) (809)
Deposits and other assets (55) (55) -- --
---------- ---------- ---------- ----------
Net cash used in investing activities $ (15,438) $ (1,871) $ (10,571) $ (2,996)
---------- ---------- ---------- ----------
Cash flows from financing activities
(Repayments) borrowings of long term debt 18,339 18,643 -- (304)
Debt financing costs (1,063) (1,063) -- --
Change in intercompany accounts -- 11,442 (2,479) (8,963)
---------- ---------- ---------- ----------
Net cash flows provided by (used in) financing
activities 17,276 29,022 (2,479) (9,267)
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash (141) -- -- (141)
---------- ---------- ---------- ----------
Net increase (decrease) in cash (17,026) (6,512) (6,416) (4,098)
Cash, beginning of period 29,735 11,890 8,923 8,922
---------- ---------- ---------- ----------
Cash, end of period $ 12,709 $ 5,378 $ 2,507 $ 4,824
========== ========== ========== ==========
For the nine months ended March 26, 2004
NON-
TOTAL ISSUER GUARANTORS GUARANTORS
---------- ---------- ---------- ----------
Net cash provided by (used in) operating activities $ (20,997) $ (37,824) $ 3,692 $ 13,135
---------- ---------- ---------- ----------
Cash flows from Investing activities:
Capital expenditures (22,718) (7,981) (10,897) (3,840)
Cash proceeds from sale of assets 1,354 -- 1,230 124
Additions to intangibles (481) (164) 161 (478)
Deposits and other assets (208) 12 (22) (198)
---------- ---------- ---------- ----------
Net cash used in investing activities $ (22,053) $ (8,133) $ (9,528) $ (4,392)
---------- ---------- ---------- ----------
Cash flows from financing activities
(Repayment) borrowing of long term debt (261,292) (261,155) -- (137)
Proceeds from Senior secured notes 267,438 267,438 -- --
Receipt of additional paid-in capital 10,500 10,500 -- --
Debt financing costs (2,745) (2,745) -- --
Change in intercompany accounts -- 13,055 (11,792) (1,263)
---------- ---------- ---------- ----------
Net cash flows provided by (used in) financing
activities 13,901 27,093 (11,792) (1,400)
---------- ---------- ---------- ----------
Effect of exchange rate changes on cash (491) -- -- (491)
---------- ---------- ---------- ----------
Net increase (decrease) in cash (29,640) (18,864) (17,628) 6,852
Cash, beginning of period 48,062 20,900 19,650 7,512
---------- ---------- ---------- ----------
Cash, end of period $ 18,422 $ 2,036 $ 2,022 $ 14,364
========== ========== ========== ==========
13
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 from July 2, 2004 through April 1, 2005 are as follows:
BALANCE COSTS CHARGED BALANCE
JULY 2004 TO RESERVE APRIL 1, 2005
--------- ------------- -------------
Legal, environmental and other 1,161 16 1,145
--------- --------- ----------
$ 1,161 $ 16 $ 1,145
========= ========= ==========
The remaining legal, environmental and other costs are expected to be paid over
the next two years.
In October 2001, the Company purchased certain assets and assumed certain
liabilities of Swan Hose for approximately $63,600. The acquisition was recorded
under the purchase method, whereby Swan's net assets were recorded at estimated
fair value and its operations have been reflected in the statement of operations
since that date.
In connection with the acquisition, a reserve of $10,000 was established for the
costs to integrate Swan operations with the Company. The components of the
integration reserve and activity from July 2, 2004 through April 1, 2005 are as
follows:
BALANCE COSTS CHARGED BALANCE
JULY 2004 TO RESERVE APRIL 1, 2005
--------- ------------- -------------
Legal and environmental 1,281 262 1,019
--------- ---------- -----------
$ 1,281 $ 262 $ 1,019
========= ========== ===========
The remaining legal and environmental costs are expected to extend over the next
two years.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIRD QUARTER OF FISCAL 2005 COMPARED WITH THE THIRD QUARTER OF FISCAL 2004
Net sales increased to $194.2 million for the three months ended April 1, 2005
from $169.1 million for the three months ended March 26, 2004, representing a
14.8% gain. Net sales in our Packaging Segment grew 17.6% to $92.2 million in
the most recent period from $78.4 million in the comparable period of 2004
primarily due to higher selling prices. Net sales in our Tubing Products Segment
increased 4.7% to $64.2 million in the third quarter of fiscal 2005 from $61.3
million in the comparable quarter of fiscal 2004 primarily due to an increase in
garden hose prices that generally went into effect in January 2005. Other net
sales grew 28.5% to $37.8 million in fiscal 2005 compared to $29.4 million in
the previous year due to both higher selling prices and higher volumes.
Cost of Sales increased to $166.0 million for the three months ended April 1,
2005 from $124.7 million for the three months ended March 26, 2004. Expressed as
a percentage of net sales, cost of sales increased to 85.5% in the current
period compared to 73.7% in the prior period, primarily due to higher raw
material costs.
Gross Profit, as a result of the above, decreased to $28.2 million in the
current period compared to $44.5 million in the prior period. Expressed as a
percentage of net sales, gross profit declined to 14.5% for the three months
ended April 1, 2005 from 26.3% in the comparable period of last year.
Our Packaging Segment gross profit increased to $22.9 million for the three
months ended April 1, 2005 from $21.8 million for the three months ended March
26, 2004 as we were largely able to pass on higher raw material costs to our
customers. However, expressed as a percentage of net sales, Packaging Segment
gross profit decreased to 24.8% in the current period from 27.8% in the previous
period.
Our Tubing Products Segment gross profit decreased to $3.7 million for the three
months ended April 1, 2005 from $20.2 million for the three months ended March
26, 2004. Expressed as a percentage of net sales, Tubing Products Segment gross
profit decreased to 5.8% in the current period from 32.9% in the previous period
as significantly higher raw material cost more than offset the price increases
that went into effect in January at our garden hose unit.
Other gross profit decreased to $1.6 million for the three months ended April 1,
2005 from $2.5 million for the three months ended March 26, 2004.
Selling, General and Administrative expense decreased to $15.5 million in the
most recent quarter from $16.4 million in the comparable period of the previous
year, primarily due to lower executive compensation. Measured as a percentage of
net sales, selling, general and administrative expense decreased to 8.0% in the
current period from 9.7% in the previous period.
Integration expense declined to $2.0 million or 1.0% of net sales for the three
months ended April 1, 2005 from $2.5 million or 1.5% of net sales for the
comparable period of fiscal 2004. These costs relate to reconfiguring and
realignment of acquired facilities to conform to the Company's current
production and product standards
Operating Profit, as a result of the above, decreased to $10.7 million for the
three months ended April 1, 2005 from $25.6 million for the three months ended
March 26, 2004. Expressed as a percentage of net sales, operating profit
decreased to 5.5% in the most recent period from 15.1% in the comparable period
of last year.
Our Packaging Segment operating profit increased to $14.5 million (15.7% of net
sales) in the current period compared to $13.8 million (17.6% of net sales) in
the previous period. Our Tubing Products Segment operating profit decreased to
$0.3 million or 0.4% of net sales in the current period compared to $16.3
million or 26.6% of net sales in the previous year. Other operating profit
decreased to a $0.01 million loss in the current period compared to a $0.9
million gain in the previous period.
Interest expense increased to $23.9 million (12.3% of net sales) in the three
months ended April 1, 2005 from $20.9 million (12.4% of net sales) for the three
months ended March 26, 2004 due to both higher average interest rates and higher
average debt levels.
Unrealized gain on derivative transactions was $3.1 million or 1.6% of net sales
for the three months ending April 1, 2005 compared to $0.8 or 0.5% of net sales
in the previous year.
The increase in other income was largely attributable to the receipt of $3.0
million from an insurance claim.
Income (loss) before income taxes, as a result, was a loss of ($7.0) million or
(3.6%) of net sales for the three months ended April 1, 2005 compared to income
of $5.3 million or 3.2% of net sales for the three months ended March 26, 2004.
15
Income tax was $2.2 million for the three months ended April 1, 2005 compared to
$2.1 million for the three months ended March 26, 2004. The Company's effective
tax rate was 36.5% for the three months ended April 1, 2005 compared to 39.7%
for the three months ending March 26, 2004. Income taxes in the current period
reflect fully reserving losses generated during the quarter.
Net income (loss), as a result, was a loss of ($9.3) million for the three
months ended April 1, 2005 or (4.8%) of net sales compared to income of $3.2
million for the three months ended March 26, 2004 or 1.9% of net sales.
FIRST NINE MONTHS OF FISCAL 2005 COMPARED WITH THE FIRST NINE MONTHS OF FISCAL
2004
Net sales increased by $48.0 million or 11.2% to $475.9 million for the nine
months ended April 1, 2005 from $427.9 million for the nine months ended March
26, 2004. Net sales in our Packaging Segment grew 17.4% to $257.3 million in
the current period compared to $219.1 million in the comparable period of the
previous year primarily due to higher selling values. Net sales in our Tubing
Products Segment declined 4.0% to $120.6 million in the first nine months of
fiscal 2005 from $125.6 million in the same period of fiscal 2004 primarily due
to lower volumes. Other net sales increased 17.8% to $98.1 million in first nine
months fiscal 2005 compared to $83.3 million to the first nine months of fiscal
2004 due to both higher volumes and pricing.
Cost of Sales increased to $392.3 million for the nine months ended April 1,
2005 from $324.6 million for the nine months ended March 26, 2004. Expressed as
a percentage of net sales, cost of sales increased to 82.4% in the current
period compared to 75.9% in the prior period primarily due to higher raw
material costs.
Gross Profit, as a result of the above, decreased to $83.6 million in the
current period compared to $103.3 million in the prior period. Expressed as a
percentage of net sales, gross profit declined to 17.6% for the nine months
ended April 1, 2005 from 24.1% in the comparable period of last year primarily
due to higher raw material costs.
Our Packaging Segment gross profit increased to $64.9 million for the nine
months ended April 1, 2005 from $57.1 million for the nine months ended March
26, 2004 as we were able to raise prices inline with increased raw material
costs and we benefited from an improved sales mix at our food packaging
operations in the first six months of fiscal 2005. Expressed as a percentage of
net sales, Packaging Segment gross profit decreased to 25.2% in the current
period from 26.1% in the previous period.
Our Tubing Products Segment gross profit decreased to $14.5 million for the nine
months ended April 1, 2005 from $40.8 million for the nine months ended March
26, 2004 as we were unable to pass along higher raw material costs to our garden
hose customers. Expressed as a percentage of net sales, Tubing Products Segment
gross profit decreased to 12.0% in the current period from 32.5% in the previous
period.
Other gross profit fell to $4.2 million or 4.3% of net sales for the nine months
ended April 1, 2005 from $5.4 million or 6.5% of net sales for the nine months
ended March 26, 2004 primarily due to higher raw material costs.
Selling, General and Administrative expense decreased to $45.5 million in the
most recent period from $46.2 million in the comparable period of the previous
year, primarily due to lower executive compensation. Measured as a percentage of
net sales, selling, general and administrative expense decreased to 9.6% in the
current period from 10.8% in the previous period.
Integration expense increased in the first nine months of fiscal 2005 to $6.8
million or 1.4% of net sales compared to $4.7 million or 1.1% of net sales for
the comparable period of fiscal 2004. These costs relate to reconfiguring and
realignment of acquired facilities to conform to the Company's current
production and product standards.
Operating Profit, as a result of the above, decreased to $31.2 million for the
nine months ended April 1, 2005 from $52.4 million for the nine months ended
March 26, 2004. Expressed as a percentage of net sales, operating profit
decreased to 6.6% in the most recent period from 12.2% in the comparable period
of last year.
Packaging Segment operating profit increased to $40.4 million (15.7% of net
sales) in the current period compared to $36.1 million (16.5% of net sales) in
the previous period. Tubing Products Segment operating profit decreased to $4.8
million or 4.0% of net sales in the current period compared to $30.9 million or
24.6% of net sales in the previous period. Other operating profit declined to a
($0.5) million loss in the current period from a $0.8 million profit in the
previous period.
Interest expense increased to $66.1 million in the nine months ended April 1,
2005 from $62.2 million in the nine months ended March 26, 2004 due to both
higher average interest rates and debt levels. Expressed as a percentage of net
sales, interest expense
16
decreased to 13.9% in the current period compared to 14.5% in the comparable
period of last year.
Unrealized (gain) loss on derivative transactions was a ($7.3) million gain or
1.5% of net sales for the nine months ending April 1, 2005 compared to a ($5.0)
million gain or 1.2% of net sales for the nine months ending March 26, 2004. The
changes were due to changes in the market interest rates underlying our
derivatives.
The increase in other income was largely attributable to the receipt of $3.0
million from an insurance claim.
Income (loss) before income taxes, as a result, was a ($25.3) million loss or
(5.3%) of net sales for the nine months ended April 1, 2005 compared to a loss
of ($5.7) million or (1.3%) of net sales for the nine months ended March 26,
2004.
Income tax expense (benefit) was $3.7 million for the nine months ended April 1,
2005, compared to a benefit of ($2.3) million for the nine months ended March
26, 2004 as operating losses were fully reserved in fiscal 2005. The Company's
effective tax rate was 15.4% for the nine months ended April 1, 2005 compared to
40.0% for the nine months ending March 26, 2004.
Net loss, as a result, was ($29.0) million or (6.1%) of net sales for the nine
months ended April 1, 2005 compared with a loss of ($3.4) million or (0.8%) of
net sales for the nine months ended March 26, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the nine months ended April 1, 2005 was $18.7
million compared with $21.0 million in the same period of the prior year. The
decrease of $2.3 million was primarily due to a $7.7 million reduction in our
normal seasonal inventory build, partially offset by lower profitability and
less of a reduction in accounts payable in the current fiscal year compared to
the previous fiscal year.
Working capital on April 1, 2005 was $220.4 million compared to $229.9 million
on July 2, 2004. The $9.5 million decrease was due primarily to a $17.0 million
reduction in cash due primarily to the losses incurred in the current year, a
$10.1 million reduction in accounts receivable, and a $17.7 million increase in
accrued interest, partially offset by a normal $34.4 million seasonal increase
in inventory.
As of April 1, 2005, the Company had an outstanding balance of $95.2 million
under the $100.0 million revolving credit line. This represents an increase of
$19.2 million from the $76.0 million outstanding balance as of July 2, 2004. Our
Senior debt and our Senior Subordinated Notes include various covenants, the
most restrictive of which require a minimum consolidated EBITDA, minimum fixed
charge coverage ratio and minimum leverage ratio as defined in the debt
agreement.
Significant increases in raw material costs, combined with soft demand in our
garden hose business brought about by unfavorable weather conditions, have
negatively impacted our recent financial performance. As a result, we were not
in compliance with the minimum consolidated EBITDA and minimum fixed charge
coverage ratio covenants contained in our credit agreement for the fiscal
quarters ended December 31, 2004 and April 1, 2005. The lenders under our credit
agreement have waived compliance with these covenants until June 10, 2005, by
which time we are required to have raised $30 million of equity financing. In
addition, our liquidity position has been constrained, causing us to draw down
substantially all of our available revolving credit capacity.
On April 19, 2005, we received the consents required to amend the covenant in
the indenture for our senior subordinated notes which places limitations on
indebtedness. The terms of the consents allow us, among other things, to incur
incremental debt, not to exceed $90.0 million at any one time outstanding, in
ratio of 1.5:1.0 for every dollar of equity received after April 1, 2005. The
amendment to our senior subordinated note indenture will not become effective
until the Company receives $30 million in additional equity.
In May, 2005, we received commitments for $30.0 million in new equity
contributions from existing equity investors, $19.1 million of which has already
been obtained by the Company.
The Company expects 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 and the anticipated $30.0 million equity financing
will be sufficient to meet its needs and to provide it with the flexibility to
make capital expenditures and other investments which management believes will
provide attractive returns.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk inherent in certain debt instruments. At
April 1, 2005, the principal amount of the Company's aggregate outstanding
variable rate indebtedness was $165.9 million. A hypothetical 10% adverse change
in interest rates would have an annualized unfavorable impact of approximately
$0.7 million on the Company's after-tax earnings and cash flows, assuming the
17
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.
In the normal course of business, Tekni-Plex is exposed to changes in interest
rates. The objective in managing its exposure to interest rates is to decrease
the volatility that changes in interest rates might have on operations and cash
flows. To achieve this objective, Tekni-Plex uses interest rate swaps and caps
to hedge a portion of total long-term debt that is subject to variable interest
rates. These derivative contracts are considered to be a hedge against changes
in the amount of future cash flows associated with the interest payments on
variable-rate debt obligations, however, they do not qualify for hedge
accounting under FASB 133. Accordingly, the interest rate swaps are reflected at
fair value in the Consolidated Balance Sheet and the related gains or losses on
these contracts are recorded as an unrealized gain or loss from derivative
instruments in the Consolidated Statements of Operations. These are the only
derivative instruments held by Tekni-Plex as of April 1, 2005. The fair value of
derivative contracts are determined based on quoted market values obtained from
a third party.
Tekni-Plex has interest rate swap contracts to pay variable rates of interest
based on a basket of LIBOR benchmarks and receive variable rates of interest
based on 3-month dollar LIBOR on an initial aggregate of $344.0 million of
indebtedness with maturity dates ranging from June 2006 through June 2008. In
conjunction with these interest rate swap contracts, Tekni-Plex also purchased
an interest rate cap. The approximate aggregate fair market value of these
interest rate swap contracts was $5.8 million and $13.0 million on April 1, 2005
and July 2, 2004, respectively, and is included in other liabilities on the
Consolidated Balance Sheet. For the nine months ending April 1, 2005 Tekni-Plex
incurred an unrealized gain of $7.3 million on these contracts which is included
in the Consolidated Statement of Operations. Similarly, Tekni-Plex incurred an
unrealized gain of $5.0 million for the comparable period of fiscal 2004.
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.
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
April 1, 2005. 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
18
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 third 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
Item 6. Exhibits
(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
19
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.
May 16, 2005
By: /s/ Dr. F. Patrick Smith
-----------------------------------------
Dr. 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
20