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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 3, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission File Number 0-26508
Tekni-Plex, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-3286312
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(State of Incorporation) (I.R.S. Employer Identification No.)
201 Industrial Parkway, Somerville, New Jersey 08876
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(Address of principal executive offices and zip code)
(908) 722-4800
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the registrant's classes
of stock as of the latest practicable date.
None
Documents Incorporated by Reference: See Index to Exhibits.
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Item 1. BUSINESS
INTRODUCTION
Tekni-Plex, Inc. was founded as a Delaware corporation in 1967 to acquire
the General Felt Products division of Standard Packaging Corporation. The
Company, then located in Brooklyn, NY, built a reputation for solving difficult
packaging problems and providing customers with high quality, advanced packaging
materials. In 1970, the Company built an additional manufacturing facility in
Somerville, New Jersey, diversifying into the business of producing polystyrene
foam trays for the poultry processing industry. The Somerville facility serves
as the current headquarters of the Company. As used herein, "Tekni-Plex" or the
"Company" means Tekni-Plex, Inc. and its subsidiaries, unless the context
otherwise requires.
In March 1994, Tekni-Plex was acquired by its current controlling
shareholder and Dr. F. Patrick Smith who was elected Chief Executive
Officer. Mr. Kenneth W.R. Baker, the Company's President and Chief Operating
Officer, was appointed in April 1994. At that time, the principal product
lines consisted of: clear, high-barrier laminations for pharmaceutical
blister packaging; foam processor trays, primarily for the poultry industry;
and closure (bottle cap) liners, primarily for pharmaceutical end-uses.
In December 1995, Tekni-Plex acquired the Flemington, NJ, plant and
business of Hargro Flexible Packaging Corporation ("Hargro"). The Flemington
plant produces packaging materials primarily for the pharmaceutical industry. In
February 1996, Tekni-Plex completed its acquisition of Dolco Packaging
Corporation ("Dolco"), a publicly-traded foam products company. With $81 million
of annual sales, Dolco at the time was nearly twice the size of Tekni-Plex.
Dolco had been in the business of producing foam packaging products since the
1960s and had attained the leading share of foam egg carton sales in the United
States. In August 1997, Dolco, which had been a wholly owned subsidiary of
Tekni-Plex, was merged into Tekni-Plex.
In March 1998, Tekni-Plex acquired PureTec Corporation ("PureTec"), a
publicly-traded company with annual sales of $315 million. PureTec is a leading
manufacturer of plastic packaging, products, and materials primarily for the
healthcare and consumer markets. PureTec is a wholly-owned subsidiary of
Tekni-Plex.
DESCRIPTION OF BUSINESS
Tekni-Plex is a global, diversified manufacturer of packaging, products,
and materials for the healthcare, consumer, and food packaging industries. The
Company has built a leadership position in its core markets, and focuses on
vertically integrated production of highly specialized products. The Company's
operations are aligned under four primary business groups: Healthcare Packaging,
Products, and Materials; Consumer Packaging and Products; Food Packaging; and
Specialty Resins and Compounds. Representative product lines in each group are
listed below:
- --------------------------------------------------------------------------------------------------------------------
HEALTHCARE PACKAGING, PRODUCTS, CONSUMER PACKAGING AND FOOD PACKAGING SPECIALTY RESINS AND
AND MATERIALS PRODUCTS COMPOUNDS
- --------------------------------------------------------------------------------------------------------------------
Pharmaceutical packaging Precision tubing and Foamed egg cartons Specialty PVC resins
gaskets
Medical tubing Garden and irrigation Meat and poultry Recycled PET resins
hose products processor trays
Medical device materials Pool hose products Agricultural foam General purpose PVC
packaging compounds
- --------------------------------------------------------------------------------------------------------------------
This end market and product line diversity has the effect of reducing
Tekni-Plex's overall risk related to any one product line or customer. For
fiscal year 1998, Tekni-Plex's largest customer, Wal-Mart Stores Inc., accounted
for approximately 10% of sales, with no other individual customer accounting for
10% or more of sales.
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The Company purchases raw materials from several sources that differ for
each product line. This diversity of raw material suppliers, as well as the
availability of alternative suppliers, has the effect of reducing Tekni-Plex's
overall risk related to any one supplier. The single exception is a key raw
material used in manufacturing the Company's clear, laminated PCTFE blister
packaging materials. Allied Signal is currently the sole manufacturer and
supplier of this proprietary raw material. There is no long-term supply contract
with Allied Signal and any interruption in the supply of this material could
disrupt production of the Company's clear, laminated blister packaging
materials. To the extent that the Company's supply of this raw material is
hindered, the Company would substitute coated or foil-based products. There has
never been a significant disruption of the supply of this PCTFE material in the
Company's 30 years of manufacturing this product line.
The Company in the past has generally been able to pass on raw material
price increases to customers on a relatively timely basis. The exception has
been garden hose products, the prices for which are typically set in advance of
each season. Raw material cost increases or decreases for garden hose products
generally are not passed through during that season.
The following sections provide further information regarding the four
business groups, including descriptions of the major product lines within each
group. Segment financial information for these groups is contained in the "Notes
to Consolidated Financial Statements."
HEALTHCARE PACKAGING, PRODUCTS, AND MATERIALS
Pharmaceutical Packaging
The Company's pharmaceutical packaging product line includes flexible,
semi-rigid, and rigid packaging films, coated films, and laminations. The
Company is the market leader for clear, high-barrier laminations for
pharmaceutical blister packaging and believes, based upon its knowledge and
experience in the industry, that it has a greater than 80% share of the market
for such products. These packaging materials are used for fast-acting
pharmaceuticals that are generally highly reactive to moisture. Transparent,
high-barrier blister packaging is primarily used to protect drugs from moisture
vapor infiltration or desiccation. Blister packaging is the preferred packaging
form when dispenser handling can affect shelf life or drug efficacy, or when
unit dose packaging is needed. Unit dose packaging is being used to improve
patient compliance with regard to dosage regimen, and has been identified as the
packaging form of choice in addressing child safety aspects of drug packaging.
The advantages of transparent blisters, as opposed to opaque foil-based
materials manufactured by various competitors, include the ability to visually
inspect the contents of the blister and to present the product with maximum
confidence.
The Company believes the flexible and semi-rigid packaging segment of the
pharmaceutical packaging industry is growing at a faster rate than the
non-plastics segments because of the generally lower package cost and broader
range of functional characteristics of plastic packaging. As a result, the
technologies used to manufacture plastic packaging materials continue to develop
at a faster pace than those used in the more mature paper, glass, and metal
products.
From an environmental viewpoint, the flexible and semi-rigid segment leads
the packaging industry in source reduction efforts. The term "source reduction"
refers to the concept of accomplishing requisite packaging functions with a
minimum of packaging materials. By using less material to perform the packaging
function, the environmental impact is reduced: greater conservation of the
Earth's resources, lower energy usage in both the production of packaging
materials and product distribution costs, and fewer disposal issues. The Company
believes that the resulting growth in the flexible and semi-rigid product line
has come at the expense of the more mature non-plastic packaging materials.
The Company's high-barrier, blister laminations are sold to major
pharmaceutical companies (or their designated contract packagers). The Company
has begun to market its full pharmaceutical product line directly on a worldwide
basis, has assembled a global network of sales personnel (both direct and
through outside manufacturer's representatives), and has established
manufacturing liaisons in the United Kingdom, Switzerland, Germany, and the
Philippines.
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In the clear pharmaceutical blister films market, Tekni-Plex has two
principal competitors worldwide that have resources equal to or greater than
those of the Company. However, the Company believes that neither of these
competitors has the breath of product offering to match that of the Company, and
that this differentiation is significant as viewed by the pharmaceutical
industry. Also, the high manufacturing and audit compliance standards imposed by
the pharmaceutical companies on their suppliers provide a significant barrier to
the entry of new competitors. Entry barriers also arise due to the lengthy and
stringent approval process required by the FDA. Since approval requires that the
drug be tested while packaged in the same packaging materials intended for
commercial use, changing materials after approval risks renewed scrutiny by the
FDA. The packaging materials for pharmaceutical applications also require
special documentation of material sources and uses within the manufacturing
process as well as heightened quality assurance measures.
Medical Tubing
Tekni-Plex is a leading producer of medical tubing, with approximately 25%
of the non-captive market in North America and Europe. Tekni-Plex specializes in
high-quality, close tolerance tubing for various surgical procedures and related
medical applications. These applications include intravenous ("IV") therapy,
hemodialysis therapy, cardio-vascular procedures such as coronary bypass
surgery, suction and aspiration products, and urinary drainage and catheter
products. Medical tubing is sold primarily to manufacturers of medical devices
that are packaged specifically for such procedures and applications. Products
are sold through direct salespeople.
The Company manufactures medical tubing using proprietary plastic
extrusion processes. The primary raw materials are proprietary compounds, which
are produced by the Company. The industry is fragmented with no single
competitor having a dominant market share.
New medical tubing products developed by the Company include microbore
tubing, silicone substitute formulations, and trilayer tubing substitutes.
Microbore tubing can be used to regulate the delivery of critical intravenous
fluids without the need for more expensive drip control devices. Medical
professionals can precisely control the drug delivery speed simply by selecting
the proper (color-coded) diameter tube, thereby improving accuracy and reducing
cost. More importantly, as home healthcare trends continue, the use of microbore
tubing will help eliminate critical dosage errors on the part of the
non-professional caregiver or the patient.
Medical Device Materials
The Company believes that it is the world's largest producer of
high-quality vinyl compounds for use in the medical industry. These
medical-grade materials are sold to leading manufacturers of medical devices and
equipment. They are also sold to producers of tubing and, to some extent, to
producers of closures for the food and beverage industry. The Company sells
these compounds in worldwide markets. Products are sold directly through the
Company's salespeople.
The market for medical-grade vinyl compounds is highly specialized, with
three significant competitors. For more than 30 years, the Company has been
supplying these specialized vinyl compounds for FDA-regulated applications. The
Company believes it competes effectively based on product quality and
performance and prompt delivery, and that price is a secondary consideration for
its customers. The Company's chemists work closely with customers to develop
compounds that address their specific requirements. Through this custom work,
the Company has introduced a number of breakthroughs to the medical device
industry by developing formulations with unique physical characteristics. For
example, the Company has recently developed a new family of flexible vinyl
compounds designed to replace silicone rubber in a variety of medical tubing and
commercial applications.
CONSUMER PACKAGING AND PRODUCTS
Precision Tubing and Gaskets
Tekni-Plex's precision tubing and gaskets product line is sold primarily
to manufacturers of aerosol valves, dispenser pumps, and writing instruments.
These products are sold throughout the United States and Europe, as well as
selected worldwide markets. Sales are made through the Company's direct sales
force. The Company believes that it is the largest tubing extruder in North
America and is the leading supplier of aerosol valve and dispenser pump gaskets
worldwide.
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Sales to the aerosol valve and dispenser pump industries consist primarily
of dip tubes, which transmit the contents of a dispenser can to the nozzle, and
specialized molded or punched rubber-based valve gaskets that serve to control
the release of the product from the container. Writing instrument products
include pen barrels and ink tubing as well as ink reservoirs for felt-tip pens.
Tekni-Plex is the single-source supplier to much of the industry. The
principal competitive pressure in this product line is the possibility of
customers switching to internal production, or vertical integration. To
counteract this possibility, the Company focuses on product quality, prompt
delivery, technical service and innovation.
The precision tubing products are manufactured at extremely high speeds
while holding to precise tolerances. The process enhancements that allow
simultaneous high speed and precision are proprietary to the Company. The
precision gasket products, which the Company has manufactured for over fifty
years, are produced using proprietary formulations. These formulations are
designed to provide consistent functional performance throughout the entire
shelf life of the product by incorporating chemical resistance characteristics
appropriate to the fluid being packaged. For example, the Company has developed
unique formulations that virtually eliminate contamination of the products
packaged in spray dispensers. This has greatly expanded the use of these
dispensers for personal hygiene products, foods, and fragrances. The Company has
also developed proprietary methods for achieving extremely accurate thickness
control, superior surface finish, and the elimination of internal imperfections
prevalent in other processing methods.
Garden and Irrigation Hose Products
Tekni-Plex believes that it is the leading producer of garden hose in the
United States, with more than 40% of the market. The Company has produced garden
hose products for nearly fifty years, and produces its primary components
internally, including proprietary material formulations and brass couplings.
There are two other principal competitors in the United States, and several
smaller companies having substantially smaller market shares.
Garden hose products are sold primarily to home centers, hardware
cooperatives, food, automotive, drug and mass merchandising chains and catalog
companies throughout the United States and Canada. Customers include some of the
fastest growing and most widely respected retail chains in North America. The
Company's market strategy is to provide a complete line of innovative,
high-quality products along with superior customer service. Innovations have
included the patented Colorite(R) Evenflow(R) design and the "drinking water
safe" product lines. Tekni-Plex also manufactures specialty hose products such
as air hose and irrigator "soaker hose".
The garden hose business is highly seasonal with approximately 75% of
sales occurring in the spring and early summer months. This seasonality tends to
have an impact on the Company's financial results from quarter to quarter.
Products are sold primarily through the Company's direct salespeople and also
through independent representatives. Both private label and brand-name products
are sold to the retail market.
FOOD PACKAGING
The Food Packaging group produces primarily thermoformed foam polystyrene
packaging products such as egg cartons and processor trays that are sold to the
poultry, meat, and egg industries. The Company believes that it produces about
80% of all foam egg cartons and has approximately 40% of the total egg carton
market. The Company also has built a strong presence in the processor tray
market, where it believes that it has an estimated market share of more than
20%.
Thermoformed foam polystyrene packaging has been the material of choice
for food packaging cartons and trays for many years. In terms of economic and
functional characteristics, foamed polystyrene products offer a combination of
high strength, minimum material content and superior moisture barrier
performance. Foamed polystyrene products also offer greater dimensional
consistency that enhances the high speed mechanical feeding of cartons and trays
into automated package filling operations.
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The Company's customer base includes most of the domestic egg packagers
(including those owned by egg retailers) and many prominent poultry processors.
The Company believes it competes effectively based on product quality and
performance and prompt delivery.
Within the polystyrene foam processor tray market, the Company competes
principally with two large competitors, both of which have significantly greater
financial resources than the Company and who, together, control the largest
share of this market. In the egg packaging market, the Company's primary
competitor manufactures pulp-based egg cartons.
SPECIALTY RESINS AND COMPOUNDS
Specialty PVC Resins
Tekni-Plex manufactures specialty PVC resins, with an annual production
capacity of 120 million pounds. The Company employs specialized technology to
produce dispersion, blending, and copolymer suspension resins for a variety of
industries, including floor covering, automotive sealants and adhesives, coil
coatings, plastisol compounding and PVC packaging.
The Company competes with a number of large chemical companies who offer a
greater breadth of products. However, the Company believes that it has built a
relatively unique position in the specialty resins market by offering customized
products for niche markets that the larger commodity producers do not serve. The
business strategy is built on individual customer service and the highest
standards of quality. Although the Company's market share in the total PVC resin
market is less than 1%, and in the overall specialty resins market is about 7%,
the Company's share in its target markets exceeds 20%.
PATENTS AND TRADEMARKS
The Company seeks to protect its proprietary know-how through the
application of patent and trademark laws. However, in the opinion of management,
none of its patents or trademarks are material to its operations.
RESEARCH AND DEVELOPMENT
The Company employs certain professionals who, along with other
responsibilities, are engaged in research relating to the development of new
products and to the improvement of existing products and processes. The Company
works closely with certain clients to develop and improve certain products and
product lines. Much of this product development is either funded by clients or
its cost is absorbed in the Company's manufacturing cost of sales, and therefore
is not reflected as research and development expense.
EMPLOYEES
As of July 3, 1998, the Company employed approximately 2,800 full-time
employees. Approximately 31% of all employees are represented by various
collective bargaining agreements that expire between December 31, 1998 and July
31, 2001. The Company believes it has good relations with its employees.
ENVIRONMENTAL MATTERS
The Company is subject to ongoing environmental oversight in the ordinary
course of business. Management is not aware of any environmental proceedings
that are likely to have a material adverse effect on its consolidated financial
position or results of operations. Additionally, in management's opinion, no
such proceedings nor compliance with Federal, state and local environmental laws
and regulations are believed to require any material estimated capital
expenditures for environmental control facilities in the foreseeable future.
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Item 2. PROPERTIES
The Company believes that its facilities are suitable and have sufficient
productive capacity for its current and foreseeable operational and
administrative needs. Set forth below is a list and brief description of all of
the Company's offices and facilities, all of which are owned unless otherwise
indicated.
APPROXIMATE
LOCATION FUNCTION SQUARE FEET
- -------- -------- -----------
Somerville, New Jersey Corporate Headquarters; Manufactures 123,000
food and healthcare packaging
Auburn, Maine (2) Specialty resins 24,000
Belfast, Ireland Healthcare materials 55,000
Burlington, New Jersey Specialty resins 107,000
Cambridge, Ontario Healthcare packaging 12,500
Cambridge, Ontario (2) Warehouse 14,000
City of Industry, Healthcare products 110,000
California (2)
Clinton, Illinois Consumer packaging 62,500
Dallas, Texas (7) Food packaging 139,000
Dalton, Georgia Healthcare products 40,000
Decatur, Indiana Food packaging 187,000
Decatur, Indiana (1) Warehouse 3,750
East Farmingdale, New York (4) Specialty resins 50,000
Erembodegem Consumer packaging 88,200
(Aalst), Belgium
Flemington, New Jersey Healthcare packaging 145,000
Huntington, West Virginia (8) Specialty resins (Under construction) 150,000
Lawrenceville, Georgia Food packaging 150,000
Lawrenceville, Georgia (1) Warehouse 31,700
Livonia, Michigan (2) Specialty resins 60,000
McKenzie, Tennessee (2) Consumer products 20,000
Milan (Gaggiano), Italy (3) Consumer packaging 14,100
Milan (Gaggiano), Italy Consumer packaging 25,800
Milan (Rosate), Italy (5) Consumer packaging 24,000
Mississauga, Ontario (6) Consumer products 150,000
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APPROXIMATE
LOCATION FUNCTION SQUARE FEET
- -------- -------- -----------
Piscataway, New Jersey (5) Compounds 50,000
Ridgefield, New Jersey Consumer products and 328,000
healthcare materials
Ridgefield, New Jersey (5) Warehouse 70,000
Rockaway, New Jersey Consumer packaging 98,600
Schaumburg, Illinois (9) Consumer packaging 58,000
Schiller Park, Illinois Consumer packaging 20,000
Sparks, Nevada (5) Consumer products and 248,000
healthcare materials
Tonawanda, New York (4) Consumer products 31,000
Waco, Texas Consumer products 104,600
Wenatchee, Washington Food packaging 99,000
Wenatchee, Washington (2) Warehouse 26,400
(Years relate to calendar years)
(1) Leased on a month-to-month basis.
(2) Lease expires in 1999.
(3) Lease expires in 2000.
(4) Lease expires in 2001.
(5) Lease expires in 2002.
(6) Lease expires in 2005.
(7) Lease expires in 2006.
(8) Lease expires in 2008.
(9) Lease expires in 2019.
Item 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Not Applicable.
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Item 6. SELECTED FINANCIAL DATA
(Dollars in thousands)
The following table sets forth selected historical consolidated financial
information of the Company, and has been derived from and should be read in
conjunction with the Company's audited consolidated financial statements,
including the notes thereto. In addition, on March 18, 1994, Tekni-Plex was
acquired by the current owners, in a transaction accounted for under the
purchase method of accounting. The financial statements for the periods prior to
March 18, 1994 are presented on the predecessors' basis of accounting and
accordingly, are not comparable to the periods subsequent to March 18, 1994.
FOR THE PERIODS YEARS ENDED
YEAR ENDED --------------- -----------
DEC. 31, JAN. 1 TO MAR. 19 TO
---------- MAR. 18, JUL. 1, JUN. 30, JUN. 28, JUN. 27, JULY 3,
1993 1994 1994 1995 1996 1997 1998
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STATEMENT OF OPERATIONS DATA:
Net sales $ 44,878 $ 9,418 $ 12,723 $ 44,688 $ 80,917 $ 144,736 $ 309,597
Cost of goods sold 36,604 7,924 9,961 34,941 62,335 107,007 232,499
Gross profit 8,274 1,494 2,762 9,747 18,582 37,729 77,098
Selling, general and administrative
expenses 5,076 602 1,521 4,814 10,339 15,886 39,220
Income from operations 3,198 892 1,241 4,933 8,243 21,843 37,878
Interest expense 160 22 1,141 4,322 5,816 8,094 19,682
Other (income) expense 7 45 62 234 469 646 415
Pre-tax income before extraordinary
item 3,031 825 38 377 1,958 13,103 17,781
Income tax provision(a) 267 56 17 211 982 4,675 9,112
Income before extraordinary item 2,764 769 21 166 976 8,428 8,669
Extraordinary item (loss)(c) -- -- -- -- -- (20,666) --
Net income (loss) $ 2,764 $ 769 $ 21 $ 166 $ 976 $ (12,238) $ 8,669
BALANCE SHEET DATA (at period end):
Working capital $ 6,023 $ 4,565 $ 1,673 $ 3,173 $ 11,660 $ 25,950 $ 84,897
Total Assets 15,701 14,900 53,724 53,415 121,770 129,029 546,832
Total debt (including current portion) 1,616 588 36,396 35,004 70,436 75,000 401,905
Stockholders' equity 10,086 10,855 11,521 11,687 24,162 30,397 38,673
OTHER FINANCIAL DATA:
EBITDA(b) $ 3,800 $ 985 $ 1,988 $ 7,922 $ 14,157 $ 30,223 $ 54,479
EBITDA margin(b) 8.5% 10.5% 15.6% 17.7% 17.5% 20.9% 17.6%
Depreciation and amortization $ 608 $ 138 $ 879 $ 3,462 $ 6,821 $ 9,551 $ 17,249
Capital expenditures 1,423 420 157 614 2,275 3,934 7,283
Cash flows:
From operations 3,512 (564) 1,147 2,354 6,568 19,537 29,009
From investing (1,871) 315 (45,567) (614) (49,522) (6,273) (310,672)
From financing (570) (1,121) 44,465 (1,451) 43,669 (3,217) 299,926
(a) Prior to the acquisition of Tekni-Plex by the current owners, the previous
owners elected to be taxed as an "S" corporation for federal income tax
purposes. Accordingly, there was no provision for federal income taxes for
periods prior to March 18, 1994 as such income was reported on the federal
income tax returns of the shareholders.
(b) EBITDA is defined as net income before interest, income taxes,
depreciation and amortization. EBITDA is presented because it is a
widely accepted financial indicator of the Company's ability to incur
and service debt. However, EBITDA should not be considered in
isolation as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity. In addition, this
measure of EBITDA may not be comparable to similar measures reported by
other companies. EBITDA margin is calculated as the ratio of EBITDA to
net sales for the period. For fiscal 1996, amortization included $522
related to the write off of prior unamortized debt costs.
(c) Extraordinary loss is comprised of (i) a prepayment penalty of $1.2
million and the write-off of deferred financing costs and debt discount of
$3.4 million, net of the combined tax benefit of $1.8 million, and (ii) a
loss of $17.8 million on the repurchase of redeemable warrants.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FOR THE YEAR ENDED JULY 3, 1998 COMPARED WITH THE YEAR ENDED JUNE 27, 1997
Net Sales increased to $309.6 million for the year ended July 3, 1998 from
$144.7 million for the year ended June 27, 1997. This represents an increase of
$164.9 million or 114.0%. The increased sales are primarily attributable to the
acquisition of PureTec in March 1998, which amounted to $154.1 million, and to a
lesser extent the increased demand for the Company's healthcare packaging
products. The level of growth for the year ended July 3, 1998 may not be
indicative of future operations.
Cost of Goods Sold increased to $232.5 million for the year ended July 3,
1998, of which PureTec operations accounted for $118.4 million of the increase,
from $107.0 million for the year ended June 27, 1997. Expressed as a percentage
of net sales, cost of goods sold increased to 75.1% for the year ended July 3,
1998 from 73.9% for the same period in 1997. The increase in cost of goods sold
as a percentage of net sales was due primarily to the different sales mix
associated with the purchase of PureTec. This level of increase in costs and
increase as a percent of sales may not be indicative of future operations.
Gross Profit as a result, increased to $77.1 million or 24.9% of net sales
for the year ended July 3, 1998, from $37.7 million or 26.1% of net sales for
the same period in 1997.
Selling, general and administrative expenses increased to $39.2 million or
12.7% of net sales for the year ended July 3, 1998 from $15.9 million or 11.0%
of net sales for the same period in 1997. Selling, general and administrative
expenses increased as a percentage of net sales due primarily to the acquisition
of PureTec and related compensation increases, as well as increased
administrative costs and higher selling expenses associated with the global
expansion of the Company's healthcare packaging products.
Operating profit increased to $37.9 million or 12.2% of net sales for the
year ended July 3, 1998, from $21.8 million or 15.1% for the same period in
1997, for the reasons stated above.
Interest expense increased to $19.7 million or 6.4% of net sales for the
year ended July 3, 1998, from $8.1 million or 5.6% of net sales for the same
period in 1997 due primarily to an issuance of new bonds and notes to acquire
PureTec.
Provision for income taxes increased to $9.1 million or 2.9% of net sales
for the year ended July 3, 1998, from $4.7 million or 3.2% for the same period
in 1997. The Company's effective tax rate was 51% for the year ended July 3,
1998 compared to 36% for the same period in 1997. The increase between periods
is due primarily to non-deductible amortization and the depletion of tax
carryover losses and credits.
Net income before extraordinary loss increased to $8.7 million or 2.8% of
net sales for the year ended July 3, 1998, from $8.4 million or 5.8% of net
sales for the same period in 1997, for the reasons discussed above.
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FOR THE YEAR ENDED JUNE 27, 1997 COMPARED WITH THE YEAR ENDED JUNE 28, 1996
Net Sales increased to $144.7 million for the year ended June 27, 1997
from $80.9 million for the year ended June 28, 1996. This represents an increase
of $63.8 million or 78.9%. The increased sales are primarily attributable to the
acquisition of Dolco in February 1996, which accounted for $55.2 million, and to
a lesser extent to the acquisition of Hargro in December 1995.
Cost of Goods Sold increased to $107.0 million for the year ended June 27,
1997, of which the Dolco operation accounted for $40.3 million of such increase,
from $62.3 million for the same period in 1996. Expressed as a percentage of net
sales, cost of goods sold fell to 73.9% for the year ended June 27, 1997 from
77.0% for the same period in 1996. The decline in cost of goods sold as a
percentage of net sales were due primarily to a decline in raw material costs
resulting from improved market conditions and the increased purchasing power of
the Company.
Gross Profit as a result, increased to $37.7 million or 26.1% of net sales
for the year ended June 27, 1997, from $18.6 million or 23.0% of net sales for
the same period in 1996.
Selling, general and administrative expenses increased to $15.9 million or
11.0% of net sales for the year ended June 27, 1997 from $10.3 million or 12.8%
of net sales for the same period in 1996. Selling, general and administrative
expenses decreased as a percentage of net sales due primarily to the acquisition
of Dolco with no relative comparable increase in the general and administrative
staff of the Company.
Operating profit increased to $21.8 million or 15.1% of net sales for the
year ended June 27, 1997, from $8.2 million or 10.2% for the same period in
1996, for the reasons stated above.
Interest expense increased to $8.1 million or 5.6% of net sales for the
year ended June 27, 1997, from $5.8 million or 7.2% of net sales for the same
period in 1996 due primarily to increased borrowings related to the Dolco
acquisition which accounted for an increase of $2.4 million. Expressed as a
percentage of net sales, interest expense for the 1997 period fell to 5.6% from
7.2% for the 1996 period as a result of the decreasing debt as a percentage of
net sales following the Dolco and Hargro acquisitions.
Provision for income taxes increased to $4.7 million or 3.2% of net sales
for the year ended June 27, 1997, from $1.0 million or 1.2% for the same period
in 1996. The Company's effective tax rate was 36% for the year ended June 27,
1997. The decrease from the Company's expected rate of 38% was a result of the
realization of certain state tax benefits.
Net income before extraordinary loss increased to $8.4 million or 5.8% of
net sales for the year ended June 27, 1997, from $1.0 million or 1.2% of net
sales for the same period in 1996, for the same reasons discussed above.
Extraordinary loss on early extinguishment of debt was $20.7 million for
the year ended June 27, 1997. On April 4, 1997, the Company issued $75.0 million
of 11-1/4% Notes. Interest on the 11-1/4% Notes is payable semi-annually. The
Company also received approximately $18.4 million in additional capital
contribution. These proceeds were used to repay the balance of $36.8 million on
the Company's then outstanding credit facility, repay the then existing
subordinated notes for $25.2 million, including a prepayment penalty of $1.2
million, and repurchase the redeemable warrants for $20.0 million. The
extraordinary loss was comprised of (i) the prepayment penalty of $1.2 million
of the write-off of deferred financing costs and debt discount of $3.4 million,
net of the combined tax benefit of $1.8 million, and (ii) the loss on the
repurchase of the warrants of $17.8 million.
Net income (loss) decreased to ($12.2 million) or (8.5%) of net sales for
the year ended June 27, 1997, from a net income of $1.0 million or 1.2% of net
sales for the same period in 1996, for the reasons stated above.
11
12
LIQUIDITY AND CAPITAL RESOURCES
For the year ended July 3, 1998, net cash provided by operating activities
was $29.0 million compared to $19.5 million for the same period in 1997. This
was due primarily to the acquisition of PureTec and to increased earnings in
1998.
Working capital at July 3, 1998 was $84.9 million compared to $26.0
million at the same period in 1997. The increase in working capital was due
primarily to the acquisition of PureTec and to increased earnings in 1998.
As of July 3, 1998 and June 27, 1997, there were no outstanding balances
under the revolving credit line.
The Company's capital expenditures for the year ended July 3, 1998 and
June 26, 1997 were $7.3 million and $3.9 million, respectively. Management
expects that annual capital expenditures will increase from historical levels
during the next few years as the Company makes improvements in the recently
acquired operations.
Apart from acquisitions, the Company's 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
from the credit facility will be sufficient to meet the Company's expected debt
service requirements, planned capital expenditures, and operating needs.
However, there can be no assurance that sufficient funds will be available from
operations or borrowings under the credit facility to meet the Company's cash
needs to the extent management anticipates. The credit facility will provide the
Company with the increased flexibility to make capital expenditures and
acquisitions that management believes will provide an attractive return on
investment. To the extent the Company pursues future acquisitions, the Company
may be required to obtain additional financing. There can be no assurance that
it will be able to obtain such financing in amounts and on terms acceptable to
it.
INFLATION
During the past fiscal year the Company's operations have benefited from
relatively stable or declining prices for raw materials. In the event
significant inflationary trends were to resume, management believes that the
Company will generally be able to offset the effects thereof through continuing
improvements in operating efficiencies and increasing prices, to the extent
permitted by competitive factors. However, there can be no assurance that all
such cost increases can be passed through to customers.
YEAR 2000 ISSUES
Definition: "Year 2000 issues" refer to possible events resulting directly
or indirectly from the inability of digital computer equipment or software to
accurately and without interruption handle dates both before and after January
1, 2000 and to process the year 2000 as a leap year.
Assessment: Tekni-Plex is currently evaluating the potential impact and
remediation costs of Year 2000 issues. Although this assessment is not yet
complete, the Company believes that, due to the nature of its manufacturing
processes and procedures, the Year 2000 issues will not have a material impact
on its business.
Manufacturing Infrastructure: The Company's basic operations involve
certain plastics converting processes. These processes involve primarily plastic
extrusion and compounding equipment of various forms. For the most part, this
equipment is controlled either manually or by means of mechanical and analog
devices. For equipment that does include microprocessors, the applications being
controlled are mechanical and not date-sensitive, and can be controlled manually
if necessary. In its investigations thus far, the Company has identified no
significant manufacturing processes that would be disabled by a total loss of
digital computer components.
Support Systems: The Company's assessment does indicate that there may be
support systems, such as accounting systems, that may be affected by the Year
2000 issues. The Company believes that it has identified most of the major
computers, software applications, and other equipment utilized by such support
systems that must be modified, upgraded, or replaced to minimize the possibility
of any disruption of business. The Company has
12
13
commenced the process of modifying, upgrading, and replacing major systems that
may be adversely affected, and expects to complete this process before the
occurrence of any significant disruption of business. However, to a large
extent, this includes replacing systems of acquired businesses, which was
previously planned as part of the Company's normal integration strategy.
Therefore, additional costs that will be incurred solely due to Year 2000 issues
are not expected to be significant. In addition, the Company does routine data
backup of critical systems during the normal course of business. This backup
provides the ability to recover data in the event of a catastrophic computer
failure. It is the Company's belief that its customers and suppliers, for the
most part, have similar data safeguards in place.
Suppliers: The Company is in the process of contacting its suppliers to
identify any potential disruption in the supply of raw materials. The Company
expects to resolve any significant Year 2000 issues before the occurrence of
any business disruptions, although the Company has limited or no control over
the actions of these suppliers. However, the Company believes that the supply
of basic chemicals and other raw materials used in its vertically integrated
manufacturing processes is unlikely to be significantly disrupted. In addition,
the Company, in the normal course of business, maintains adequate inventories
of such raw materials to protect against short-term delivery interruptions.
Customers: Tekni-Plex is committed to providing uninterrupted service to
its customers. In a few cases, the Company has direct interfaces with the
computer systems of its customers, primarily for "vendor managed inventory"
applications. The Company expects to resolve any significant Year 2000 issues
with such customers before the occurrence of any business disruptions, although
the Company has limited or no control over the actions of these customers. The
Company expects to maintain adequate finished goods inventories to protect
customers against the possibility of temporary service interruptions, if any.
Conclusion: Tekni-Plex expects to find and adequately prepare for all
significant internal Year 2000 issues that could adversely affect its business
operations. The Company does not anticipate that the cost of resolving such
problems will be material to its financial results. However, the Company does
not believe that it is possible to identify, with complete certainty, all
potential Year 2000 issues that may in some way affect the Company, its
suppliers, or its customers. The Company expects that any disputes arising as
the result of such unidentified Year 2000 issues will be resolved in the normal
course of business.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
Item 8. FINANCIAL STATEMENTS
The financial statements commence on Page F-2.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
13
14
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Tekni-Plex are listed below. Each
director is elected at the annual meeting of the stockholders of Tekni-Plex to
serve a one year term until the next annual meeting or until a successor is
elected and qualified, or until his earlier resignation. Each executive officer
holds his office until a successor is chosen and qualified or until his earlier
resignation or removal. Pursuant to its by-laws, Tekni-Plex indemnifies its
officers and directors to the fullest extent permitted by the General
Corporation Law of the State of Delaware and Tekni-Plex's certificate of
incorporation.
NAME AGE POSITION
Dr. F. Patrick Smith 50 Chairman of the Board and Chief Executive Officer
Kenneth W.R. Baker 54 President, Chief Operating Officer and Principal
Accounting and Financial Officer
Arthur P. Witt 68 Corporate Secretary and Director
J. Andrew McWethy 57 Director
Barry A. Solomon 50 Director
Stephen A. Tuttle 57 Director
Michael F. Cronin 44 Director
Dr. F. Patrick Smith has been Chairman of the Board and Chief Executive
Officer of Tekni-Plex since March 1994. He received his doctorate degree in
chemical engineering from Texas A&M University in 1975. He served as Senior
Chemical Engineer to Texas Eastman Company, a wholly owned chemical and plastics
subsidiary of Eastman Kodak, where he developed new grades of polyolefin resins
and hot melt and pressure sensitive adhesives. In 1979, he became Technical
Manager of the Petrochemicals and Plastics Division of Cities Service Company,
and a Member of the Business Steering Committee of that division. From 1982 to
1984, Dr. Smith was Vice President of R&D and Marketing for Guardian Packaging
Corporation, a diversified flexible packaging company. Thereafter, he joined
Lily-Tulip, Inc. and managed their research and marketing functions before
becoming Senior Vice President of Manufacturing and Technology. Following the
acquisition of Lily-Tulip by Fort Howard Corporation in 1986, he became the
Corporate Vice President of Fort Howard, responsible for the manufacturing and
technical functions of the combined Sweetheart Products and Lily-Tulip
operations. From 1987 to 1990, Dr. Smith was Chairman and Chief Executive
Officer of WFP Corporation. Since 1990, Dr. Smith has been a principal of Brazos
Financial Group, a business consulting firm. Dr. Smith is a limited partner of
Tekni-Plex Partnership.
Kenneth W.R. Baker has served as Tekni-Plex Chief Operating Officer since
April 1994 and as President since July 1995. Mr. Baker served in various
management roles including systems development, finance, industrial
engineering, research and development, and manufacturing operations at
Owens-Illinois, Inc. and Lily-Tulip, Inc. from 1965 to 1985. From 1986 to
1987, he served as Vice President, Operations at Fort Howard Cup Corporation.
In 1987, Mr. Baker joined WFP Corporation, Inc. as Senior Vice President,
Operations and eventually became the company's President and CEO before leaving
the company in 1992. Thereafter, Mr. Baker became Vice President, Research and
Development at the Molded Products Division of Carlisle Plastics, Inc. until
joining the Company. Mr. Baker is a limited partner of Tekni-Plex Partnership.
Arthur P. Witt has been a director of Tekni-Plex since March 1994 and was
appointed Secretary in January 1997. Since July 1989, he has been president of
PAJ Investments which is involved in financial consulting and property
management. Over the same period, Mr. Witt also served as a temporary chief
financial officer for WFP Corporation and Flexible Technology. Prior to 1989,
Mr. Witt served in a number of senior management positions for companies such as
Lily-Tulip, Inc., BMC Industries and Fort Howard Paper Co. Mr. Witt is a limited
partner of Tekni-Plex Partnership.
J. Andrew McWethy has served as a director of Tekni-Plex since March 1994.
He is a co-founder of MST Partners L.P. ("MST L.P.") and MST Offshore Partners,
C.V. (together with MST L.P., the "MST Investment Partnerships"), each of which
was formed in 1989, and is a general partner of MST Management, L.P., a general
partner of MST Investment Partnerships. Prior to 1989, Mr. McWethy was employed
by Irving Trust Company for twelve years.
Barry A. Solomon has served as a director of Tekni-Plex since March 1994.
He is a co-founder of the MST Investment Partnerships and is a general partner
of MST Management, L.P. Prior to 1989, Mr. Solomon was employed by Irving Trust
Company for ten years.
14
15
Stephen A. Tuttle has served as a director of Tekni-Plex since March 1994.
He is a co-founder of the MST Investment Partnerships and is a general partner
of MST Management, L.P. Prior to 1989, Mr. Tuttle was employed by Irving Trust
Company for four years.
Michael F. Cronin has served as a director of Tekni-Plex since March 1994.
He has invested in emerging growth companies and various industrial and service
businesses since 1978. Since June 1991, Mr. Cronin has been a general partner of
Weston Presidio Capital.
COMPENSATION OF DIRECTORS
Tekni-Plex reimburses directors for any reasonable out-of-pocket expenses
incurred by them in connection with services provided in such capacity. In
addition, Tekni-Plex compensates outside directors for services provided in such
capacity in the amount of $30,000 or less per fiscal year for each such
director.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the remuneration paid by Tekni-Plex to the
Chief Executive Officer and the next most highly compensated executive officer
of Tekni-Plex whose salary and bonus exceeded $100,000 for the years indicated
in connection with his position with Tekni-Plex:
SUMMARY COMPENSATION TABLE
FISCAL STOCK OTHER ANNUAL
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(a)
- ------------------------- ---- ------ ----- ------- ---------------
Dr. F. Patrick Smith, 1998 $770,577 $5,072,134 9.15041 $150,283
Chief Executive Officer 1997 490,385 1,921,291 -- 15,417
1996 351,923 859,248 -- 21,245
Mr. Kenneth W.R. Baker, 1998 $385,289 $2,536,062 13.72562 $ 6,315
President, Chief Operating 1997 260,096 960,645 -- 32,136
Officer and Principal 1996 217,308 429,624 -- 13,870
Accounting Officer
(a) Includes amounts reimbursed during the fiscal year for payment of taxes,
auto expense, membership fees, relocation expenses, etc.
Option/SAR Grants in Last Fiscal Year
Potential Potential
Percent of Realizable Realizable
Total Value at Value at
Number of Options/ Exer- Assumed Assumed
Securities SARs cise or Annual Rates Annual Rates
Under- Granted Base of Stock Price of Stock Price
lying to Price Appreciation Appreciation
Options/ Employees per Expi- for Option for Option
SARs in Fiscal Share ration Term 5% Term 10%
Name Granted Year ($000) Date ($000) ($000)
Dr. F. Patric Smith 9.15 32.3% $154.5 4/01/2008 $2,302 $3,666
Kenneth W.R. Baker 13.73 48.4% $154.5 4/01/2008 $3,453 $5,499
15
16
Aggregated Option/SAR Exerceses in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value ($000) of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at
FY-End FY-end
Name Shares Acquired Exercisable/ Exercisable/
on Exercise Value Realized Unexercisable Unexercisable
Dr. F. Patrick Smith --- --- ---/9.15 ---/---
Kenneth W.R. Baker --- --- 21.73/13.73 $3,356/---
EMPLOYMENT AGREEMENTS
Tekni-Plex recently renewed its employment agreements with Dr. F.
Patrick Smith and Mr. Kenneth W.R. Baker. Both Dr. Smith and Mr. Baker's
employment agreements expire June 29, 2001 and have renewal provisions. The
employment agreements provide, among other things, for (i) payment of a base
annual salary in the amount of $1,200,000 in the case of Dr. Smith and
$600,000 in the case of Mr. Baker, and that these salaries may be increased
(but not decreased) at the sole discretion of Tekni-Plex's Board of
Directors, (ii) payment of bonuses based on Tekni-Plex's performance, and
(iii) certain fringe benefits. Each employment agreement provides that the
executive may be terminated by Tekni-Plex upon the following bases: (i) for
cause or (ii) death or disability of the executive. Each of Dr. Smith and
Mr. Baker are entitled to severance benefits if he is terminated due to the
occurrence of an event specified in the preceding sentence. The employment
agreements also contain certain non-compete provisions.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee for the Board of Directors of Tekni-Plex, Inc.
consists of Michael F. Cronin and Arthur P. Witt. Their duties are to recommend
to the Board of Directors excluding the Chief Executive Officer, salary changes
and bonus awards for the Company's Chief Executive Officer. The Compensation
Committee and the Chief Executive Officer together recommend salary changes and
bonus awards for the Chief Operating Officer. The Board of Directors then votes
on the recommendations (excluding the Chief Executive Officer in the case of his
own compensation) with a simple majority required for approvals.
The salary for Dr. F. Patrick Smith, the Company's Chief Executive Officer
was raised from $650,000 per year to $1,200,000 per year effective March 3, 1998
to reflect expanded responsibilities as the result of the acquisition of
PureTec. The acquisition of PureTec increased the Company's size as measured by
annual sales by a factor of about 325% and the number of business units from one
to four. The bonus award for fiscal 1998 for Dr. Smith was based upon his
employment contract as amended in January of 1998, and is performance based.
Mr. Baker's salary was raised from $325,000 per year to $600,000 per
year effective March 3, 1998 to reflect expanded responsibilities resulting
from the PureTec acquisition. Mr. Baker's bonus award was based upon his
employment contract as revised in January, 1998, and is performance based.
Compensation levels and bonus awards for all other employees are
controlled by Dr. Smith and Mr. Baker.
Stock options were granted to Dr. Smith and Mr. Baker in fiscal 1998 under
a stock option plan approved by the Board of Directors effective December 31,
1997. Dr. Smith recommended, and the Board approved, stock options to three
other employees and to one Board member under this same stock option plan in
fiscal 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Witt, who is also the corporate Secretary of Tekni-Plex, serves as
a member of the compensation committee of Tekni-Plex's board of directors.
In addition, as Chief Executive Officer of Tekni-Plex, Dr. Smith participated
in deliberations concerning the compensation of the Chief Operating Officer of
Tekni-Plex (but not the compensation for himself or Mr. Witt).
16
17
SECURITY OWNERSHIP
Tekni-Plex Partnership owns 100% of the outstanding shares of Tekni-Plex
and 92.625% of Tekni-Plex on a fully diluted basis.
Tekni-Plex Partnership has one general partner and six limited partners.
Messrs. McWethy, Solomon and Tuttle are affiliated with the general partner of
Tekni-Plex Partnership which owns an aggregate interest in the net profits of
Tekni-Plex Partnership equal to approximately 55% and Dr. Smith owns an interest
in the net profits of Tekni-Plex Partnership equal to approximately 18%, in each
case, subject to certain conditions contained in Tekni-Plex Partnership's
agreement of limited partnership.
In 1994, Kenneth W.R. Baker was granted options on 2.5% of Tekni-Plex's
common stock, with anti-dilution provisions. Mr. Baker's option has a term of
fifteen years from the date of the grant. The option terminates immediately
upon Mr. Baker's termination for cause from Tekni-Plex. If Mr. Baker for any
other reason ceases to be employed by Tekni-Plex or is terminated by reason of a
disability, the option may be exercised for a period of six months following Mr.
Baker's cessation of employment. The option may be exercised by Mr. Baker's
estate for a year following Mr. Baker's death.
In April, 1997, Tekni-Plex, Tekni-Plex Partnership and Dr. F. Patrick
Smith entered into an agreement pursuant to which: (i) so long as Tekni-Plex
Partnership continues, Dr. Smith has an option to acquire an interest in
Tekni-Plex Partnership representing up to 1.4% of the outstanding equity
interest in Tekni-Plex Partnership; and (ii) if Tekni-Plex Partnership has been
dissolved, Dr. Smith has an option to acquire shares of common stock of
Tekni-Plex representing up to 1.4% (less any options exercised pursuant to
clause (i) above) of the outstanding common stock. These options have a term of
five years from the date of the grant.
CERTAIN TRANSACTIONS
Tekni-Plex has a management consulting agreement with MST Management
Company and MST/TP Holding, Inc., both of whom are affiliated with Tekni-Plex's
controlling shareholder. Pursuant to their respective agreements, MST Management
Company and MST/TP Holding, Inc. provide regular and customary management
consulting services to Tekni-Plex. The terms of each agreement require
Tekni-Plex to pay a monthly management fee to MST Management Company and MST/TP
Holding, Inc. for a period of ten years from March 18, 1994. Consulting service
fees were in the aggregate approximately $400,000 for fiscal year 1998. The
Company's policy is not to enter into any significant transaction with an
affiliate of the Company unless a majority of the disinterested directors of the
board of directors of the Company determines, in such majority's sole discretion
(making such assumptions and determinations of fact as such majority sees fit),
that the terms of such transaction are, in all material respects or taken as a
whole, at least as favorable as the terms that could be obtained by the Company
in a comparable transaction made on an arm's-length basis between unaffiliated
parties.
Tekni-Plex has an arrangement with Arthur P. Witt, a director and
Secretary of Tekni-Plex, whereby Mr. Witt provides customary management
consulting services to Tekni-Plex on an "as needed" basis. Compensation to Mr.
Witt for consulting services rendered on behalf of Tekni-Plex was approximately
$137,000 for fiscal year 1998.
17
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements and Schedules
The financial statements listed in the Index to Financial
Statements under Part II, Item 8 and the financial statement
schedules listed under Exhibit 27 are filed as part of this
annual report.
(a)(2) Financial Statement Schedule - Schedule II - Valuation and
Qualifying Accounts
(a)(3) Exhibits
The exhibits listed on the Index to Exhibits following the
Signature Page herein are filed as part of this annual report
or by incorporation by reference from the documents there
listed.
(b) Reports on Form 8-K
None.
18
19
TEKNI-PLEX, INC.
FINANCIAL STATEMENT CONTENTS
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7
Notes to financial statements F-8-35
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE F-36
SUPPLEMENTAL SCHEDULE:
Valuation and qualifying accounts and reserves F-37
F-2
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of Tekni-Plex, Inc.
and its wholly owned subsidiaries (the "Company") as of July 3, 1998 and June
27, 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended July 3,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tekni-Plex, Inc. and
its wholly owned subsidiaries as of July 3, 1998 and June 27, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended July 3, 1998, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Woodbridge, New Jersey
September 11, 1998
F-3
21
TEKNI-PLEX, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
July 3, 1998 June 27, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS (Note 5)
CURRENT:
Cash $ 29,363 $ 11,095
Accounts receivable, net of an allowance of $1,326 and $313 for
possible losses 88,778 12,688
Inventories (Note 3) 57,929 13,315
Refundable income taxes - 1,083
Deferred income taxes (Note 6) 5,565 1,500
Prepaid expenses and other current assets 9,642 2,030
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 191,277 41,711
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 4) 128,234 42,389
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $15,030 AND
$7,700 193,849 36,967
DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $1,768
AND $77 22,791 5,204
DEFERRED INCOME TAXES (NOTE 6) 7,065 -
OTHER ASSETS 3,616 2,758
- -----------------------------------------------------------------------------------------------------------------------------------
$546,832 $129,029
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt (Note 5) $ 5,147 $ -
Line of credit (Note 5) 307 -
Accounts payable trade 32,986 6,139
Accrued payroll and benefits 12,074 5,189
Accrued interest 8,884 -
Accrued liabilities - other (Note 2) 44,539 4,433
Income taxes payable 2,443 -
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 106,380 15,761
Long-term debt (Note 5) 396,451 75,000
Deferred income taxes (Note 6) - 7,255
Other liabilities 5,328 616
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 508,159 98,632
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8 AND 10)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000 shares, issued and - -
outstanding 1,700 shares at June 27, 1997 and 848 at July 3, 1998
Additional paid-in capital 41,075 41,473
Cumulative currency translation adjustment 5 -
Retained (deficit) (2,407) (11,076)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 38,673 30,397
- -----------------------------------------------------------------------------------------------------------------------------------
$546,832 $129,029
===================================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
22
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Years ended July 3, 1998 June 27, 1997 June 28, 1996
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES $309,597 $144,736 $80,917
COST OF SALES 232,499 107,007 62,335
- ----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 77,098 37,729 18,582
OPERATING EXPENSES:
Selling, general and administrative 39,220 15,886 10,339
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 37,878 21,843 8,243
OTHER EXPENSES:
Interest, net 19,682 8,094 5,816
Other 415 646 469
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME 17,781 13,103 1,958
TAXES AND EXTRAORDINARY ITEM
PROVISION FOR INCOME TAXES (Note 6):
Current 7,232 3,675 918
Deferred 1,880 1,000 64
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 8,669 8,428 976
EXTRAORDINARY ITEM, NET OF TAXES - (20,666) -
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 8,669 $(12,238) $ 976
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
23
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Cumulative
Additional Currency
Common Paid-In Translation Retained
Stock Capital Adjustment Earnings Total
- -------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 $-- $ 11,500 $ -- $ 186 $ 11,686
Proceeds from capital contributions -- 11,500 -- -- 11,500
Net income -- -- -- 976 976
- -------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 28, 1996 -- 23,000 -- 1,162 24,162
Issuance of common stock -- 18,473 -- -- 18,473
Net loss -- -- -- (12,238) (12,238)
- -------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 27, 1997 -- 41,473 -- (11,076) 30,397
Repurchase and cancellation of
shares -- (398) -- -- (398)
Foreign currency translation -- -- 5 -- 5
Net income -- -- -- 8,669 8,669
- -------------------------------------------------------------------------------------------------------------
BALANCE, JULY 3, 1998 $-- $ 41,075 $ 5 $ (2,407) $ 38,673
=============================================================================================================
See accompanying notes to consolidated financial statements.
F-6
24
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Years ended July 3, 1998 June 27, 1997 June 28, 1996
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,669 $ (12,238) $ 976
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 8,856 6,051 3,247
Amortization 8,393 3,500 3,574
Provision for bad debts 705 200 121
Deferred income taxes 1,880 1,000 64
Amortization of redeemable warrants -- 556 379
Extraordinary loss on extinguishment of debt -- 20,666 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (22,269) 67 1,161
Inventories 24,730 (360) 1,395
Prepaid expenses and other current assets (5,635) (292) (792)
Deferred financing costs and other assets 534 12 163
Accounts payable and other current liabilities 3,218 496 (4,516)
Income taxes 4,262 (121) 796
Other liabilities (4,334) -- --
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,009 19,537 6,568
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of net assets including acquisition costs, net
of cash acquired (303,389) -- (47,247)
Capital expenditures (7,283) (3,934) (2,275)
Increase in deposits -- (2,339) --
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (310,672) (6,273) (49,522)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 7 (6,857) 3,460
Proceeds from long-term debt 319,156 75,000 51,615
Repayments of long-term debt (787) (64,551) (19,642)
Proceeds from capital contribution -- 18,473 11,500
Debt financing costs (18,052) (5,282) (3,714)
Redemption of capital (398) -- --
Redemption of warrants -- (20,000) --
Proceeds from issuance of warrants -- -- 450
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 299,926 (3,217) 43,669
- -------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 5 -- --
- -------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 18,268 10,047 715
CASH, BEGINNING OF PERIOD 11,095 1,048 333
- -------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 29,363 $ 11,095 $ 1,048
===================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
25
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF Nature of Business
ACCOUNTING POLICIES
Tekni-Plex, Inc. is a global,
diversified manufacturer of packaging,
products, and materials for the
healthcare, consumer, and food packaging
industries. The Company has built a
leadership position in its core markets,
and focuses on vertically integrated
production of highly specialized
products. The Company's operations are
aligned under four primary business
groups: Healthcare Packaging, Products,
and Materials; Consumer Packaging and
Products; Food Packaging; and Specialty
Resins and Compounds.
Consolidation Policy
The consolidated financial statements
include the financial statements of
Tekni-Plex, Inc. and its wholly-owned
subsidiaries. All intercompany
transactions and balances have been
eliminated in consolidation.
Inventories
Inventories are stated at the lower of
cost (weighted average) or market.
Property, Plant and Equipment
Property, plant and equipment are stated
at cost. Depreciation and amortization
are computed over the estimated useful
lives of the assets by the straight-line
method for financial reporting purposes
and by accelerated methods for income
tax purposes. Repairs and maintenance
are charged to expense as incurred.
Intangible Assets
The Company amortizes the excess of cost
over the fair value of net assets
acquired on a straight-line basis over
15 years, and the cost of acquiring
certain patents and trademarks, over
seventeen and ten years, respectively.
Recoverability is evaluated periodically
based on the expected undiscounted net
cash flows of the related businesses.
Deferred Financing Costs
The Company amortizes the deferred
financing costs incurred in connection
with the Company's borrowings over the
life of the related indebtedness (5-10
years).
F-8
26
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Income Taxes
The Company accounts for income taxes
under the provisions of Statement of
Financial Accounting Standards No. 109
("SFAS 109"), "Accounting for Income
Taxes." Deferred income tax assets and
liabilities are recognized for
differences between the financial
statement and income tax basis of assets
and liabilities based upon statutory
rates enacted for future periods.
Valuation allowances are established
when necessary to reduce deferred tax
assets to the amount expected to be
realized.
Revenue Recognition
The Company recognizes revenue when
goods are shipped to customers. The
Company provides for returned goods and
volume rebates on an estimated basis.
Cash Equivalents
The Company considers all highly liquid
debt instruments with an original
maturity of three months or less to be
cash equivalents.
Fiscal Year-End
The Company utilizes a 52/53 week fiscal
year ending on the Friday closest to
June 30. The year ended July 3, 1998
contained 53 weeks, the years ended June
27, 1997 and June 28, 1996 contained 52
weeks each.
Significant Risks and Uncertainties
The preparation of financial statements
in conformity with generally accepted
accounting principles requires
management to make estimates and
assumptions that affect the reported
amounts of assets and liabilities and
disclosure of contingent assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Foreign Currency Translation
Assets and liabilities of international
subsidiaries are translated at current
exchange rates and related translation
adjustments are reported as a component
of stockholders' equity. Income
statement accounts are translated at the
average rates during the period.
F-9
27
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Long-Lived Assets
Effective June 29, 1996, the Company
adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and
Long-Lived Assets Being Disposed of,"
which provides guidance on how and when
impairment losses are recognized on
long-lived assets. No impairment
losses have been recorded through July
3, 1998.
Stock Based Compensation
Effective June 29, 1996, the Company
adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company
chose 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. As a result, this statement did
not have an effect on the financial
position or results of operations of the
Company.
New Accounting Pronouncements
In June 1997, SFAS 130, "Reporting
Comprehensive Income," was issued which
addresses standards for reporting and
display of comprehensive income and its
components. Also, in June 1997, SFAS
131, "Disclosures about Segments of an
Enterprise and Related Information,"
was issued which revises the standards
for segment reporting. In February 1998,
SFAS 132, "Employer's Disclosures About
Pensions and Other Post Retirement
Benefits," was issued. This statement
standardizes certain pension
disclosures. In June 1998, SFAS 133,
"Accounting for Derivative Instruments
and Hedging Activities," was issued.
SFAS 130, 131 and 132 are effective for
the Company's 1999 fiscal year and SFAS
133 is effective for the Company's 2000
fiscal year. The Company will be
implementing SFAS 130, 131 and 132 in
its 1999 financial statements. Since
these statements relate to disclosures,
which are not expected to be
significant, there will be no impact
on financial condition or results of
operations as a result of the adoption
of these statements. SFAS 133 is not
currently applicable to the Company.
F-10
28
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. ACQUISITIONS On March 3, 1998, Tekni-Plex acquired
PureTec Corporation ("PureTec"), a
publicly traded company with annual
sales of $315,000, for $312,000. PureTec
is a leading manufacturer of plastic
packaging, products, and materials
primarily for the healthcare and
consumer markets. PureTec is a
wholly-owned subsidiary of Tekni-Plex.
This acquisition was financed by the
issuance of $200,000 of Senior
Subordinated Debt (Note 5(a)) and
$115,000 of Senior Term Debt (Note
5(c)).
The acquisition was recorded under the
purchase method, whereby PureTec's net
assets were recorded at their fair value
and its operations have been reflected
in the statement of operations since
the acquisition date. As a result of the
acquisition, goodwill of approximately
$162,000 has been recorded, which is
being amortized over 15 years.
In connection with the acquisition of
PureTec, a reserve of $24,000 has been
established. The reserve is comprised of
the costs to close or sell incompatible
and duplicate facilities, terminate
employees and provide for existing
litigation. The employees are expected
to be terminated within six months of
the acquisition. The plans to close the
facilities have been put in place,
however, certain related lease costs
will extend for the next five years. At
July 3, 1998, approximately $21,000 was
remaining in this reserve, which is
included in accrued expenses.
The following table presents the
unaudited pro forma results of
operations as though the acquisition of
PureTec occurred on June 29, 1996:
Year ended Year ended
July 3, 1998 June 27, 1997
- -------------------------------------------------------------------------------------
Net sales $507,482 $460,070
Operating profit 45,858 40,703
Income (loss) from continuing operations 3,494 (3,938)
=====================================================================================
Proforma adjustments were made to the
related historical results to reflect
changes in interest expense and goodwill
amortization.
F-11
29
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The pro forma results are not
necessarily indicative of what actually
would have occurred if the acquisition
had been in effect for the entire
periods presented. In addition, they are
not intended to be a projection of
future results and do not reflect any
synergies that might be achieved from
combined operations.
On July 3, 1997, the Company purchased
100% of the stock of PurePlast, Inc.
("PurePlast") for $2,292. Pro forma
results of operations, assuming the
PurePlast acquisition had occurred on
June 29, 1996, would not be materially
different from the results presented.
On February 22, 1996, the Company
purchased 100% of the common stock of
Dolco Packaging Corp. ("Dolco") for
approximately $40,000. Dolco is the
nation's leading producer of foamed egg
cartons and various grocery store
containers for meat, poultry, baked
goods and produce. The acquisition was
recorded under the purchase method and
Dolco's operations have been reflected
in the statement of operations since
that date. As a result of the
acquisition, goodwill of approximately
$14,044 has been recorded, which is
being amortized over 15 years.
In connection with this acquisition, a
reserve of $5,000 was established for
the costs to integrate Dolco's
operations with the Company and to
eliminate duplicate personnel. During
the year ended June 27, 1997, the
Company reduced its estimate of these
costs and, accordingly, reduced this
reserve and goodwill by $790. At July 3,
1998, there was no balance remaining in
this reserve.
The following table presents the
unaudited pro forma results of
operations as though the acquisition of
Dolco occurred on June 27, 1995:
June 28, 1996
- ----------------------------------------------------------------------------
Net sales $135,800
Income from operations 11,753
Net income 1,848
============================================================================
F-12
30
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
On December 22, 1995, the Company
purchased certain assets and assumed
certain liabilities of Hargro Flexible
Packaging Corporation in Flemington, NJ,
for approximately $7,500, which
approximated the fair value of the net
assets acquired. The acquisition was
recorded under the purchase method. As a
result of this acquisition, the former
Brooklyn, New York Closure Liners
Operation of Tekni-Plex was closed on
May 31, 1996. The machinery and
equipment along with many of the
employees have been relocated to the
Flemington facility.
3 INVENTORIES Inventories are summarized as follows:
July 3, June 27,
1998 1997
- -----------------------------------------------------------------------------------
Raw materials $24,427 $5,943
Work-in-process 5,136 3,362
Finished goods 28,366 4,010
- -----------------------------------------------------------------------------------
$57,929 $13,315
===================================================================================
4. PROPERTY, PLANT AND Property, plant and equipment consists
EQUIPMENT of the following:
July 3, June 27, Estimated
1998 1997 useful lives
- -------------------------------------------------------------------------------------
Land $ 14,764 $ 1,901
Building and improvements 26,411 10,450 30 - 40 years
Machinery and equipment 97,256 38,375 5 - 10 years
Furniture and fixtures 2,256 451 5 - 10 years
Construction in progress, primarily
machinery and equipment 6,885 2,138
- -------------------------------------------------------------------------------------
147,572 53,315
Less: Accumulated depreciation 19,338 10,926
- -------------------------------------------------------------------------------------
$128,234 $42,389
=====================================================================================
F-13
31
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. LONG-TERM DEBT Long-term debt consists of the following:
July 3, June 27,
1998 1997
- -------------------------------------------------------------------------------------------------------------
Senior Subordinated Notes issued March 3,
1998 at 9 1/4%, due March 1, 2008. Interest
payable semi-annually. (a) $200,000 $ --
Senior Subordinated Notes issued April 4,
1997 at 11 1/4%, due April 1, 2007. Interest
payable semi-annually (b) 75,000 75,000
Senior Debt (c)
Revolving line of credit -- --
Term notes 114,213 --
PS&T term notes at 11 1/4%, senior secured
notes due December 1, 2003 (d) 1,550 --
Mortgage payable, bearing interest at prime
(8.5% at July 3, 1998),
plus 1 1/2%, payable in monthly installments
of $4, due January 2000, collateralized by a
building in Newark, NJ 211 --
7% Subordinated Notes issued in connection with an acquisition by PureTec, due
July 1, 2005. Interest is payable semi-annually and
principal is payable at maturity 662 --
6.10% Foreign Term Loan payable in Belgium Francs, with interest in twenty
quarterly installments through September 2000 630 --
4 1/4% Foreign Term Loan payable in Belgium
Francs, with five equal yearly installments
with first payment commencing December
1997 635 --
8.40% Foreign Term Loan payable in Italian
Lira, repayable semi-annually including
principal and interest through 2001 1,118 --
5.30% Foreign Term Loan payable in Italian Lira, with five equal yearly
installments with first payment commencing May 1998
Interest is payable quarterly 914 --
F-14
32
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Foreign Term Loan payable in British Pounds,
in 13 equal semi-annual installments,
commencing June 1998, with a final payment
due December 2004 at LIBOR, plus 1 3/4%
(approximately 7 3/4% at July 3, 1998) 6,055
Foreign Line of Credit in British Pounds, due
on demand and unsecured 492
PurePlast Line of Credit for $722 (CDN
$1,000) at the prime rate, plus 1/4%. The
line is due on demand and is unsecured. 307 -
PurePlast Term Loan in the amount of $93
(CDN $133). The loan is due in monthly
payments of $4 (CDN $6), plus interest at
prime, plus 1 1/4%. 67 -
Other, primarily equipment financing 51 -
- -----------------------------------------------------------------------------------------
401,905 75,000
Less: Current maturities 5,454 -
- -----------------------------------------------------------------------------------------
$396,451 $75,000
=========================================================================================
(a) In February 1998, the Company issued $200,000 of 9 1/4%, ten
year Senior Subordinated Notes, the net proceeds of which were used in
connection with the PureTec acquisition (Note 2). Interest is payable
semi-annually. The notes are uncollateralized and rank equally to the
$75,000 Senior Subordinated Notes discussed below and will be
subordinate to all current and future senior indebtedness of the
Company. The notes are callable by the Company after March 1, 2003 at
a premium which decreases to par after March 2006. These notes also
contain various covenants including a limitation on future
indebtedness; limitation of payments, including dividends; and
limitations on mergers, consolidations and sale of assets.
F-15
33
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(b) In April 1997, the Company issued $75,000 of 11 1/4% ten year notes.
Interest on the notes is payable semi-annually. These notes are
uncollateralized and rank equally with the $200,000 Senior Subordinated
Notes discussed above and will be subordinate to all current and future
senior indebtedness of the Company. The notes are callable by the
Company after April 1, 2002 at a premium which decreases to par after
April 2005. These notes also contain various covenants including a
limitation on future indebtedness; limitation of payments, including
dividends; and limitations on mergers, consolidations and sale of
assets.
The net proceeds of these bonds along with a capital contribution of
$18,473 were used to repay the balance of $36,800 on a prior credit
facility, repay prior subordinated notes of $25,200, including a
prepayment penalty of $1,200 and repurchase the redeemable warrants for
$20,000 with the balance being used for general corporate purposes.
These transactions resulted in an extraordinary loss of approximately
$20,666. The extraordinary loss was comprised of (i) the prepayment
penalty of $1,200 and the write-off of deferred financing costs and
debt discount of $3,449 net of the combined tax benefit of $1,757, and
(ii) the loss on the repurchase of the warrant of $17,773 and has been
reflected in the 1997 statements of operations.
(c) Senior Debt
The Company has a Senior Debt agreement, which includes a $90,000
revolving credit agreement, and two term loans in the aggregate amount
of $115,000. The proceeds of the term loans were used as part of the
financing for the PureTec acquisition (Note 2). These loans are senior
to all other indebtedness and are collateralized by substantially all
the assets of the Company. The debt agreement includes various
covenants including a limitation on capital expenditures and compliance
with customary financial ratios. At July 3, 1998, the Company is in
compliance with these covenants.
F-16
34
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Revolving Credit Agreement
Borrowings under the agreement
may be used for general
corporate purposes and at July
3, 1998, $90,000 is available
for borrowing. Interest, at the
Company's option, is charged at
the Prime Rate, plus the
Applicable Base Rate (initially
1.25%) or the Adjusted LIBOR
Rate, as defined, plus the
Applicable Euro-Dollar Margin
(initially 2.25%). The
Applicable Base Rate and
Applicable Euro-Dollar Margin
can be reduced by up to 1.25%
based on the maintenance of
certain leverage ratios. This
agreement matures on March 31,
2004.
Term Loan A
Borrowings under this loan in
the amount of $50,000, were to
be used solely in connection
with the acquisition of PureTec.
Interest is payable quarterly at
the same rate discussed above
under the Revolving Credit
Agreement, 7.938% at July 3,
1998. Principal is payable $625
quarterly, beginning June 30,
1998, increasing to $5,000 at
June 30, 2003 through the
maturity date of March 31, 2004.
Term Loan B
Borrowings under this loan in
the amount of $65,000, were to
be used solely in connection
with the acquisition of PureTec.
Interest is payable quarterly at
the same rate discussed above,
except the Applicable Base Rate
is initially 1.75% and the
Applicable Euro-Dollar Margin is
initially 2.75%. The rate at
July 3, 1998 is 8.438%. In
addition, the Applicable Base
Rate and Applicable Euro-Dollar
Margin can be reduced .5% based
on the maintenance of certain
leverage ratios. Principal is
payable $162.5 quarterly,
beginning June 30, 1998,
increasing to $7,150 on June 30,
2004 and to $8,125 on June 30,
2005 through the maturity date
of March 31, 2006.
F-17
35
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(d) PureTec Senior Secured Notes
In November 1993, PST, a
subsidiary of PureTec, issued
$125,000 11.25% Senior Secured
Notes which were to mature in
2003. In connection with the
acquisition of PureTec by the
Company, $123,450 of these notes
were redeemed. Interest is
payable quarterly and principal
is payable at maturity.
Principal payments on long-term debt
over the next five years and thereafter
are as follows:
- -----------------------------------------------------------------------------------------
1999 $ 5,454
2000 5,477
2001 6,859
2002 8,935
2003 17,136
Thereafter 358,044
- -----------------------------------------------------------------------------------------
$401,905
=========================================================================================
The Company believes the recorded value
of long-term debt approximates fair
value based on current rates available
to the Company for similar debt.
F-18
36
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. INCOME TAXES The provision for income taxes is summarized as follows:
July 3, June 27, June 28,
Years ended 1998 1997 1996
- -----------------------------------------------------------------------------------------
Current:
Federal $ 4,492 $3,425 $735
Foreign 1,345 - -
State and local 1,395 250 183
- -----------------------------------------------------------------------------------------
7,232 3,675 918
- -----------------------------------------------------------------------------------------
Deferred:
Federal 1,656 932 60
Foreign 182 - -
State and local 42 68 4
- -----------------------------------------------------------------------------------------
1,880 1,000 64
- -----------------------------------------------------------------------------------------
Provision for income taxes $ 9,112 $4,675 $982
=========================================================================================
For the year ended July 3, 1998, pre-tax income is comprised of $14,754 from
domestic operations and $3,027 from foreign operations.
The provision for income taxes differs from the amounts computed by applying the
applicable Federal statutory rates due to the following:
July 3, June 27, June 28,
Years ended 1998 1997 1996
- ------------------------------------------------------------------------------------------
Provision for Federal income
taxes at statutory rate $ 6,046 $4,455 $666
State and local income taxes,
net of Federal benefit 921 165 305
Non-deductible goodwill amortization 1,838 - -
Foreign tax rates in excess of
Federal tax rate 328 - -
Other, net (21) 55 11
- ------------------------------------------------------------------------------------------
Provision for income taxes $ 9,112 $4,675 $982
==========================================================================================
F- 19
37
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
July 3, June 27,
1998 1997
- --------------------------------------------------------------------------------
Current deferred taxes:
Allowance for doubtful accounts $ 565 $ 125
Inventory 818 360
Tax credit and net operating loss
carryforwards -- 298
Accrued expenses 4,182 717
- --------------------------------------------------------------------------------
Total current deferred tax assets $ 5,565 $ 1,500
================================================================================
Long-term deferred taxes:
Net operating loss carryforwards $ 29,359 $ --
Accrued pension and postretirement 1,375 --
Accrued expenses 464 --
Difference in book vs tax basis of assets (19,133) (7,255)
- --------------------------------------------------------------------------------
Total deferred tax assets (liabilities) 12,065 (7,255)
Valuation allowance (5,000) --
- --------------------------------------------------------------------------------
Total long-term deferred tax assets
(liabilities) $ 7,065 $ (7,255)
================================================================================
The net long-term deferred tax assets have been subjected to a valuation
allowance since management believes it is more likely than not that this portion
of the net operating loss carryforwards (NOL) balance will not be realized as a
result of the various limitations on their usage, discussed below.
The domestic net operating losses are subject to matters discussed below and are
subject to change due to the restructuring occurring at the corporate subsidiary
level, as well as adjustment for the timing of inclusion of expenses and losses
in the federal returns as compared to amounts included for financial statement
purposes.
F-20
38
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net Operating Losses
The Company and its U.S. subsidiaries file a consolidated tax return. The NOL
carryforwards involve complex issues of federal tax law and are subject to
various limitations as follows:
- - $68,400 - Subject to IRC Section 382 change in ownership annual
limitation of approximately $3,900; this includes $4,700 of losses
incurred prior to 1992, which are subject to additional limitations.
Approximately $27,700 of these losses were incurred after the change of
ownership occurred and are not subject to Section 382 limitations
except as discussed below; expire 2001-2013.
- - $17,700 - Subject to IRC Section 382 annual limitation of approximately
$3,100, Separate Return Limitation Year ("SRLY") as to a PureTec
subsidiary, expire 1999 - 2005.
- - $4,000 - Subject to IRC Section 382 annual limitation of approximately
$3,100. (This is part of, and not in addition to, $3,100 IRC Section
382 limitation discussed immediately above). SRLY as to a Puretec
subsidiary, expires 2009.
In addition, as a result of the acquisition of PureTec by the Company, the NOL
carryforwards are subject to a total annual IRC Section 382 Separate Return
limitation of $5,900.
To the extent the amounts of NOL's reserved are subsequently recognized, they
will cause changes in the goodwill arising from the transaction. In addition to
the domestic NOL balances, the Company has incurred losses relating to a
subsidiary, taxable in Northern Ireland. Fiscal 1998 and 1997 losses aggregated
$1,818 which have no expiration date. The Company believes that it is more
likely than not that this deferred tax asset will not be realized and has
recorded a full valuation allowance on these amounts.
F-21
39
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. EMPLOYEE BENEFIT (a) Savings Plans
PLANS
The Company maintains a discretionary 401(k)
plan covering all eligible employees,
excluding those employed by Dolco and
PureTec, with at least one year of service.
Contributions to the plan are determined
annually by the Board of Directors. There
were no contributions for years ended July 3,
1998, June 27, 1997 and June 28, 1996.
The Company has a defined contribution profit
sharing plan for the benefit of all employees
having completed one year of service with
Dolco. The Company contributes 3% of
compensation for each participant and a
matching contribution of up to 1% when an
employee contributes 3% compensation.
Contributions totaled approximately $653 and
$475 for the years ended July 3, 1998 and
June 27, 1997 and approximately $188 for the
period February 22, 1996 to June 28, 1996.
Additionally, the Company has a savings plan
for all employees of three wholly-owned
subsidiaries who are not covered under a
collective bargaining agreement. The three
subsidiaries are Plastic Specialties &
Technologies Inc (PST); Burlington Resins,
Inc (Burlington); and PTI Plastics, Inc.
(PTI). Under the savings plan, the Company
will match each eligible employee's
contribution up to 3% of the employee's
earnings. Such contribution amounted to
approximately $215 for the period March 3
through July 3, 1998.
(b) Pension Plans
The Company maintains a non-contributory
defined benefit pension plan that covers
substantially all non-collective bargaining
unit employees of PST and of Burlington, who
have completed one year of service and are
not participants in any other pension plan.
The funding policy of the Company is to make
contributions to the plan based on actuarial
computations of the minimum required
contribution for the plan year. The plan's
assets are invested primarily in the Master
Trust Fund of PST in accordance with the
investment agreements of the plan. On
September 8, 1998, the Company approved a
plan to freeze this defined benefit pension
plan effective September 30, 1998.
F-22
40
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net pension costs for the period March 3 through July 3, 1998 consist of the
following:
- ----------------------------------------------------------------------------
Service cost $ 290
Interest cost on projected benefit obligations 202
Actual return on plan assets (233)
- ----------------------------------------------------------------------------
$ 259
============================================================================
The funded status of the Plan at July 3, 1998 is as follows:
- ----------------------------------------------------------------------------
Vested benefit obligation $ 8,275
============================================================================
Accumulated benefit obligation $ 8,636
============================================================================
Projected benefit obligation $ 10,127
Plan assets at fair value 9,258
- ----------------------------------------------------------------------------
Projected benefit obligation in excess of $ 869
plan assets/accrued pension costs
============================================================================
The expected long-term rate of return on plan assets was 9% for the
period presented and the discount rate was 7 1/2% at July 3, 1998.
The Company's Burlington subsidiary has a non-contributory defined benefit
pension plan that covers substantially all hourly compensated employees covered
by a collective bargaining agreement, who have completed one year of service.
The funding policy of the Company is to make contributions to this plan based on
actuarial computations of the minimum required contribution for the plan year.
The plan's assets are invested primarily in the Master Trust Fund of PST.
F-23
41
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net pension costs and funded status of the Plan for the period March 3 through
July 3, 1998 and as of July 3, 1998 consist of the following:
- ----------------------------------------------------------
Service cost $ 40
Interest cost on projected benefit
obligations 136
Actual return on plan assets (140)
- ----------------------------------------------------------
Net pension cost $ 36
==========================================================
Vested benefit obligation $ 4,686
==========================================================
Accumulated benefit obligation $ 4,974
==========================================================
Projected benefit obligation $ 4,974
Plan assets at fair value 4,978
- ----------------------------------------------------------
Projected benefit obligation less than plan $ 4
assets
==========================================================
The expected long-term rate of return on plan assets was 9% and the discount
rate was 7 1/2% for the period.
The Company also has a defined benefit pension plan for the benefit of all
employees having completed one year of service with Dolco. The Company's policy
is to fund the minimum amounts required by applicable regulations. Dolco's Board
of Directors approved a plan to freeze the pension plan on June 30, 1987, at
which time benefits ceased to accrue. The Company has not been required to
contribute to the plan since 1990.
F-24
42
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(c) Post-retirement Benefits
In addition to providing pension benefits,
the Company also sponsors the Burlington
Retiree Welfare Plan, which provides certain
healthcare benefits for retired employees of
the Burlington division who were employed on
an hourly basis, covered under a collective
bargaining agreement and retired prior to
July 31, 1997. Those employees and their
families became eligible for these benefits
after the employee completed five years of
service, if retiring at age fifty-five, or at
age sixty-five, the normal retirement age.
Post retirement healthcare benefits paid
during the period March 3, through July 3,
1998 amounted to $139.
Net periodic post-retirement benefit cost for
the period March 3 through July 3, 1998 was
$110 and was comprised of $10 of service cost
and $100 of interest cost.
The status of the plan is as follows:
- ----------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation:
Retirees $1,199
Fully eligible active plan participants 451
Other active participants 347
- ----------------------------------------------------------------------------------
Total accrued post-retirement costs $1,997
==================================================================================
The accumulated post-retirement benefit
obligation was determined using a 7% discount
rate for the period March 3 through July 3,
1998. The healthcare cost trend rate for
medical benefits was assumed to be 6% for
1998, gradually declining until it reaches a
constant annual rate of 5% in 2002. The
healthcare cost trend rate assumption has a
significant effect on the amounts reported. A
1% increase in healthcare trend rate would
increase the accumulated post-retirement
benefit obligation by $214 and increase the
service and interest components by $5 at July
3, 1998.
F-25
43
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. RELATED PARTY The Company has a management consulting
TRANSACTIONS agreement with an affiliate of a stockholder.
The terms of the agreement require the
Company to pay a fee of Approximately $30 per
month for a period of Ten years. Consulting
service fees were approximately $400, $390
and $274 for the years ending July 3, 1998,
June 27, 1997 and June 28, 1996,
respectively.
9. STOCK OPTIONS In April 1994, the Company granted options to
an employee to acquire 2 1/2% of the
outstanding common stock for $13.5 per share,
with anti-dilution provisions. The options
are exercisable as to 33 1/3% of the shares
on the first, second and third anniversary
dates of the original grant and expire
fifteen years from the date of the grant.
In January 1998, the Company adopted an
incentive stock plan (the "Stock Incentive
Plan"). Under the Stock Incentive Plan,
45.75206 shares are available for awards to
employees of the Company. Options will be
granted at fair market value on the date of
grant. During 1998, options were granted to
purchase 28.37 shares of common stock at an
exercise price of $154.5 per share. The
options are subject to vesting provisions
determined at date of grant and expire 10
years from date of grant.
In addition, an option to purchase 2.288
shares of common stock was granted to a
member of the Board of Directors, in April
1998, at an exercise price of $154.5 per
share. The options vest 100% after 3 years
and expire 10 years from date of grant.
At July 3, 1998, options for 21.73 shares are
exercisable and no options have been
exercised or forfeited as of July 3, 1998.
F-26
44
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company applies APB Opinion 25 and
related interpretations in accounting for
these options. Accordingly, no compensation
cost has been recognized. Had compensation
cost been determined based on the fair value
at the grant dates for these awards
consistent with the method of SFAS Statement
123, the Company's net income would have been
reduced to the pro forma amounts indicated
below. The calculations were based on a risk
free interest rate of 5.28%, 6 3/4% and 6.24%
in 1998, 1997 and 1996, respectively,
expected volatility of zero, a dividend yield
of zero and expected lives of 8 years.
July 3, June 27, June 28,
Years ended 1998 1997 1996
- -----------------------------------------------------------------------------------------
Income before extraordinary item:
As reported $8,669 $8,428 $976
=========================================================================================
Pro forma $8,618 $8,324 $904
=========================================================================================
10. COMMITMENTS AND Commitments
CONTINGENCIES
The Company leases building space in 23
locations throughout the United States,
Canada and Europe. At July 3, 1998, the
Company's future minimum lease payments are
as follows:
- -----------------------------------------------------------------------------------------
1999 $ 4,801
2000 4,401
2001 4,270
2002 4,161
2003 2,474
Thereafter 9,541
- -----------------------------------------------------------------------------------------
$ 29,648
=========================================================================================
Rent expense, including escalation charges,
amounted to approximately $2,802, $676 and
$614 for the years ended July 3, 1998, June
27, 1997 and June 28, 1996, respectively.
The Company has employment contracts with two
employees which provide for minimum salaries
of $1,800 and bonuses based on performance
and expire in June 2001. Salaries and bonuses
for the year ended July 3, 1998 under these
contracts were $1,157 and $7,608,
respectively. These contracts provide
aggregate minimum annual compensation for the
fiscal years ended as follows: 1998--$1,800;
1999--$1,800; 2000--$1,800; 2001-$1,800.
F-27
45
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Contingencies
(a) In January 1993 and 1994, the Company's
Belgian subsidiary received income tax
assessments aggregating approximately $2,114
(75,247 Belgian Francs) for the disallowance
of certain foreign tax credits and investment
losses claimed for the years ended July 31,
1990 and 1991. Additionally, in January 1995,
the subsidiary received an income tax
assessment of approximately $902 (32,083
Belgian francs) for the year ended July 31,
1992. By Belgian law, these assessments are
capped at the values above and do not
continue to accrue additional penalties or
interest. Although the future outcome of
these matters are uncertain, the Company
believes that its tax position was
appropriate and that the assessments are
without merit. Therefore, the Company has
appealed the assessments. Based on advice of
legal counsel in Belgium, the Company
believes that the assessment appeals will be
accepted by the tax authorities in Belgium,
although there can be no assurance whether or
when such appeals will be accepted.
(b) The Company is a party to various other legal
proceedings arising in the normal conduct of
business. Management believes that the final
outcome of these proceedings will not have a
material adverse effect on the Company's
financial position.
11. CONCENTRATIONS OF Financial instruments that potentially
CREDIT RISKS subject the Company to significant
concentrations of credit risk consist
principally of cash deposits and trade
accounts receivable.
The Company provides credit to customers on
an unsecured basis after evaluating customer
credit worthiness. Since the Company sells to
a broad range of customers, concentrations of
credit risk are limited. The Company provides
an allowance for bad debts where there is a
possibility for loss.
The Company maintains demand deposits at
several major banks throughout the United
States. As part of its cash management
process, the Company periodically reviews the
credit standing of these banks.
F-28
46
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
12. SUPPLEMENTAL CASH (a) Cash Paid
FLOW INFORMATION
July 3, June 27, June 28,
Years ended 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Interest $15,776 $ 5,317 $ 4,730
=================================================================================================
Income taxes $ 5,832 $ 3,747 $ 188
=================================================================================================
(b) Non-Cash Financing and Investing Activities
The Company purchased the outstanding stock
of PureTec Corporation on March 3, 1998 for
approximately $312,047. In conjunction with
the acquisition, liabilities were assumed as
follows:
- ----------------------------------------------------------------------------------
Fair value of assets acquired $ 246,160
Goodwill 161,722
Cash paid (312,047)
- ----------------------------------------------------------------------------------
Liabilities assumed $ 95,835
==================================================================================
The Company purchased certain assets and
assumed certain liabilities of PurePlast,
Inc., effective July 3, 1997, for
approximately $2,292 in cash. In conjunction
with the acquisition, liabilities were
assumed as follows:
- --------------------------------------------------------------------------------
Fair value of assets acquired $ 1,802
Goodwill 1,734
Cash paid (2,292)
- --------------------------------------------------------------------------------
Liabilities assumed $ 1,244
================================================================================
F-29
47
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company purchased all of the outstanding
common and preferred stock of Dolco
Packaging Corp, effective February 22, 1996,
for approximately $40,000 in cash. In
conjunction with the acquisition,
liabilities were assumed as follows:
- --------------------------------------------------------------------------------
Fair value of assets acquired $ 46,293
Goodwill 14,044
Cash paid (39,434)
- --------------------------------------------------------------------------------
Liabilities assumed $ 20,903
================================================================================
The Company purchased certain assets and
assumed certain liabilities of Hargro
Flexible Packaging Corporation, effective
December 22, 1995, for approximately $7,500
in cash. In conjunction with the acquisition,
liabilities were assumed as follows:
- --------------------------------------------------------------------------------
Fair value of assets acquired $ 10,592
Cash paid (7,543)
- --------------------------------------------------------------------------------
Liabilities assumed $ 3,049
================================================================================
13. SEGMENT INFORMATION The Company operates in four industry
segments: healthcare packaging, products, and
materials; consumer packaging and products;
food packaging; and specialty resins and
compounds. The healthcare packaging,
products, and materials segment principally
produces pharmaceutical packaging, medical
tubing and medical device materials. The
consumer packaging and products segment
principally produces precision tubing and
gaskets, and garden and irrigation hose
products. The food packaging segment produces
foamed polystyrene packaging products for the
poultry, meat and egg industries. The
specialty resins and compounds segment
produces specialty PVC resins. The healthcare
packaging, products, and materials and
consumer packaging and products segments have
operations in the United States, Europe and
Canada (Canadian operations are included in
the domestic amounts below). Prior to 1998,
the Company operated principally in the food
packaging segment.
F-30
48
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Financial information concerning the Company's business segments and the
geographic areas in which it operated for the year ended July 3, 1998 is as
follows:
- --------------------------------------------------------------------------------
NET SALES:
Healthcare Packaging, Products, and Materials:
Domestic $ 88,749
Europe 1,959
Consumer Packaging and Products:
Domestic 90,329
Europe 13,415
Food packaging 99,336
Specialty Resins and Compounds 32,405
Corporate & eliminations (16,596)
- --------------------------------------------------------------------------------
TOTAL NET SALES $ 309,597
================================================================================
OPERATING INCOME (LOSS):
Healthcare Packaging, Products, and Materials:
Domestic $ 13,951
Europe (388)
Consumer Packaging and Products:
Domestic 11,293
Europe 3,573
Food packaging 18,321
Specialty Resins and Compounds 2,955
Corporate & eliminations (11,827)
- --------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS $ 37,878
================================================================================
DEPRECIATION AND AMORTIZATION:
Healthcare Packaging, Products, and Materials:
Domestic $ 1,596
Europe 109
Consumer Packaging and Products:
Domestic 3,395
Europe 459
Food packaging 9,320
Specialty Resins and Compounds 1,952
Corporate & eliminations 418
- --------------------------------------------------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION $ 17,249
================================================================================
F-31
49
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CAPITAL EXPENDITURES:
Healthcare Packaging, Products, and Materials:
Domestic $ 1,318
Europe 29
Consumer Packaging and Products:
Domestic 1,276
Europe 111
Food packaging 4,326
Specialty Resins and Compounds 233
- --------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 7,283
================================================================================
IDENTIFIABLE ASSETS:
Healthcare Packaging, Products, and Materials:
Domestic $ 70,816
Europe 11,487
Consumer Packaging and Products:
Domestic 178,636
Europe 39,368
Food packaging 135,064
Specialty Resins and Compounds 89,355
Corporate & eliminations 22,106
- --------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS $546,832
================================================================================
Income (loss) from operations is total net sales less cost of goods sold and
operating expenses of each segment before deductions for general corporate
expenses not directly related to an individual segment. In computing operating
income (loss) from operations, the following items have not been included:
interest expense and income tax provision. Identifiable assets by industry are
those assets that are used in the Company's operation in each industry segment,
including assigned value of goodwill. Corporate identifiable assets consist
primarily of cash, prepaid expenses and fixed assets offset by elimination of
intersegment profit in ending inventories.
For the year ended July 3, 1998, one customer represented 10% of sales and two
customers each represented 11% of accounts receivable at July 3, 1998.
F-32
50
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. SUPPLEMENTAL CON- Tekni-Plex, Inc. issued 11 1/4% Senior
DENSED CONSOLIDATING Subordinated Notes in April 1997 and 9 1/4%
FINANCIAL STATEMENTS Series B Senior Subordinated Notes in
February 1998. These notes are guaranteed by
all domestic subsidiaries of Tekni-Plex. At
June 27, 1997, there were no non-guarantor
subsidiaries. The following condensed
consolidating financial statements present
separate information for Tekni-Plex (the
"Issuer") and its domestic subsidiaries (the
"Guarantors") and the foreign subsidiaries
(the "Non-Guarantors").
Condensed Consolidating Statement of
Operations - For the year ended July 3, 1998
Non-
Issuer Guarantors Guarantors Total
- -----------------------------------------------------------------------------------------
Sales, net $151,507 $137,013 $21,077 $309,597
Cost of sales 110,886 106,543 15,070 232,499
- -----------------------------------------------------------------------------------------
Gross profit 40,621 30,470 6,007 77,098
Selling, general and
administrative 24,218 12,581 2,421 39,220
- -----------------------------------------------------------------------------------------
Income from operations 16,403 17,889 3,586 37,878
Interest expense, net 18,996 477 209 19,682
Other expense (income) 346 (281) 350 415
- -----------------------------------------------------------------------------------------
Income (loss) before
provision for income taxes (2,939) 17,693 3,027 17,781
Provision for income
taxes (1,447) 9,023 1,536 9,112
- -----------------------------------------------------------------------------------------
Net income (loss) $ (1,492) $ 8,670 $ 1,491 $ 8,669
=========================================================================================
F-33
51
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - at July 3, 1998:
Non-
Issuer Guarantors Guarantors Eliminations Total
- ---------------------------------------------------------------------------------------------------------------
Current assets $ 18,510 $ 107,700 $ 24,621 $ 40,446 $ 191,277
Property, plant and
equipment, net 40,535 71,304 16,395 -- 128,234
Goodwill 30,624 161,722 1,503 -- 193,849
Investment in
subsidiaries 333,498 -- -- (333,498) --
Deferred financing
costs, net 22,277 396 118 -- 22,791
Other long-term
assets 7,041 2,060 1,580 -- 10,681
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 452,485 $ 343,182 $ 44,217 $(293,052) $ 546,832
===============================================================================================================
Current liabilities $ 28,855 $ 64,948 $ 12,577 $ -- $ 106,380
Long-term debt 386,063 6,755 3,633 -- 396,451
Other long-term
liabilities (6,377) (37,606) 10,599 38,712 5,328
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 408,541 34,097 26,809 38,712 508,159
- ---------------------------------------------------------------------------------------------------------------
Additional paid-in
capital 41,095 296,747 15,641 (312,408) 41,075
Retained earnings
(deficit) 2,849 12,611 1,489 (19,356) (2,407)
Cumulative currency
translation
adjustment -- (273) 278 -- 5
- ---------------------------------------------------------------------------------------------------------------
Total equity 43,944 309,085 17,408 (331,764) 38,673
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and
equity $ 452,485 $ 343,182 $ 44,217 $(293,052) $ 546,832
===============================================================================================================
F-34
52
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. QUARTERLY RESULTS OF
OPERATIONS
(UNAUDITED)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
Net sales $37,791 $37,831 $68,388 $165,587
Gross profit 9,934 10,464 17,152 39,548
Income from operations 5,886 6,257 7,438 18,297
Net income 2,305 2,436 1,635 2,293
=========================================================================================
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------
Net sales $35,167 $36,428 $38,233 $ 34,908
Gross profit 8,621 9,514 10,454 9,140
Income from operations 4,207 6,778 5,609 5,249
Income before
extraordinary item 1,277 2,884 2,266 2,001
Loss on extinguishment
of debt - - - (20,666)
- -----------------------------------------------------------------------------------------
Net income (loss) $ 1,277 $ 2,884 $ 2,266 $ (18,665)
=========================================================================================
F-35
53
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL SCHEDULE
Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
The audits referred to in our report dated September 11, 1998 relating to the
consolidated financial statements of Tekni-Plex, Inc. and Subsidiaries, which is
contained in this Form 10-K, included the audits of the financial statement
schedule for the years ended July 3, 1998, June 27, 1997 and June 28, 1996
listed in the accompanying index. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
Woodbridge, New Jersey
September 11, 1998
F-36
54
TEKNI-PLEX, INC.
AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Period Expenses (1) Accounts Deductions (2) Period
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1996
Accounts receivable allowance $ 93 $121 $ 351(3) $ - $ 565
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 28, 1997
Accounts receivable allowance $565 $200 $ - $ 452 $ 313
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 3, 1998
Accounts receivable allowance $313 $705 $1,592(4) $ 1,284 $ 1,326
- ------------------------------------------------------------------------------------------------------------------------------------
(1) To increase accounts receivable allowance.
(2) Uncollectible accounts written off, net of recoveries.
(3) Balance related to Dolco acquisition.
(4) Balance related to Puretec acquisition.
F-37
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
TEKNI-PLEX, INC.
By: /s/ F. PATRICK SMITH
-------------------------------
F. Patrick Smith
Chairman of the Board and
Chief Executive Officer
Dated: September 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Registrant
and in the capacities indicated, on September 29, 1998.
SIGNATURE TITLE
--------- -----
/s/ F. PATRICK SMITH
-------------------------- Chairman of the Board and Chief Executive
F. Patrick Smith Officer
/s/ KENNETH W.R. BAKER
-------------------------- President and Chief Operating Officer
Kenneth W.R. Baker Principal Accounting and Financial Officer
/s/ ARTHUR P. WITT
--------------------------
Arthur P. Witt Corporate Secretary and Director
/s/ J. ANDREW MCWETHY
--------------------------
J. Andrew McWethy Director
--------------------------
Barry A. Solomon Director
/s/ STEPHEN A. TUTTLE
--------------------------
Stephen A. Tuttle Director
/s/ MICHAEL F. CRONIN
--------------------------
Michael F. Cronin Director
19
56
Exhibit Index
Exhibit
Number Document Description
3.1 Restated Certificate of Incorporation of Tekni-Plex, Inc. (Filed as
Exhibit 3.1 to Registrant's Registration Statement on Form S-4,
Commission File No. 333-28157, and incorporated herein by
reference.)
3.2 Amended and Restated By-laws of Tekni-Plex, Inc. (Filed as Exhibit
3.3 to Registrant's Registration Statement on Form S-4, Commission
File No. 333-28157, and incorporated herein by reference.)
10.1 Credit Agreement, dated as of March 3, 1998, among Tekni-Plex, Inc.,
the Guarantors party thereto, the Lenders party thereto, the LC
Issuing Banks referred to therein and Morgan Guaranty Trust Company
of New York, as Agent. (Filed as Exhibit 10.1 to Registrant's
Registration Statement on Form S-4, Commission File No. 333-28157,
and incorporated herein by reference.)
10.2 Note (original not included; form of Note included in Exhibit 10.1).
10.3 Security Agreement, dated as of March 3, 1998, among Tekni-Plex,
Inc., the Guarantors listed therein and Morgan Guaranty Trust
Company of New York, as Collateral Agent (original not included;
form of Security Agreement included in Exhibit 10.1).
10.4 Pledge Agreement, dated as of March 3, 1998, between Tekni-Plex,
Inc. and Morgan Guaranty Trust Company of New York, as Agent
(original not included; form of Pledge Agreement included in Exhibit
10.1).
10.5 Form of Mortgage, dated as of March 3, 1998, made by Tekni-Plex,
Inc., or the Guarantors listed therein. in favor of Morgan Guaranty
Trust Company, as Agent (original not included; form of Mortgage
included in Exhibit 10.1).
10.6 Employment Agreement, dated as of January 30, 1997, between Dr.
F. Patrick Smith and Tekni-Plex, Inc. (Filed as Exhibit 10.6 to
Registrant's Registration Statement on Form S-4, Commission File
No. 333-28157, and incorporated herein by reference).
10.7 Employment Agreement, dated as of April 4, 1997, between Mr. Kenneth
W.R. Baker and Tekni-Plex, Inc. (Filed as Exhibit 10.7 to
Registrant's Registration Statement on Form S-4, Commission File No.
333-28157, and incorporated herein by reference).
10.8 Form of Amended and Restated Option Agreement, dated as of April
4, 1997, among Tekni-Plex, Inc., Tekni-Plex Partners L.P. and F.
Patrick Smith (Filed as Exhibit 10.8 to Registrant's Amendment
No. 2 to Registration Statement on Form S-4, Commission File No.
333-28157, and incorporated herein by reference).
10.9 Form of Amended and Restated Stock Option Agreement, dated as of
April 4, 1997, between Tekni-Plex, Inc. and Kenneth W.R. Baker
(Filed as Exhibit 10.9 to Registrant's Amendment No. 1 to
Registration Statement on Form S-4, Commission File No.
333-28157, and incorporated herein by reference).
10.10 Management Fee Agreement, dated as of April 4, 1997, between
Tekni-Plex, Inc. and MST Management Company, Inc. (Filed as
Exhibit 10.10 to Registrant's Registration Statement on Form S-4,
Commission File No. 333-28157, and incorporated herein by
reference).
20
57
10.11 Management Fee Agreement, dated as of April 4, 1997, between
Tekni-Plex, Inc. and MST/TP Holding, Inc. (Filed as Exhibit 10.11
to Registrant's Amendment No. 2 to Registration Statement on Form
S-4, Commission File No. 333-28157, and incorporated herein
by reference).
10.12 Indenture, dated as of April 1, 1997 among Tekni-Plex, Inc., Dolco
Packaging, Corp. and Marine Midland Bank, as Trustee (Filed as
Exhibit 4.1 to Registrant's Registration Statement on Form S-4,
Commission File No. 333-28157, and incorporated herein by
reference).
10.13 Senior Subordinated Note and Guarantee (original not included; form
of Note and Guarantee included in Exhibit 10.12).
10.14 Agreement and Plan of Merger, dated as of November 11, 1997 among
Tekni-Plex, Inc., P.T. Holding, Inc., PureTec Corporation and
Plastic Specialties and Technologies, Inc. (Filed as Exhibit 2.1 to
PureTec Corporation's Annual Report on Form 10-K, Commission File
No. 0-26508 and incorporated herein by reference).
10.15 Indenture, dated as of March 1, 1998 among Tekni-Plex, Inc., the
Guarantors listed therein and Marine Midland Bank, as Trustee.
(Filed as Exhibit 4.1 to Registrant's Registration Statement on Form
S-4, Commission File No. 333-28157, and incorporated herein by
reference.)
10.16 Senior Subordinated Note and Guarantee (original not included; form
of Note and Guarantee included in Exhibit 4.1).
10.17 Tekni-Plex, Inc. Stock Incentive Plan.*
21.0 List of Subsidiaries.*
27.0 Financial Data Schedule.*
* Filed herewith.
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