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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended July 2, 1999
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____
Commission File Number 333-28157
Tekni-Plex, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3286312
(State of Incorporation) (I.R.S. Employer Identification No.)
201 Industrial Parkway, Somerville, New Jersey 08876
(Address of principal executive offices and zip code)
(908) 722-4800
(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.
In January 1999, a wholly-owned subsidiary of Tekni-Plex acquired
substantially all the assets of Tri-Seal International, Inc., a leader in
sophisticated extruded and co-extruded capliners and seals. The Tri-Seal
operations have been integrated with Tekni-Plex's closure liner business. In
April 1999, a wholly-owned subsidiary of Tekni-Plex acquired substantially all
the assets of High Voltage Engineering Corporation's Natvar division, a producer
of disposable medical tubing. As with Tri-Seal, the Natvar acquisition was
intended to strengthen existing Tekni-Plex lines of business and expand product
offerings. The Natvar operation has been integrated into the Company's medical
tubing division.
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, CONSUMER PACKAGING FOOD PACKAGING SPECIALTY RESINS
PRODUCTS, AND MATERIALS AND PRODUCTS AND COMPOUNDS
- --------------------------------------------------------------------------------------------------------------
Pharmaceutical packaging Precision tubing and Foamed egg cartons Specialty PVC resins
gaskets
Medical tubing Garden and irrigation Poultry and meat Recycled PET resins
hose products processor trays
Medical device materials Pool hose products Agricultural foam General purpose PVC
packaging compounds
- --------------------------------------------------------------------------------------------------------------
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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 1999, Tekni-Plex's largest customer, Wal-Mart Stores Inc., accounted
for approximately 11% of sales, with no other individual customer accounting for
10% or more of sales.
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, co-extrusions, and
laminations.
The Company believes that it is a market leader for clear, high-barrier
laminations for pharmaceutical blister packaging. These packaging materials are
used for fast-acting pharmaceuticals that are generally highly reactive to
moisture. Transparent, high-barrier blister packaging is primarily used to
protect drugs from moisture vapor infiltration or desiccation. Blister packaging
is the preferred packaging form when dispenser handling can affect shelf life or
drug efficacy, or when unit dose packaging is needed. Unit dose packaging is
being used to improve patient compliance with regard to dosage regimen, and has
been identified as the packaging form of choice in addressing child safety
aspects of drug packaging. The advantages of transparent blisters, as opposed to
opaque foil-based materials manufactured by various competitors, include the
ability to visually inspect the contents of the blister and to present the
product with maximum confidence.
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
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worldwide basis, has assembled a global network of sales and marketing
personnel, and has established manufacturing liaisons in the United Kingdom,
Switzerland, and the Philippines.
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 breadth 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.
Tekni-Plex is also a leading producer of sophisticated extruded,
co-extruded, and laminated cap-liners and seals, known as closure liners, for
glass and plastic bottles. These products are sold primarily to packagers of
pharmaceutical, health care, and food products. There are three other principal
competitors in the United States, and several smaller companies having
substantially smaller market shares. However, as a result of the acquisition of
Tri-Seal, Tekni-Plex believes that it offers the widest range of liner materials
in the industry.
Medical Tubing
Tekni-Plex is a leading supplier of medical tubing to 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. However, as a result of its Natvar
acquisition, the Company believes that it is the largest non-captive supplier of
disposable medical tubing in North America.
New medical tubing products developed by the Company include microbore
tubing and silicone substitute formulations. Microbore tubing can be used to
regulate the delivery of critical intravenous fluids without the need for more
expensive drip control devices. Medical professionals can precisely control the
drug delivery speed simply by selecting the proper (color-coded) diameter tube,
thereby improving accuracy and reducing cost. More importantly, as home
healthcare trends continue, the use of microbore tubing will help eliminate
critical dosage errors on the part of the non-professional caregiver or the
patient.
Medical Device Materials
The Company believes that it is the leading non-captive 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.
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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 leading precision tubing
extruder in North America and is the leading supplier of aerosol valve and
dispenser pump gaskets worldwide.
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, cost
reduction, 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. The Company has produced garden hose products for 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 that utilize medical-grade plastics. 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 and meat industries. The Company believes that it is
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the leading manufacturer of foam egg cartons in the United States. The Company
is also a leading supplier of processor trays to the poultry industry.
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.
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 Vinyl Resins
Tekni-Plex manufactures specialty vinyl resins, with an annual
production capacity of 110 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.
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 2, 1999, the Company employed approximately 2,950 full-time
employees. Approximately 28% of all employees are represented by various
collective bargaining agreements that expire between September 30, 1999 and July
31, 2001. The Company believes it has good relations with its employees.
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal and state environmental
regulations 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
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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.
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, Northern Ireland Healthcare materials 55,000
Blauvelt, New York (8) Healthcare packaging 56,400
Burlington, New Jersey Specialty resins 107,000
Cambridge, Ontario Healthcare packaging 25,000
City of Industry, Healthcare products 110,000
California (6)
Clayton, North Carolina Healthcare products 76,000
Clinton, Illinois Consumer packaging 62,500
Dallas, Texas (1) 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 and 88,200
(Aalst), Belgium healthcare products
Flemington, New Jersey Healthcare packaging 145,000
Lakewood, Colorado (3) Healthcare products 17,300
Lawrenceville, Georgia Food packaging 150,000
Lawrenceville, Georgia (1) Warehouse 31,700
Livonia, Michigan (3) Specialty resins 60,000
McKenzie, Tennessee Consumer products 20,000
Milan (Gaggiano), Italy (3) Consumer packaging 14,100
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Milan (Gaggiano), Italy Consumer packaging 25,800
Milan (Rosate), Italy (5) Consumer packaging 24,000
Mississauga, Ontario (7) Consumer products 100,000
Piscataway, New Jersey (5) Compounds 150,000
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 32,000
Waco, Texas Consumer products 104,600
Wenatchee, Washington Food packaging 97,000
Wenatchee, Washington (2) Warehouse 26,200
(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 2004.
(7) Lease expires in 2005.
(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.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Not Applicable.
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.
YEARS ENDED
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JUN. 30, JUN. 28, JUN. 27, JULY 3, JULY 2,
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net sales $ 44,688 $ 80,917 $144,736 $ 309,597 $ 489,237
Cost of goods sold 34,941 62,335 107,007 232,499 358,293
Gross profit 9,747 18,582 37,729 77,098 130,944
Selling, general and administrative expenses 4,814 10,339 15,886 39,220 62,534
Income from operations 4,933 8,243 21,843 37,878 68,410
Interest expense 4,322 5,816 8,094 19,682 38,977
Other (income) expense 234 469 646 415 286
Pre-tax income before extraordinary item 377 1,958 13,103 17,781 29,147
Income tax provision 211 982 4,675 9,112 14,150
Income before extraordinary item 166 976 8,428 8,669 14,997
Extraordinary item (loss)(b) -- -- (20,666) -- --
Net income (loss) $ 166 $ 976 $(12,238) $ 8,669 $ 14,997
BALANCE SHEET DATA (at period end):
Working capital $ 3,173 $ 11,660 $ 25,950 $ 84,897 $ 101,445
Total Assets 53,415 121,770 129,029 539,279 559,436
Total debt (including current portion) 35,004 70,436 75,000 401,905 416,394
Stockholders' equity 11,687 24,162 30,397 38,673 52,297
OTHER FINANCIAL DATA:
EBITDA(a) $ 7,922 $ 14,157 $ 30,223 $ 54,479 $ 101,681
EBITDA margin(a) 17.7% 17.5% 20.9% 17.6% 20.8%
Depreciation and amortization $ 3,462 $ 6,821 $ 9,551 $ 17,249 $ 35,343
Capital expenditures 614 2,275 3,934 7,283 12,950
Cash flows:
From operations 2,354 6,568 19,537 29,009 38,794
From investing (614) (49,522) (6,273) (310,672) (58,089)
From financing (1,451) 43,669 (3,217) 299,926 12,057
(a) 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.
(b) 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 2, 1999 COMPARED WITH THE YEAR ENDED JULY 3, 1998
Net Sales increased to $489.2 million for the year ended July 2, 1999
from $309.6 million for the year ended July 3, 1998. This represents an increase
of $179.6 million or 58.0%. The increased sales are primarily attributable to
the acquisition of PureTec in March 1998, and to a lesser extent the acquisition
of Tri-Seal International in January 1999 and Natvar in April 1999. The
year-over-year change related to the impact of these acquisitions amounted to
$184.4 million. This increase was partially offset by the elimination in fiscal
1999 of certain low-margin sales related to the restructuring of acquired
operations. The level of growth for the year ended July 2, 1999 may not be
indicative of future operations.
Cost of Goods Sold increased to $358.3 million for the year ended July
2, 1999, of which $121.3 million was due to the acquired operations discussed
above, from $232.5 million for the year ended July 3, 1998. Expressed as a
percentage of net sales, cost of goods sold decreased to 73.2% for the year
ended July 2, 1999 from 75.1% for the same period in 1998. The decrease in cost
of goods sold as a percentage of net sales was due primarily to efficiencies
achieved in operations acquired with the purchase of PureTec, and lower raw
material costs.
Gross Profit as a result, increased to $130.9 million or 26.8% of net
sales for the year ended July 2, 1999, from $77.1 million or 24.9% of net sales
for the same period in 1998.
Selling, general and administrative expenses increased to $62.5 million
or 12.8% of net sales for the year ended July 2, 1999 from $39.2 million or
12.7% of net sales for the same period in 1998. Selling, general and
administrative expenses increased in proportion to the increase in net sales
resulting from acquired operations and related compensation increases.
Operating profit increased to $68.4 million or 14.0% of net sales for
the year ended July 2, 1999, from $37.9 million or 12.2% for the same period in
1998, for the reasons discussed above.
Interest expense increased to $39.0 million or 8.0% of net sales for
the year ended July 2, 1999, from $19.7 million or 6.4% of net sales for the
same period in 1998 due primarily to an issuance of new bonds and notes to
acquire PureTec. The Company also borrowed under its revolving line of credit in
fiscal 1999 to fund the purchase of Tri-Seal and Natvar.
Provision for income taxes increased to $14.2 million or 2.9% of net
sales for the year ended July 2, 1999, from $9.1 million or 2.9% for the same
period in 1998. The Company's effective tax rate was 48.5% for the year ended
July 2, 1999 compared to 51.2% for the same period in 1998. The decrease between
periods is due primarily to the use of tax carryover credits.
Net income increased to $15.0 million or 3.1% of net sales for the year
ended July 2, 1999, from $8.7 million or 2.8% of net sales for the same period
in 1998, for the reasons discussed above.
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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.
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.
11
12
LIQUIDITY AND CAPITAL RESOURCES
For the year ended July 2, 1999, net cash provided by operating
activities was $38.8 million compared to $29.0 million for the same period in
1998. This was due primarily to the acquisition of PureTec and to increased
earnings in 1999.
Working capital at July 2, 1999 was $101.4 million compared to $84.9
million at the same period in 1998. The increase in working capital was due
primarily to the acquisition of PureTec and to increased earnings in 1999.
As of July 2, 1999, the Company had an outstanding balance of $22.0
million under the $90 million revolving credit line of the existing credit
facility. The proceeds were used primarily to fund the purchase of assets from
Tri-Seal International, Inc. and High Voltage Engineering Corporation. At July
3, 1998, there were no outstanding balances under this revolving credit line.
The Company's capital expenditures for the year ended July 2, 1999 and
July 3, 1998 were $13.0 million and $7.3 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 has evaluated the potential impact and remediation costs
of Year 2000 issues. 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 fabrication 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 will be disrupted by the Year 2000
issues.
12
13
Support Systems: The Company believes that it has identified the major
computers, software applications, and other equipment utilized by support
systems, primarily the accounting systems, that must be modified, upgraded, or
replaced to minimize the possibility of any disruption of business. The Company
has 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 as part of the
Company's normal integration strategy. As a result, additional costs that will
be incurred solely due to Year 2000 issues are difficult to isolate.
Nonetheless, the Company estimates such additional costs will be less than
$250,000 in the aggregate. 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 has contacted its suppliers to identify any potential
disruption in the supply of raw materials. As a result, 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 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 computer interface interruptions, if any.
Conclusion: Tekni-Plex believes that it is taking adequate steps to address all
significant internal Year 2000 issues that could adversely affect its business
operations. Of course, it is not 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-1.
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 51 Chairman of the Board and Chief Executive Officer
Kenneth W.R. Baker 55 President, Chief Operating Officer and Principal
Accounting and Financial Officer
Arthur P. Witt 69 Corporate Secretary and Director
J. Andrew McWethy 58 Director
Barry A. Solomon 51 Director
Stephen A. Tuttle 58 Director
Michael F. Cronin 45 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, 1999 $1,200,000 $8,981,000 -- $ 42,000
Chief Executive Officer 1998 770,577 5,072,134 9.15041 150,283
1997 490,385 1,921,291 -- 15,417
Mr. Kenneth W.R. Baker, 1999 $ 600,000 $4,490,000 -- $ 9,000
President, Chief Operating 1998 385,289 2,536,062 13.72562 6,315
Officer and Principal 1997 260,096 960,645 -- 32,136
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
PERCENT OF POTENTIAL POTENTIAL
TOTAL REALIZABLE REALIZABLE VALUE
NUMBER OF OPTIONS/ VALUE AT AT ASSUMED
SECURITIES SARS GRANTED EXERCISE ASSUMED ANNUAL ANNUAL RATES OF
UNDERLYING TO EMPLOYEES OR BASE RATES OF STOCK STOCK PRICE
OPTIONS/ IN FISCAL PRICE PRICE APPRECIATION FOR
SARS GRANTED YEAR PER EXPIRATION APPRECIATION OPTION TERM 10%
SHARE DATE FOR OPTION TERM ($000)
NAME ($000) 5%
($000)
Dr. F. Patrick Smith --- ---% --- --- --- ---
Kenneth W.R. Baker --- ---% --- --- --- ---
15
16
AGGREGATED OPTION/SAR EXERCISES 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
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE VALUE REALIZED UNEXERCISABLE UNEXERCISABLE
Dr. F. Patrick Smith --- --- 3.05/6.10 --- /---
Kenneth W.R. Baker --- --- 26.31/9.15 $3,356 /---
EMPLOYMENT AGREEMENTS
Dr. F. Patrick Smith and Mr. Kenneth W.R. Baker have employment
agreements with Tekni-Plex. Both Dr. Smith and Mr. Baker's employment agreements
expire June 28, 2002 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 bonus awards for fiscal 1999 for Dr. Smith and Mr. Baker were based
upon their respective employment contracts as amended in March of 1998, and are
performance based.
Compensation levels and bonus awards for all other employees are
controlled by Dr. Smith and Mr. Baker.
In fiscal 1999, Dr. Smith recommended, and the Board approved, stock
options to four employees under a stock option plan approved by the Board of
Directors effective December 31, 1997.
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 1999. 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. Compensation to Mr. Witt for consulting
services rendered on behalf of Tekni-Plex was approximately $95,000 for fiscal
year 1999.
17
18
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.
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 2, 1999, JULY 3, 1998 AND JUNE 27, 1997
F-1
20
TEKNI-PLEX, INC.
CONTENTS
INDEPENDENT AUDITORS' REPORT F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-4
Statements of operations F-5
Statements of comprehensive income (loss) F-6
Statements of stockholders' equity F-7
Statements of cash flows F-8
Notes to financial statements F-9 - F-39
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULE F- 40
SUPPLEMENTAL SCHEDULE:
Valuation and qualifying accounts and reserves F- 41
F-2
21
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 2, 1999 and July 3,
1998, and the related consolidated statements of operations, comprehensive
income (loss), stockholders' equity and cash flows for each of the three years
in the period ended July 2, 1999. 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 2, 1999 and July 3, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended July 2, 1999, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
Woodbridge, New Jersey
July 30, 1999
F-3
22
TEKNI-PLEX, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
JULY 2, 1999 July 3, 1998
------------ ------------
ASSETS (Note 5)
CURRENT:
Cash $22,117 $29,363
Accounts receivable, net of an allowance of $1,662 and $1,326 for
possible losses 96,835 88,778
Inventories (Note 3) 63,190 57,929
Deferred income taxes (Note 6) 5,900 5,565
Prepaid expenses and other current assets 3,664 2,089
-------- --------
TOTAL CURRENT ASSETS 191,706 183,724
PROPERTY, PLANT AND EQUIPMENT, NET (NOTE 4) 136,953 128,234
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $29,581 AND
$15,030 206,140 193,849
DEFERRED FINANCING COSTS, NET OF ACCUMULATED AMORTIZATION OF $4,287
AND $1,768 19,358 22,791
DEFERRED INCOME TAXES (NOTE 6) 1,346 7,065
OTHER ASSETS 3,933 3,616
-------- --------
$559,436 $539,279
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt (Note 5) $5,207 $5,147
Line of credit (Note 5) 541 307
Accounts payable trade 27,612 32,986
Accrued payroll and benefits 21,581 12,074
Accrued interest 7,965 8,884
Accrued liabilities - other (Note 2) 26,613 36,986
Income taxes payable 742 2,443
-------- --------
TOTAL CURRENT LIABILITIES 90,261 98,827
LONG-TERM DEBT (NOTE 5) 410,646 396,451
OTHER LIABILITIES 6,232 5,328
-------- --------
TOTAL LIABILITIES 507,139 500,606
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8 AND 10)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 20,000 shares, issued and
outstanding 848 at July 2, 1999 and July 3, 1998 - -
Additional paid-in capital 41,075 41,075
Cumulative currency translation adjustment (1,368) 5
Retained earnings (deficit) 12,590 (2,407)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 52,297 38,673
-------- --------
$559,436 $539,279
======== ========
See accompanying notes to consolidated financial statements.
F-4
23
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Years ended JULY 2, 1999 July 3, 1998 June 27, 1997
- ----------- ------------ ------------ -------------
NET SALES $489,237 $309,597 $144,736
COST OF SALES 358,293 232,499 107,007
------- ------ --------
GROSS PROFIT 130,944 77,098 37,729
OPERATING EXPENSES:
Selling, general and administrative 62,534 39,220 15,886
------- ------ --------
INCOME FROM OPERATIONS 68,410 37,878 21,843
OTHER EXPENSES:
Interest, net 38,977 19,682 8,094
Other 286 415 646
------- ------ --------
INCOME BEFORE PROVISION FOR INCOME 29,147 17,781 13,103
TAXES AND EXTRAORDINARY ITEM
PROVISION FOR INCOME TAXES (NOTE 6):
Current 7,004 7,232 3,675
Deferred 7,146 1,880 1,000
------- ------ --------
INCOME BEFORE EXTRAORDINARY ITEM 14,997 8,669 8,428
EXTRAORDINARY ITEM, NET OF INCOME TAXES - - (20,666)
------- ------ --------
NET INCOME (LOSS) $14,997 $8,669 $(12,238)
======= ====== ========
See accompanying notes to consolidated financial statements.
F-5
24
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
JULY 2, 1999 July 3, 1998 June 27, 1997
------------ ------------ -------------
NET INCOME (LOSS) $ 14,997 $ 8,669 $(12,238)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES
Foreign currency translation adjustment (1,373) 5 --
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 13,624 $ 8,674 $(12,238)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
25
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 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
Foreign currency translation -- -- (1,373) -- (1,373)
Net income -- -- -- 14,997 14,997
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 2, 1999 $ -- $ 41,075 $ (1,368) $ 12,590 $ 52,297
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
26
TEKNI-PLEX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 12)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Years ended JULY 2, 1999 July 3, 1998 June 27, 1997
- ----------- ------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,997 $ 8,669 $ (12,238)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 16,930 8,856 6,051
Amortization 18,413 8,393 3,500
Provision for bad debts 370 705 200
Deferred income taxes 7,146 1,880 1,000
Amortization of redeemable warrants -- -- 556
Extraordinary loss on extinguishment of debt -- -- 20,666
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (5,709) (22,269) 67
Inventories (4,778) 24,730 (360)
Prepaid expenses and other current assets (1,483) 1,918 (292)
Other assets (532) 534 12
Accounts payable and other current liabilities (4,859) (4,335) 496
Income taxes (1,701) 4,262 (121)
Other liabilities -- (4,334) --
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,794 29,009 19,537
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of net assets including acquisition costs, net
of cash acquired (45,139) (303,389) --
Capital expenditures (12,950) (7,283) (3,934)
Increase in deposits -- -- (2,339)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (58,089) (310,672) (6,273)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 22,234 7 (6,857)
Proceeds from long-term debt -- 319,156 75,000
Repayments of long-term debt (10,177) (787) (64,551)
Proceeds from capital contribution -- -- 18,473
Debt financing costs -- (18,052) (5,282)
Redemption of capital -- (398) --
Redemption of warrants -- -- (20,000)
NET CASH PROVIDED BY (USED IN) FINANCING --------- --------- ---------
ACTIVITIES 12,057 299,926 (3,217)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (8) 5 --
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH (7,246) 18,268 10,047
CASH, BEGINNING OF PERIOD 29,363 11,095 1,048
--------- --------- ---------
CASH, END OF PERIOD $ 22,117 $ 29,363 $ 11,095
========= ========= =========
See accompanying notes to consolidated financial statements.
F-8
27
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-9
28
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 July 2, 1999 and June
27, 1997 contained 52 weeks each.
Reclassifications
Certain items in the prior year financial
statements have been reclassified to
conform to the current year presentation.
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.
F-10
29
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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.
Long-Lived Assets
Long-lived assets, such as goodwill and
property and equipment, are evaluated for
impairment when events or changes in
circumstances indicate that the carrying
amount of the assets may not be recoverable
through the estimated undiscounted future
cash flows from the use of these assets.
When such impairments exist, the related
assets will be written down to fair value.
No impairment losses have been recorded
through July 2, 1999.
Stock Based Compensation
The Company applies the provisions of SFAS
No. 123, "Accounting for Stock-Based
Compensation," which allows the Company to
apply APB Opinion 25 and related
interpretations in accounting for its stock
options and present pro forma effects of the
fair value of such options.
New Accounting Pronouncements
In June 1998, SFAS 133, "Accounting for
Derivative Instruments and Hedging
Activities," was issued. SFAS 133, as
amended by SFAS 137, is effective for the
Company's 2001 fiscal year. SFAS 133 is not
applicable to the Company since the client
does not currently have hedging activities.
2. ACQUISITIONS On April 24, 1999, the Company purchased certain assets and
assumed certain liabilities of High Voltage Engineering Corp.
- Natvar Division ("Natvar"), for approximately $26,000. The
acquisition was recorded under the purchase method and
Natvar's operations have been reflected in the statement of
operations since that date. As a result of the acquisition,
goodwill of approximately $17,100 has been recorded, which is
being amortized over 15 years.
F-11
30
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
On January 25, 1999, the Company purchased certain assets and
assumed certain liabilities of Tri-Seal International, Inc.
("Tri-Seal") for approximately $21,000. The acquisition was
recorded under the purchase method and Tri-Seal's operations
have been reflected in the statement of operations since that
date. As a result of the acquisition, goodwill of
approximately $13,600 has been recorded, which is being
amortized over 15 years.
The following table presents the unaudited pro forma results
of operations as though the acquisition of Tri-Seal and Natvar
occurred on June 28, 1997:
Year ended JULY 2, 1999 July 3, 1998
- ---------- ------------ ------------
Net sales $510,050 $342,910
Income from operations 70,691 38,477
Income before provision for income taxes 31,211 18,731
============================================================================
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.
F-12
31
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
In connection with the acquisition of PureTec, a reserve of
$24,000 was established. The reserve was comprised of the
costs to close or sell incompatible and duplicate facilities,
terminate employees and provide for existing litigation. At
July 2, 1999, approximately $8,400 was remaining in this
reserve, which is included in accrued expenses. The remaining
reserve is primarily to cover pre-existing litigation and
lease costs of facilities to be closed which extend for the
next four years.
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
Income from operations 45,858 40,703
Income before provision for income taxes 3,494 (3,938)
==============================================================================
Proforma adjustments were made to the related historical
results to reflect changes in interest expense and goodwill
amortization.
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.
3. INVENTORIES Inventories are summarized as follows:
JULY 2, 1999 July 3, 1998
------------ ------------
Raw materials $26,663 $ 24,427
Work-in-process 5,282 5,136
Finished goods 31,245 28,366
- -------------------------------------------------------------------------------------
$63,190 $ 57,929
=====================================================================================
F-13
32
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
4. PROPERTY, PLANT AND Property, plant and equipment consists of the
EQUIPMENT following:
Estimated
JULY 2, 1999 July 3, 1998 useful lives
- --------------------------------------------------------------------------------
Land $ 14,611 $ 14,764
Building and improvements 31,043 26,411 30 - 40 years
Machinery and equipment 114,927 97,256 5 - 10 years
Furniture and fixtures 2,691 2,256 5 - 10 years
Construction in progress
(primarily machinery and
equipment) 8,768 6,885
- --------------------------------------------------------------------------------
172,040 147,572
Less: Accumulated depreciation 35,087 19,338
- --------------------------------------------------------------------------------
$136,953 $128,234
================================================================================
5. LONG-TERM DEBT Long-term debt consists of the following:
JULY 2, 1999 July 3, 1998
- --------------------------------------------------------------------------------
Senior Subordinated Notes issued March 3,
1998 at 9 1/4%, due March 1, 2008. Interest
payable semi-annually. (a) $200,000 $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 22,000 --
Term notes 111,063 114,213
Other, primarily foreign term loans, with
interest rates ranging from 4 1/4% to 8.4%
and maturities from 2000 to 2004 8,331 12,692
- --------------------------------------------------------------------------------
416,394 401,905
Less: Current maturities 5,748 5,454
- --------------------------------------------------------------------------------
$410,646 $396,451
================================================================================
F-14
33
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(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 of 4 5/8%, which decreases
to par after March 2006. Upon a change in control,
the Company is required to make an offer to
repurchase the Notes at 101% of the principal amount.
These notes also contain various covenants including
a limitation on future indebtedness; limitation of
payments, including prohibiting the payment of
dividends; and limitations on mergers, consolidations
and sale of assets.
(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 and change in control similar to those
provisions discussed above.
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 all
outstanding 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
warrants of $17,773 and has been reflected in the
1997 statements of operations.
F-15
34
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(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 2, 1999, the Company
is in compliance with these covenants.
Revolving Credit Agreement
Borrowings under the agreement may be used for general
corporate purposes and at July 2, 1999, $68,000 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. At July 2, 1999, the rate charged is 8.75%.
This agreement matures on March 31, 2004.
Term Loan A
Borrowings under this loan in the amount of $50,000, were used
solely in connection with the acquisition of PureTec. Interest
is payable quarterly at the same rates discussed above under
the Revolving Credit Agreement, 7.125% at July 2, 1999.
Principal is payable $625 quarterly, increasing to $5,000 at
June 30, 2003 through the maturity date of March 31, 2004.
F-16
35
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Term Loan B
Borrowings under this loan in the amount of
$65,000, were 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 2, 1999 is 7.625%. In addition,
the Applicable Base Rate and Applicable
Euro-Dollar Margin was reduced .5% based on
the maintenance of certain leverage ratios.
Principal is payable $162.5 quarterly,
increasing to $7,150 on June 30, 2004 and to
$8,125 on June 30, 2005 through the maturity
date of March 31, 2006.
(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. The balance of these
notes were redeemed during 1999.
Principal payments on long-term debt over the next
five years and thereafter are as follows:
2000 $5,748
2001 7,021
2002 8,868
2003 17,319
2004 45,058
Thereafter 332,380
- --------------------------------------------------------------------------------
$416,394
===============================================================================
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-17
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 2, July 3, June 27,
Years ended 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
Federal $ 3,604 $ 4,492 $ 3,425
Foreign 2,900 1,345 --
State and local 500 1,395 250
- --------------------------------------------------------------------------------
7,004 7,232 3,675
- --------------------------------------------------------------------------------
Deferred:
Federal 5,918 1,656 932
Foreign 328 182 --
State and local 900 42 68
- --------------------------------------------------------------------------------
7,146 1,880 1,000
- --------------------------------------------------------------------------------
Provision for income $14,150 $ 9,112 $ 4,675
taxes
================================================================================
The components of income before income taxes are as follows:
JULY 2, July 3, June 27,
Years ended 1999 1998 1997
- --------------------------------------------------------------------------------
Domestic $21,198 $14,754 $13,103
Foreign 7,949 3,027 --
- --------------------------------------------------------------------------------
$29,147 $17,781 $13,103
================================================================================
F-18
37
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
The provision for income taxes differs from the amounts computed by applying the
applicable Federal statutory rates due to the following:
JULY 2, July 3, June 27,
Years ended 1999 1998 1997
- --------------------------------------------------------------------------------
Provision for Federal income $ 9,910 $ 6,046 $ 4,455
taxes at statutory rate
State and local income taxes, net
of Federal benefit 330 921 165
Non-deductible goodwill
amortization 3,765 1,838 --
Foreign tax rates in excess of
Federal tax rate 465 328 --
Other, net (320) (21) 55
- --------------------------------------------------------------------------------
Provision for income taxes $ 14,150 $ 9,112 $ 4,675
================================================================================
Significant components of the Company's deferred tax assets and liabilities are
as follows:
JULY 2, July 3,
1999 1998
- --------------------------------------------------------------------------------
Current deferred taxes:
Allowance for doubtful accounts $ 533 $ 565
Inventory 934 818
Accrued expenses 4,433 4,182
- --------------------------------------------------------------------------------
Total current deferred tax assets $ 5,900 $ 5,565
================================================================================
Long-term deferred taxes:
Net operating loss carryforwards $ 28,863 $ 29,359
Accrued pension and post-retirement 1,497 1,375
Accrued expenses 626 464
Difference in book vs. tax basis of assets (6,668) (6,114)
Excellerated tax vs. book depreciation (17,972) (13,019)
- --------------------------------------------------------------------------------
Total long-term net deferred tax assets 6,346 12,065
Valuation allowance (5,000) (5,000)
- --------------------------------------------------------------------------------
Total long-term net deferred tax assets $ 1,346 $ 7,065
================================================================================
F-19
38
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
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
carryforward ("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 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.
Net Operating Losses
The Company and its U.S. subsidiaries file a consolidated tax
return. The NOL carryforwards, as a result of the PureTec
acquisition, involve complex issues of federal tax law and are
subject to various limitations as follows:
- $35,800 - Subject to IRC Section 382 change of
ownership annual limitation of approximately $3,900;
this includes $4,700 of losses incurred prior to
1992, which are subject to additional limitations;
expire 2002-2010.
- $19,500 - Subject to IRC Section 382 change of
ownership annual limitation of approximately $3,100;
expire 2001 - 2010.
- $29,500 - Subject to IRC Section 382 change of
ownership annual limitation of approximately $5,900;
expires 2009.
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-20
39
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
7. EMPLOYEE BENEFIT PLANS (a) Savings Plans
i The Company maintains a discretionary 401(k)
plan covering all eligible employees,
excluding those employed by its Dolco
Division ("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 2, 1999,
July 3, 1998 and June 27, 1997.
ii 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 $727,
$653 and $475 for the years ended July 2,
1999, July 3, 1998 and June 27, 1997,
respectively.
iii 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 &
Technology, Inc. ("PST"); Burlington Resins,
Inc. ("Burlington"); and PTI Plastics, Inc.
("PTI"). Under the savings plan, the Company
matches each eligible employees'
contribution up to 3% of the employees'
earnings. Such contribution amounted to
approximately $362 for the year ended July
2, 1999 and $215 for the period March 3
through July 3, 1998.
F-21
40
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(b) Pension Plans
i The Company maintains a non-contributory defined benefit
pension plan that covers substantially all non-collective
bargaining unit employees of PST and 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. On
September 8, 1998, the Company approved a plan to freeze this
defined benefit pension plan effective September 30, 1998,
resulting in a curtailment gain of $576.
The components of net periodic pension costs are as follows:
YEAR ENDED Period ended
JULY 2, 1999 July 3, 1998
- --------------------------------------------------------------------
Service cost $ 253 $ 290
Interest cost on projected benefit
obligations 674 202
Expected actual return on plan
assets (938) (233)
Amortization of unrecognized net
gain (8) -
Recognized curtailment gain (576) -
- --------------------------------------------------------------------
Net pension cost $ (595) $ 259
====================================================================
CHANGE IN PROJECTED BENEFIT
OBLIGATION
Projected benefit obligation,
beginning of period $ 10,127 $ 9,759
Service cost 253 290
Interest cost 674 202
Curtailments (576) -
Actuarial gain (512) (24)
Benefits paid (411) (100)
- --------------------------------------------------------------------
Projected benefit obligation, end
of period $ 9,555 $ 10,127
====================================================================
F-22
41
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED Period ended
JULY 2, 1999 July 3, 1998
- --------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning
of period $ 9,555 $ 8,852
Actual return on plan assets 827 334
Company contributions 1,142 172
Benefits paid (411) (100)
- --------------------------------------------------------------------
Plan assets at fair value, end of
period $ 11,113 $ 9,258
====================================================================
The funded status of the Plan and amounts recorded in the Company's
balance sheets are as follows:
JULY 2, 1999 July 3, 1998
- ------------------------------------------------------------------------
Funded status of the plan $ 1,558 $ (869)
Unrecognized net gain (467) -
- ------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 1,091 $ (869)
========================================================================
The expected long-term rate of return on plan assets was 9% for the
periods presented and the discount rate was 7 1/2% at July 2, 1999 and
July 3, 1998.
ii The Company's Burlington subsidiary has a non-contributory defined
benefit pension plan that covers substantially all hourly compensated
employees covered by a collective bargaining agreement, who have
completed one year of service. The funding policy of the Company is to
make contributions to this plan based on actuarial computations of the
minimum required contribution for the plan year.
F-23
42
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The components of net periodic pension costs are as follows:
YEAR ENDED Period ended
JULY 2, 1999 July 3, 1998
- ------------------------------------------------------------------
Service cost $ 133 $ 40
Interest cost on projected benefit
obligations 366 136
Expected return on plan assets (453) (140)
- ------------------------------------------------------------------
Net pension cost $ 46 $ 36
==================================================================
CHANGE IN PROJECTED BENEFIT
OBLIGATION
Projected benefit obligation,
beginning of period $ 4,974 $ 4,898
Service cost 133 40
Interest cost 366 136
Actuarial gain - (52)
Benefits paid (181) (48)
- ------------------------------------------------------------------
Projected benefit obligation, end
of period $ 5,292 $ 4,974
==================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value,
beginning of period $ 4,978 $ 4,708
Actual return on plan assets 410 206
Company contributions 224 112
Benefits paid (181) (48)
- ------------------------------------------------------------------
Plan assets at fair value, end of
period $ 5,431 $ 4,978
==================================================================
F-24
43
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The funded status of the Plan and amounts recorded in the
Company's balance sheets are as follows:
JULY 2, 1999 July 3, 1998
- ------------------------------------------------------------------------
Funded status of the plan $ 139 $ 4
Unrecognized net loss 43 -
- ------------------------------------------------------------------------
Prepaid pension cost $ 182 $ 4
========================================================================
The expected long-term rate of return on plan assets was 9%
for the periods presented and the discount rate was 7 1/2% at
July 2, 1999 and July 3, 1998.
iii 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.
(c) Post-retirement Benefits
In addition to providing pension benefits, the Company also sponsors
the Burlington Retiree Welfare Plan, which provides certain healthcare
benefits for retired employees of the Burlington division who were
employed on an hourly basis, covered under a collective bargaining
agreement and retired prior to July 31, 1997. Those employees and their
families became eligible for these benefits after the employee
completed five years of service, if retiring at age fifty-five, or at
age sixty-five, the normal retirement age. Post retirement healthcare
benefits paid for the year ended July 2, 1999 and for the period March
3 through July 3, 1998 amounted to $84 and $139, respectively.
F-25
44
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Net periodic post-retirement benefit costs are as follows:
YEAR ENDED Period ended
JULY 2, 1999 July 3, 1998
- -----------------------------------------------------------------------
Service cost $ 42 $ 10
Interest cost 146 100
- -----------------------------------------------------------------------
Net post-retirement benefit cost $ 188 $ 110
=======================================================================
CHANGE IN PROJECTED BENEFIT
OBLIGATION
Projected benefit obligation, beginning $ 1,997 $ 1,936
of period
Service cost 42 10
Interest cost 146 42
Actuarial loss (gain) - 37
Benefits paid (84) (28)
- -----------------------------------------------------------------------
Projected benefit obligation, end of $ 2,101 $ 1,997
period
=======================================================================
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of $ - $ -
period
Company contributions 84 139
Benefits paid (84) (139)
- -----------------------------------------------------------------------
Plan assets at fair value, end of period $ - $ -
=======================================================================
The funded status of the Plan and amounts recorded in the
Company's balance sheets are as follows:
JULY 2, 1999 July 3, 1998
- -----------------------------------------------------------------------
Funded status of the plan $(2,101) $(1,997)
- -----------------------------------------------------------------------
Accrued post retirement cost $(2,101) $(1,997)
- -----------------------------------------------------------------------
F-26
45
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accumulated post-retirement benefit
obligation was determined using a 7 1/2%
discount rate for the periods presented. The
healthcare cost trend rate for medical
benefits was assumed to be 6%, 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 $239 and $214 and
increase the service and interest components
by $6 and $5 at July 2, 1999 and July 3,
1998.
8. RELATED PARTY The Company has a management consulting agreement
TRANSACTIONS 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, $400 and $390 for the years ending July 2,
1999, July 3, 1998 and June 27, 1997, 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 1999 and 1998, options were granted to
purchase 7.32 and 28.37 shares of common stock at an
exercise price of $222.4 and $154.5 per share,
respectively. The options are subject to vesting
provisions, as determined by the Board of Directors,
at date of grant and expire 10 years from date of
grant.
F-27
46
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 are subject to vesting
provisions, as determined by the Board of Directors,
at date of grant and expire 10 years from date of
grant.
At July 2, 1999, options for 30.12 shares are
exercisable and no options have been exercised or
forfeited as of July 2, 1999.
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 4.75%, 5.28% and 6 3/4% in 1999, 1998 and 1997,
respectively, expected volatility of zero, a dividend
yield of zero and expected lives of 8 years.
JULY 2, July 3, June 27,
Years ended 1999 1998 1997
- ----------------------------------------------------------------------------
Income before extraordinary item:
As reported $ 14,997 $ 8,669 $ 8,428
============================================================================
Pro forma $ 14,868 $ 8,618 $ 8,324
============================================================================
10. COMMITMENTS AND
CONTINGENCIES Commitments
(a) The Company leases building space and
certain equipment in 20 locations throughout
the United States, Canada and Europe. At
July 2, 1999, the Company's future minimum
lease payments are as follows:
- --------------------------------------------------------------------------------
2000 $ 4,141
2001 3,933
2002 3,710
2003 2,198
2004 1,491
Thereafter 7,852
- --------------------------------------------------------------------------------
$23,325
================================================================================
F-28
47
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Rent expense, including escalation charges, amounted
to approximately $3,756, $2,802 and $676 for the
years ended July 2, 1999, July 3, 1998 and June 27,
1997, respectively.
(b) 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 2002. Salaries and bonuses for the years ended
July 2, 1999 and July 3, 1998 under these contracts
were $1,800 and $13,471, and $1,157 and $7,608,
respectively. These contracts provide aggregate
minimum annual compensation of $1,800 for each of the
fiscal years in the period ended 2002.
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.
F-29
48
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
11. CONCENTRATIONS OF Financial instruments that potentially subject the
CREDIT RISKS 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.
12. SUPPLEMENTAL CASH (a) Cash Paid
FLOW INFORMATION
JULY 2, July 3, June 27,
Years ended 1999 1998 1997
- ---------------------------------------------------------------------------------
Interest $ 37,376 $ 15,776 $ 5,317
=================================================================================
Income taxes $ 10,185 $ 5,832 $ 3,747
=================================================================================
(b) Non-Cash Financing and Investing Activities
The Company purchased certain assets and
assumed certain liabilities of Natvar,
effective April 24, 1999, for approximately
$26,169 in cash. In conjunction with the
acquisition, liabilities were assumed as
follows:
- ---------------------------------------------------------------------------------
Fair value of assets acquired $ 10,192
Goodwill 17,107
Cash paid (26,169)
- ---------------------------------------------------------------------------------
Liabilities assumed $ 1,130
=================================================================================
F-30
49
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The Company purchased certain assets and
assumed certain liabilities of Tri-Seal,
effective January 25, 1999, for
approximately $21,272 in cash. In
conjunction with the acquisition,
liabilities were assumed as follows:
- ---------------------------------------------------------------------------------
Fair value of assets acquired $ 11,400
Goodwill 13,584
Cash paid (21,272)
- ---------------------------------------------------------------------------------
Liabilities assumed $ 3,712
=================================================================================
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-31
50
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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, recycled PET resins, and
general purpose PVC compounds. The healthcare
packaging, products, and materials and consumer
packaging and products segments have operations in
the United States, Europe and Canada. Prior to 1998,
the Company operated principally in the food
packaging segment.
Financial information concerning the Company's
business segments and the geographic areas in which
it operates are as follows:
Healthcare
Packaging, Consumer
Products Packaging Specialty
and and Food Resins and
July 2, 1999 Materials Products Packaging Compounds TOTALS
- -----------------------------------------------------------------------------------------
Revenues from external
customers $137,309 $184,684 $100,258 $66,986 $489,237
Interest expense 11,818 13,254 8,014 5,891 38,977
Depreciation and
amortization 7,327 13,072 9,640 5,086 35,125
Segment income from
operations 25,027 37,848 18,777 6,810 88,462
Segment assets 173,704 216,067 73,351 83,601 546,723
Expenditures for segment
assets 3,761 3,540 4,567 1,082 12,950
=========================================================================================
F-32
51
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Healthcare
Packaging, Consumer
Products Packaging Specialty
and and Food Resins and
July 3, 1998 Materials Products Packaging Compounds TOTALS
- -----------------------------------------------------------------------------------------
Revenues from external
customers $90,708 $103,744 $ 99,336 $15,809 $309,597
Interest expense 4,844 6,395 6,346 2,097 19,682
Depreciation and
amortization 1,705 3,854 9,320 1,952 16,831
Segment income from
operations 13,563 14,866 18,321 2,955 49,705
Segment assets 134,053 224,754 73,261 87,105 519,173
Expenditures for segment
assets 1,347 1,387 4,316 233 7,283
- -----------------------------------------------------------------------------------------
JULY 2, 1999 July 3, 1998
- ----------------------------------------------------------------------------------
PROFIT OR LOSS
Total operating profit for reportable segments $ 88,462 $ 49,705
before income taxes
Corporate and eliminations (20,052) (11,827)
- ----------------------------------------------------------------------------------
$ 68,410 $ 37,878
==================================================================================
ASSETS
Total assets from reportable segments $ 546,723 $ 519,173
Other unallocated amounts 12,713 20,106
- ----------------------------------------------------------------------------------
Consolidated total $ 559,436 $ 539,279
==================================================================================
DEPRECIATION AND AMORTIZATION
Segment totals $ 35,125 $ 16,831
Corporate 218 418
- ----------------------------------------------------------------------------------
Consolidated total $ 35,343 $ 17,249
==================================================================================
F-33
52
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LONG-LIVED
July 2, 1999 REVENUES ASSETS
- -----------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
United States $445,603 $339,409
Canada 4,996 2,542
Europe 38,638 25,779
- -----------------------------------------------------------------------------------------
Total $489,237 $367,730
=========================================================================================
Long-lived
July 3, 1998 Revenues assets
- -----------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
United States $288,520 $325,292
Canada 5,868 2,302
Europe 15,209 27,961
- -----------------------------------------------------------------------------------------
Total $309,597 $355,555
=========================================================================================
Income from operations is total net sales less cost
of goods sold and operating expenses of each segment
before deductions for general corporate expenses not
directly related to an individual segment and
interest. Identifiable assets by industry are those
assets that are used in the Company's operation in
each industry segment, including assigned value of
goodwill. Corporate identifiable assets consist
primarily of cash, prepaid expenses, deferred income
taxes and fixed assets.
For the year ended July 2, 1999, one customer
represented 11% of sales and two customers each
represented 10% of accounts receivable at July 3,
1999.
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-34
53
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
14. SUPPLEMENTAL CONDENSED
CONSOLIDATING
FINANCIAL STATEMENTS Tekni-Plex, Inc. issued 11 1/4% Senior
Subordinated Notes in April 1997 and 9 1/4%
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 2, 1999
Non-
Issuer Guarantors Guarantors TOTAL
- -----------------------------------------------------------------------------------------
Sales, net $150,564 $295,039 $43,634 $489,237
Cost of sales 110,057 218,428 29,808 358,293
- -----------------------------------------------------------------------------------------
Gross profit 40,507 76,611 13,826 130,944
Selling, general and
administrative 44,815 13,243 4,476 62,534
- -----------------------------------------------------------------------------------------
Income from operations (4,308) 63,368 9,350 68,410
Interest expense, net 39,487 (739) 229 38,977
Other expense (income) 294 (1,180) 1,172 286
- -----------------------------------------------------------------------------------------
Income (loss) before provi-
sion for income taxes (44,089) 65,287 7,949 29,147
Provision for income taxes (23,682) 34,604 3,228 14,150
- -----------------------------------------------------------------------------------------
Net income (loss) $(20,407) $ 30,683 $ 4,721 $ 14,997
- -----------------------------------------------------------------------------------------
F-35
54
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Condensed Consolidating Balance Sheet - at July 2, 1999:
Non-
Issuer Guarantors Guarantors Eliminations TOTAL
- ----------------------------------------------------------------------------------------------------------
CURRENT ASSETS $ 45,967 117,689 $ 28,050 - $ 191,706
Property, plant and
equipment, net 44,507 77,132 15,314 - 136,953
Intangible assets 68,073 136,639 1,428 - 206,140
Investment in
subsidiaries 367,167 - - (367,167) -
Deferred financing
costs, net 19,257 (128) 229 - 19,358
Deferred taxes 1,346 - - - 1,346
Other long-term
assets 89,222 36,046 11,350 (132,685) 3,933
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 635,539 $ 367,378 $ 56,371 $(499,852) $ 559,436
==========================================================================================================
CURRENT LIABILITIES $ 52,551 $ 26,868 $ 10,842 - $ 90,261
Long-term debt 404,288 - 6,358 - 410,646
Other long-term
liabilities 119,759 - 19,158 (132,685) 6,232
- ----------------------------------------------------------------------------------------------------------
Total liabilities 576,598 26,868 36,358 (132,685) 507,139
==========================================================================================================
Additional paid-in
capital 41,095 296,747 15,641 (312,408) 41,075
Retained earnings
(deficit) 17,846 43,763 5,740 (54,759) 12,590
Cumulative currency
translation
adjustment - - (1,368) - (1,368)
- ----------------------------------------------------------------------------------------------------------
Total equity 58,941 340,510 20,013 (367,167) 52,297
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
EQUITY $ 635,539 $ 367,378 $ 56,371 $(499,852) $ 559,436
==========================================================================================================
F-36
55
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 provi-
sion 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-37
56
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 $ 100,147 $ 24,621 $ 40,446 $ 183,724
Property, plant and
equipment, net 40,535 71,304 16,395 - 128,234
Goodwill 30,624 151,055 12,170 - 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 $ 324,962 $ 54,884 $(293,052) $ 539,279
==========================================================================================================
Current liabilities $ 28,855 $ 57,395 $ 12,577 $ - $ 98,827
Long-term debt 386,063 6,755 3,633 - 396,451
Other long-term
liabilities (6,377) (48,273) 21,266 38,712 5,328
- ----------------------------------------------------------------------------------------------------------
Total liabilities 408,541 15,877 37,476 38,712 500,606
==========================================================================================================
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 $ 324,962 $ 54,884 $(293,052) $ 539,279
==========================================================================================================
F-38
57
TEKNI-PLEX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. QUARTERLY RESULTS OF
OPERATIONS
(UNAUDITED)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------
Net sales $108,069 $94,004 $129,754 $157,410
Gross profit 27,091 24,878 37,680 41,295
Income from operations 13,131 10,320 21,273 23,686
Net income 1,543 505 5,849 7,100
========================================================================================
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)
========================================================================================
Fluctuations in net sales are due primarily to seasonality in
a number of product lines, particularly garden hose and
irrigation hose products.
F-39
58
INDEPENDENT AUDITORS' REPORT
ON SUPPLEMENTAL SCHEDULE
Board of Directors
Tekni-Plex, Inc.
Somerville, New Jersey
The audits referred to in our report dated July 30, 1999 relating to the
consolidated financial statements of Tekni-Plex, Inc. and Subsidiaries, which
are contained in this Form 10-K, included the audits of the financial statement
schedule for the years ended July 2, 1999, July 3, 1998 and June 27, 1997 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
July 30, 1999
F-40
59
TEKNI-PLEX, INC.
AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 28, 1997
Accounts receivable allowance $ 565 $ 200 $ - $ 452 $ 313
===================================================================================================================================
YEAR ENDED JULY 3, 1998
Accounts receivable allowance $ 313 $ 705 $ 1,592 (3) $ 1,284 $ 1,326
===================================================================================================================================
YEAR ENDED JULY 2, 1999
Accounts receivable allowance $ 1,326 $ 370 $ 68 (3) $ 102 $ 1,662
===================================================================================================================================
(1) To increase accounts receivable allowance.
(2) Uncollectible accounts written off, net of recoveries.
(3) Balances related to acquisitions.
F-41
60
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 3, 1999
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 3, 1999.
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
61
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).
10.6.1 Amendment No. 1 to Employment Agreement, dated as of January 30, 1997,
between Dr. F. Patrick Smith and Tekni-Plex, Inc., made effective as of
March 2, 1998.*
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).
10.7.1 Amendment No. 1 to Employment Agreement, dated as of April 4, 1997,
between Mr. Kenneth W.R. Baker and Tekni-Plex, Inc., made effective as
of March 2, 1998.*
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).
62
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).
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. (Filed as Exhibit 10.17 to
Registrant's Annual Report on Form 10-K for the fiscal year ended July
3, 1998, and incorporated herein by reference.)
21.0 List of Subsidiaries.*
27.0 Financial Data Schedule.*
* Filed herewith.