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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 2003
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-73552
PLASTIPAK HOLDINGS, INC.
------------------------
(Exact name of registrant as specified in its charter)
Michigan 52-2186087
- --------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9135 General Court, Plymouth, Michigan 48170
--------------------------------------------
(Address of principal executive offices)
(734) 455-3600
--------------
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes No [X]
The number of shares of the registrant's common stock, $1.00 par value,
outstanding as of August 2, 2003 was 28,316.
PLASTIPAK HOLDINGS, INC.
FORM 10-Q INDEX
PAGE
PART I - FINANCIAL INFORMATION...................................................................................1
Item 1. Financial Statements...............................................................................1
Condensed Consolidated Balance Sheets as of August 2, 2003 (unaudited)
and November 2, 2002 .............................................................................1
Condensed Consolidated Statements of Operations (unaudited) for the
Three Month and Nine Month Periods Ended August 2, 2003 and August 3, 2002.........................3
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine months Ended August 2, 2003 and August 3, 2002................................................4
Notes to Condensed Consolidated Financial Statements...............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................31
Item 4. Controls and Procedures...........................................................................31
PART II - OTHER INFORMATION.....................................................................................31
Item 1. Legal Proceedings.................................................................................31
Item 6. Exhibits and Reports on Form 8-K..................................................................32
10-Q EXHIBIT INDEX..............................................................................................34
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS AUGUST 2, NOVEMBER 2,
2003 2002
------------ ------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 39,023,673 $ 69,696,262
Accounts Receivable
Trade (net of allowance of $3,259,486 and $2,166,430
at August 2, 2003 and November 2, 2002) 48,774,392 46,086,007
Related parties 7,260,926 6,228,360
------------ ------------
56,035,318 52,314,367
Inventories 86,786,387 78,730,293
Prepaid expenses 12,208,747 8,523,505
Prepaid federal income taxes 3,860,645 3,808,730
Deferred income taxes 2,112,000 2,732,000
Other current assets 5,375,630 4,427,893
------------ ------------
Total current assets 205,402,400 220,233,050
PROPERTY, PLANT & EQUIPMENT- NET 351,246,756 310,913,565
OTHER ASSETS
Cash surrender value of life insurance 1,788,374 1,788,374
Deposits 11,678,884 15,711,204
Capitalized loan costs (net of accumulated amortization
of $3,019,552 and $1,729,634 at August 2, 2003 and
November 2, 2002) 9,971,695 11,261,613
Intangible assets (net of accumulated amortization of
of $12,574,023 and $9,376,111 at August 2, 2003
and November 2, 2002) 6,345,274 8,768,184
Prepaids 962,010 910,466
Sundry 247,397 11,894
------------ ------------
Total Other Assets 30,993,634 38,451,735
------------ ------------
Total Assets $587,642,790 $569,598,350
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY AUGUST 2, NOVEMBER 2,
2003 2002
-------------- --------------
(UNAUDITED)
CURRENT LIABILITIES
Accounts payable - trade $ 83,357,687 $ 90,223,335
Current portion of long term obligation 4,276,977 5,180,231
Accrued liabilities
Taxes other than income 7,814,660 4,943,876
Other accrued expenses 41,815,506 25,709,607
Income taxes 1,369,304 1,388,244
-------------- --------------
Total Current Liabilities 138,634,134 127,445,293
SENIOR NOTES (NET OF UNAMORTIZED DISCOUNT (PREMIUM) AND
FV OF SWAPS OF ($2,289,468) AND $6,910,039 AT AUGUST 2,
2003 AND ($2,501,893) AND $0 AT NOVEMBER 2, 2002) 320,379,429 327,501,893
LONG-TERM OBLIGATIONS 57,946,852 55,132,393
DEFERRED INCOME TAXES 16,767,000 12,344,000
OTHER NON-CURRENT LIABILITIES 3,977,067 3,785,884
OBLIGATIONS UNDER STOCK BONUS PLAN 7,844,882 6,104,850
STOCKHOLDERS' EQUITY
Common stock, no par value, 60,000 shares authorized;
28,316 shares issued and outstanding 28,316 28,316
Retained earnings 42,065,110 37,255,721
-------------- --------------
Total Stockholders' Equity 42,093,426 37,284,037
-------------- --------------
Total Liabilities and Stockholders' Equity $ 587,642,790 $ 569,598,350
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ ------------------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenues $ 237,355,017 $ 208,359,282 $ 664,228,422 $ 599,255,915
Cost and expenses 207,944,594 180,804,364 572,464,745 510,913,536
------------- ------------- ------------- -------------
Gross profit 29,410,423 27,554,918 91,763,677 88,342,379
Selling, general and
administrative expenses 18,693,366 17,108,319 55,556,230 49,099,773
------------- ------------- ------------- -------------
Operating profit 10,717,057 10,446,599 36,207,447 39,242,606
Other expense (income)
Interest expense 9,118,594 8,763,959 28,138,198 26,667,365
Interest income (208,947) (446,704) (768,149) (1,003,994)
Royalty income (187,500) (590,273) (767,746) (815,481)
Loss (gain) on foreign
currency translation 33,366 (1,946,402) 819,791 806,159
Sundry (income) loss (57,106) (7,879) (91,691) 28,184
------------- ------------- ------------- -------------
8,698,407 5,772,701 27,330,403 25,682,233
------------- ------------- ------------- -------------
Earnings before income taxes 2,018,650 4,673,898 8,877,044 13,560,373
Income tax expense (benefit)
Current (2,878,000) 2,253,000 (1,177,000) 2,253,000
Deferred 4,486,000 (632,000) 5,043,000 2,068,000
------------- ------------- ------------- -------------
1,608,000 1,621,000 3,866,000 4,321,000
------------- ------------- ------------- -------------
Net earnings $ 410,650 $ 3,052,898 $ 5,011,044 $ 9,239,373
============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
-------------------------------------
AUGUST 2, AUGUST 3,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
Net earnings $ 5,011,044 $ 9,239,373
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 41,498,012 35,035,207
Amortization of net (premium) / discount on Senior Notes (212,425) 309,407
Bad debt expense 783,388 794,258
Deferred salaries 290,700 378,050
(Gain) loss on sale of equipment (212,792) 251,268
Deferred tax expense 5,043,000 2,068,000
Restricted stock option - compensation 1,538,377 --
Foreign currency translation loss (gain) 796,677 (2,473,908)
Change in assets and liabilities:
Increase in accounts receivable (4,828,791) (1,787,897)
(Increase) decrease in inventories (8,056,094) 349,999
Increase in prepaid expenses and other current assets (5,116,523) (3,822,128)
Increase in prepaid federal income taxes (51,915) (813,520)
Increase in other liabilities 11,966,463 15,226,314
Decrease (increase) in deposits 4,032,320 (8,838,897)
Decrease in accounts payable (6,865,648) (14,187,247)
Increase in sundry other assets (235,503) (404,802)
(Increase) decrease in income taxes (18,940) 1,929,003
------------ ------------
Net cash provided by operating activities 45,361,350 33,252,480
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (72,010,775) (52,526,278)
Proceeds from sale of equipment 629,559 --
Acquisition of intangible assets (775,000) (3,000,000)
------------ ------------
Net cash used in investing activities (72,156,216) (55,526,278)
CASH FLOWS USED IN FINANCING ACTIVITIES
Net borrowings under revolving credit facility 1,052,982 1,803,115
Principal payments on long-term obligations (4,981,250) (6,299,556)
Proceeds from long-term obligations 50,545 21,503
Capitalized loan costs -- (375,814)
------------ ------------
Net cash used in financing activities (3,877,723) (4,850,752)
------------ ------------
Net decrease in cash and cash equivalents (30,672,589) (27,124,550)
Cash and cash equivalents at beginning of the year 69,696,262 53,483,389
------------ ------------
Cash and cash equivalents at end of the period $ 39,023,673 $ 26,358,839
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
AUGUST 2, AUGUST 3,
2003 2002
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION: (UNAUDITED) (UNAUDITED)
Cash paid for interest $ 22,387,000 $ 19,773,000
============ ============
Cash paid for income taxes $ 723,000 $ 775,000
============ ============
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of equipment through the assumption of
long-term obligations $ 5,317,367 $ 313,850
============ ============
Increase in Obligation Under Stock Bonus Plan $ 1,740,032 $ --
============ ============
(Decrease) increase in fair value of interest rate swaps $ (6,910,039) $ 174,548
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SUMMARY OF ACCOUNTING
POLICIES
Organization and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules of the Securities and Exchange Commission
for quarterly reports on Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and estimated provisions for bonus and
profit-sharing arrangements) considered necessary for a fair presentation have
been included. Operating results for the nine months ended August 2, 2003 are
not necessarily indicative of the results that may be expected for the year
ending November 1, 2003.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto included in the
Company's Form 10-K filed by Plastipak Holdings, Inc. (Plastipak) with the
Securities and Exchange Commission on January 31, 2003.
Reclassifications
Certain reclassifications have been made to the 2002 financial information
in order for them to conform to the classifications at August 2, 2003.
Employee Compensation Plans
The Company has two stock-based employee compensation plans. The Company
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. The plans are considered to be variable plans and therefore,
stock-based employee compensation cost is reflected as a component of general
and administrative expenses.
Amounts expensed approximate that which would have been expensed had the
value of the options granted been computed under the provisions of FAS 123.
NOTE B - FISCAL PERIOD
Plastipak has elected a 52/53 week fiscal period for tax and financial
reporting purposes. Plastipak's fiscal period ends on the Saturday closest to
October 31. The three month periods ended August 2, 2003 and August 3, 2002
contained 13 weeks. The nine month periods ended August 2, 2003 and August 3,
2002 contained 39 weeks.
NOTE C - NEW ACCOUNTING PRONOUNCEMENTS
On November 3, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), Accounting for Goodwill and Other Intangibles,
which requires that goodwill and certain other intangible assets no longer be
amortized to earnings but instead be reviewed periodically for potential
impairment. The Company determined that the intangible assets had finite lives
and there was no change in the lives, therefore, there is no pro forma
disclosure requirement. Statement of Financial Accounting Standards No. 144
("SFAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets
which addresses financial accounting and reporting for the impairment or
disposal long-lived assets; and Statement of Financial Accounting Standards No.
148 ("SFAS 148"), Accounting for Stock Based Compensation-Transition and
Disclosure, which addresses financial accounting and reporting for stock-based
employee compensation plans. The adoption of these standards did not have a
material impact on the Company's financial position or results of operations.
6
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE C - NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46
clarifies the applications of Accounting Research Bulletin 51, Consolidated
Financial Statements, for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company is currently evaluating the impact, if any,
from this standard on its results of operations and financial position.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149
requires that contracts with comparable characteristics be accounted for
similarly. This Statement is effective for contracts entered into or modified
after June 30, 2003. All provisions of this Statement should be applied
prospectively, except as stated below and for hedging relationships designated
after June 30, 2003. All provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. The adoption of this standard did not have a
material impact on the Company's financial position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently evaluating the impact,
if any, from this standard on its results of operations and financial position.
NOTE D - INVENTORIES
Inventories consisted of the following at: August 2, November 2,
2003 2002
----------- -----------
Raw materials $35,226,018 $29,585,642
Finished goods 38,354,453 37,753,695
Parts and supplies 13,205,916 11,390,956
----------- -----------
$86,786,387 $78,730,293
=========== ===========
7
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE E - LEGAL PROCEEDINGS
The Company is a party to various litigation matters arising in the ordinary
course of business. The ultimate legal and financial liability of this
litigation cannot be estimated with certainty, but management believes, based on
their examination of these matters, experience to date and discussions with
counsel, that the ultimate liability will not be material to the Company's
business, financial condition or results of operations.
NOTE F - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by Financial
Accounting Standards Board Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," requires companies to recognize all
of their derivative instruments as either assets or liabilities at fair value in
the statement of financial position. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and further,
on the type of hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate the
hedging instrument, based upon the exposure being hedged, as either a fair value
hedge or a cash flow hedge.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the change in fair values. For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change. The Company currently uses only fair value
hedge accounting.
On March 11, 2003, the Company entered into two interest rate swap
agreements. In connection with the Senior Notes, the Company exchanged fixed
rate interest of 10.75% for variable rate interest. The interest rate swap
agreements have notional amounts of $50,000,000 million each. The variable rates
are equal to six month LIBOR plus 6.46% and 6.66%, respectively, for an 8-year
period ending September 1, 2011. As of August 2, 2003, the Company recorded an
increase of $6,910,039 in other accrued expenses to recognize the fair value of
the swap and a $6,910,039 decrease in the Senior Notes to recognize the
difference between the carrying value and fair value of the related hedge
liability.
NOTE G - INCOME TAXES
The 2003 effective tax rate is in excess of the statutory rate due to the
recognition of a change in estimate for prior year book and tax differences and
the settlement of prior period tax liabilities.
8
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE
SEGMENTS
The Senior Notes are unsecured, and guaranteed by each of Plastipak's
current and future material domestic subsidiaries.
The following condensed consolidating financial information presents:
(1) Condensed consolidating financial statements as of August 2, 2003 and
November 2, 2002 and the three and nine months ending August 2, 2003
and August 3, 2002 of (a) Plastipak the parent; (b) the guarantor
subsidiaries; (North American Operating Segment) (c) the nonguarantor
subsidiaries (South American Operating Segment); (d) Plastipak on a
consolidated basis, and
(2) Elimination entries necessary to consolidate Plastipak Holdings,
Inc., the parent, with the guarantor (North American operating
segment) and nonguarantor (South American operating segment)
subsidiaries.
Each subsidiary guarantor is wholly-owned by Plastipak, all guarantees are
full and unconditional and all guarantees are joint and several.
9
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE
SEGMENTS (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 2, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CURRENT ASSETS
Cash $ 28,953,382 $ 9,027,095 $ 1,043,196 $ -- $ 39,023,673
Accounts receivable 12,821,114 41,610,857 8,654,148 (7,050,801) 56,035,318
Inventories -- 71,106,497 15,679,890 -- 86,786,387
Prepaid expenses -- 9,177,256 3,031,491 -- 12,208,747
Prepaid federal income taxes 1,023,000 2,741,774 95,871 -- 3,860,645
Deferred income taxes (2,639,000) 2,226,000 2,525,000 -- 2,112,000
Other current assets -- 4,927,005 448,625 -- 5,375,630
------------- ------------- ------------- ------------- -------------
Total Current Assets 40,158,496 140,816,484 31,478,221 (7,050,801) 205,402,400
PROPERTY, PLANT &
EQUIPMENT- NET -- 299,380,975 52,165,781 (300,000) 351,246,756
OTHER ASSETS
Cash surrender value
of life insurance -- 1,788,374 -- -- 1,788,374
Deposits -- 11,678,884 -- -- 11,678,884
Investment in and advances
to affiliates 338,455,977 (267,311,489) -- (71,144,488) --
Capitalized loan costs 1,057,627 8,914,068 -- -- 9,971,695
Intangible assets -- 3,136,250 3,209,024 -- 6,345,274
Deferred tax asset-long term (101,556) 101,556 -- -- --
Prepaids -- 962,010 -- -- 962,010
Sundry -- 5,004,248 243,149 (5,000,000) 247,397
------------- ------------- ------------- ------------- -------------
Total Other Assets 339,412,048 (235,726,099) 3,452,173 (76,144,488) 30,993,634
------------- ------------- ------------- ------------- -------------
Total Assets $ 379,570,544 $ 204,471,360 $ 87,096,175 $ (83,495,289) $ 587,642,790
============= ============= ============= ============= =============
10
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
AS OF AUGUST 2, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CURRENT LIABILITIES
Accounts payable $ 1,473 $ 59,108,668 $ 31,298,347 (7,050,801) $ 83,357,687
Current portion of long
term obligation -- $ 3,287,416 989,561 -- 4,276,977
Taxes other than income -- $ 6,891,942 922,718 -- 7,814,660
Deferred income tax
liability current (118,000) $ 118,000 -- -- --
Other accrued expenses 20,068,958 $ 20,725,791 1,020,757 -- 41,815,506
Income taxes (168,440) $ 1,537,744 -- -- 1,369,304
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 19,783,991 91,669,561 34,231,383 (7,050,801) 138,634,134
SENIOR NOTES 323,714,165 (3,334,736) -- -- 320,379,429
LONG-TERM OBLIGATIONS -- 5,162,593 57,784,259 (5,000,000) 57,946,852
DEFERRED INCOME TAXES (10,413,358) 24,150,097 3,030,261 -- 16,767,000
OTHER NON-CURRENT
LIABILITIES -- 3,397,559 579,508 -- 3,977,067
OBLIGATIONS UNDER
STOCK BONUS PLAN 4,392,320 3,452,562 -- -- 7,844,882
STOCKHOLDERS'
EQUITY (DEFICIT) 42,093,426 79,973,724 (8,529,236) (71,444,488) 42,093,426
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Stockholders' Equity $ 379,570,544 $ 204,471,360 $ 87,096,175 $ (83,495,289) $ 587,642,790
============= ============= ============= ============= =============
11
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF NOVEMBER 2, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 44,619,480 $ 22,888,938 $ 2,187,844 $ -- $ 69,696,262
Accounts receivable 5,086,992 44,941,401 8,757,490 (6,471,516) 52,314,367
Inventories -- 62,985,057 15,745,236 -- 78,730,293
Prepaid expenses -- 6,273,988 2,249,517 -- 8,523,505
Prepaid federal income taxes 796,000 3,012,730 -- -- 3,808,730
Deferred income taxes (2,019,000) 2,226,000 2,525,000 -- 2,732,000
Other current assets -- 4,057,036 370,857 -- 4,427,893
------------- ------------- ------------- ------------- -------------
Total Current Assets 48,483,472 146,385,150 31,835,944 (6,471,516) 220,233,050
PROPERTY, PLANT &
EQUIPMENT- NET -- 255,598,323 55,715,242 (400,000) 310,913,565
OTHER ASSETS
Cash surrender value
of life insurance -- 1,788,374 -- -- 1,788,374
Deposits -- 15,711,204 -- -- 15,711,204
Investment in and advances
to affiliates 316,666,208 (254,504,681) -- (62,161,527) --
Capitalized loan costs 1,155,757 10,105,856 -- -- 11,261,613
Intangible assets -- 4,504,210 4,263,974 -- 8,768,184
Deferred tax asset - long term (86,000) 86,000 -- -- --
Prepaids -- 910,466 -- -- 910,466
Sundry -- 5,011,894 -- (5,000,000) 11,894
------------- ------------- ------------- ------------- -------------
Total Other Assets 317,735,965 (216,386,677) 4,263,974 (67,161,527) 38,451,735
------------- ------------- ------------- ------------- -------------
Total Assets $ 366,219,437 $ 185,596,796 $ 91,815,160 $ (74,033,043) $ 569,598,350
============= ============= ============= ============= =============
12
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET - CONTINUED
AS OF NOVEMBER 2, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CURRENT LIABILITIES
Accounts payable $ -- $ 65,472,597 $ 31,222,254 $ (6,471,516) $ 90,223,335
Current portion of long
term obligation -- 3,459,728 1,720,503 -- 5,180,231
Taxes other than income -- 4,392,901 550,975 -- 4,943,876
Deferred income tax
liability current (118,000) 118,000 -- -- --
Other accrued expenses 5,481,483 16,638,057 3,590,067 -- 25,709,607
Income taxes (168,440) 1,556,684 -- -- 1,388,244
------------- ------------- ------------- ------------- -------------
Total Current Liabilities 5,195,043 91,637,967 37,083,799 (6,471,516) 127,445,293
SENIOR NOTES 331,146,037 (3,644,144) -- -- 327,501,893
LONG-TERM OBLIGATIONS -- 2,981,314 57,151,079 (5,000,000) 55,132,393
DEFERRED INCOME TAXES (11,798,000) 22,705,000 1,437,000 -- 12,344,000
OTHER LONG-TERM
LIABILITIES -- 3,147,418 638,466 -- 3,785,884
OBLIGATIONS UNDER
STOCK BONUS PLAN 4,392,320 1,712,530 -- -- 6,104,850
STOCKHOLDERS'
EQUITY (DEFICIT) 37,284,037 67,056,711 (4,495,184) (62,561,527) 37,284,037
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Stockholders' Equity $ 366,219,437 $ 185,596,796 $ 91,815,160 $ (74,033,043) $ 569,598,350
============= ============= ============= ============= =============
13
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 2, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 218,563,468 $ 20,426,682 $ (1,635,133) $ 237,355,017
Cost and expenses -- 188,929,311 20,700,416 (1,685,133) 207,944,594
------------- ------------- ------------- ------------- -------------
Gross profit (loss) -- 29,634,157 (273,734) 50,000 29,410,423
Selling, general and
administrative expenses 81,000 16,902,761 1,709,605 -- 18,693,366
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (81,000) 12,731,396 (1,983,339) 50,000 10,717,057
Other expense (income)
Equity in loss (earnings)
of affiliates 136,337 914,972 -- (1,051,309) --
Interest expense 7,939,238 174,459 1,045,818 (40,921) 9,118,594
Interest income (7,967,423) 7,797,790 (80,235) 40,921 (208,947)
Royalty income -- (187,500) -- -- (187,500)
Loss on foreign currency
translation -- -- 33,366 -- 33,366
Sundry (income) loss (135,071) 78,654 (689) -- (57,106)
------------- ------------- ------------- ------------- -------------
(26,919) 8,778,375 998,260 (1,051,309) 8,698,407
------------- ------------- ------------- ------------- -------------
(Loss) earnings before
income taxes (54,081) 3,953,021 (2,981,599) 1,101,309 2,018,650
Income taxes (464,731) 479,470 1,593,261 -- 1,608,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 410,650 $ 3,473,551 $ (4,574,860) $ 1,101,309 $ 410,650
============= ============= ============= ============= =============
14
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 3, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 195,810,872 $ 13,893,324 $ (1,344,914) $ 208,359,282
Cost and expenses -- 167,000,573 14,878,705 (1,074,914) 180,804,364
------------- ------------- ------------- ------------- -------------
Gross profit (loss) -- 28,810,299 (985,381) (270,000) 27,554,918
Selling, general and
administrative expenses -- 15,505,234 1,873,085 (270,000) 17,108,319
------------- ------------- ------------- ------------- -------------
Operating profit (loss) -- 13,305,065 (2,858,466) -- 10,446,599
Other expense (income)
Equity in loss (earnings)
of affiliates (4,628,370) 348,874 -- 4,279,496 --
Interest expense 7,337,871 314,767 1,161,032 (49,711) 8,763,959
Interest income (7,248,399) 7,077,382 (325,398) 49,711 (446,704)
Royalty income -- (590,273) -- -- (590,273)
Gain on foreign currency
translation -- -- (1,946,402) -- (1,946,402)
Sundry (income) loss (135,000) 130,447 (3,326) -- (7,879)
------------- ------------- ------------- ------------- -------------
(4,673,898) 7,281,197 (1,114,094) 4,279,496 5,772,701
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes 4,673,898 6,023,868 (1,744,372) (4,279,496) 4,673,898
Income taxes 1,621,000 -- -- -- 1,621,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 3,052,898 $ 6,023,868 $ (1,744,372) $ (4,279,496) $ 3,052,898
============= ============= ============= ============= =============
15
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 2, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 604,762,193 $ 63,092,513 $ (3,626,284) $ 664,228,422
Cost and expenses -- 516,610,693 59,580,337 (3,726,285) 572,464,745
------------- ------------- ------------- ------------- -------------
Gross profit -- 88,151,500 3,512,176 100,001 91,763,677
Selling, general and
administrative expenses 246,619 50,922,245 4,387,366 -- 55,556,230
------------- ------------- ------------- ------------- -------------
Operating (loss) profit (246,619) 37,229,255 (875,190) 100,001 36,207,447
Other expense (income)
Equity in loss (earnings)
of affiliates (8,391,424) 1,206,809 -- 7,184,615 --
Interest expense 24,651,058 620,629 2,992,794 (126,283) 28,138,198
Interest income (22,905,495) 22,249,761 (238,698) 126,283 (768,149)
Royalty income -- (767,746) -- -- (767,746)
Loss on foreign currency
translation -- -- 819,791 -- 819,791
Sundry (income) loss (405,071) 321,666 (8,286) -- (91,691)
------------- ------------- ------------- ------------- -------------
(7,050,932) 23,631,119 3,565,601 7,184,615 27,330,403
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes 6,804,313 13,598,136 (4,440,791) (7,084,614) 8,877,044
Income taxes 1,793,269 479,470 1,593,261 -- 3,866,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 5,011,044 $ 13,118,666 $ (6,034,052) $ (7,084,614) $ 5,011,044
============= ============= ============= ============= =============
16
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED AUGUST 3, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 553,250,175 $ 48,169,685 $ (2,163,945) $ 599,255,915
Cost and expenses -- 462,636,393 50,171,088 (1,893,945) 510,913,536
------------- ------------- ------------- ------------- -------------
Gross profit (loss) -- 90,613,782 (2,001,403) (270,000) 88,342,379
Selling, general and
administrative expenses -- 43,781,362 5,588,411 (270,000) 49,099,773
------------- ------------- ------------- ------------- -------------
Operating profit (loss) -- 46,832,420 (7,589,814) -- 39,242,606
Other expense (income)
Equity in loss (earnings)
of affiliates (13,469,753) 2,275,220 -- 11,194,533 --
Interest expense 22,119,121 1,102,842 3,599,362 (153,960) 26,667,365
Interest income (21,756,545) 21,127,570 (528,979) 153,960 (1,003,994)
Royalty income -- (815,481) -- -- (815,481)
Loss on foreign currency
translation -- -- 806,159 -- 806,159
Sundry (income) loss (453,196) 571,634 (90,254) -- 28,184
------------- ------------- ------------- ------------- -------------
(13,560,373) 24,261,785 3,786,288 11,194,533 25,682,233
------------- ------------- ------------- ------------- -------------
Earnings (loss) before
income taxes 13,560,373 22,570,635 (11,376,102) (11,194,533) 13,560,373
Income taxes 4,321,000 -- -- -- 4,321,000
------------- ------------- ------------- ------------- -------------
Net earnings (loss) $ 9,239,373 $ 22,570,635 $ (11,376,102) $ (11,194,533) $ 9,239,373
============= ============= ============= ============= =============
17
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 2, 2003
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash (used in) provided by
operating activities $ (2,066,098) $ 47,453,235 $ (25,787) $ -- $ 45,361,350
CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of property
and equipment -- (69,448,645) (2,562,130) -- (72,010,775)
Proceeds from sale of equipment -- 616,967 12,592 -- 629,559
Investment in and advances
to affiliates (13,600,000) (400,000) -- 14,000,000 --
Acquisition of intangible assets -- (775,000) -- (775,000)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by investing activities (13,600,000) (70,006,678) (2,549,538) 14,000,000 (72,156,216)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Net borrowings under line of credit -- -- 1,052,982 -- 1,052,982
Principal payments on long-term
obligations -- (3,308,400) (1,672,850) -- (4,981,250)
Proceeds from long-term obligations -- 12,000,000 50,545 (12,000,000) 50,545
Capital increases -- -- 2,000,000 (2,000,000) --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities -- 8,691,600 1,430,677 (14,000,000) (3,877,723)
------------- ------------- ------------- ------------- -------------
Net decrease in cash (15,666,098) (13,861,843) (1,144,648) -- (30,672,589)
Cash and cash equivalents at
the beginning of the year 44,619,480 22,888,938 2,187,844 -- 69,696,262
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at
the end of the period $ 28,953,382 $ 9,027,095 $ 1,043,196 $ -- $ 39,023,673
============= ============= ============= ============= =============
18
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED AUGUST 3, 2002
PARENT GUARANTOR NONGUARANTOR CONSOLIDATED
TOTAL SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities $ 6,400,000 $ 31,400,171 $ (4,547,691) $ -- $ 33,252,480
CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of property
and equipment -- (50,765,055) (3,338,416) 1,577,193 (52,526,278)
Proceeds from sale of equipment -- -- 1,577,193 (1,577,193) --
Investment in and advances
to affiliates (6,400,000) (1,990,000) -- 8,390,000 --
Acquisition of intangible assets -- (3,000,000) -- (3,000,000)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided
by investing activities (6,400,000) (55,755,055) (1,761,223) 8,390,000 (55,526,278)
CASH FLOWS USED IN
FINANCING ACTIVITIES
Net borrowings under line of credit -- -- 1,803,115 -- 1,803,115
Principal payments on long-term
obligations -- (2,418,198) (3,881,358) -- (6,299,556)
Proceeds from long-term obligations -- -- 21,503 -- 21,503
Capitalized loan costs -- (375,814) -- -- (375,814)
Capital increases -- -- 8,390,000 (8,390,000) --
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities -- (2,794,012) 6,333,260 (8,390,000) (4,850,752)
------------ ------------ ------------ ------------ ------------
Net (decrease) increase in cash -- (27,148,896) 24,346 -- (27,124,550)
Cash and cash equivalents at
the beginning of the year 1,000 51,476,877 2,005,512 -- 53,483,389
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at
the end of the period $ 1,000 $ 24,327,981 $ 2,029,858 $ -- $ 26,358,839
============ ============ ============ ============ ============
19
PLASTIPAK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE H - GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS AND REPORTABLE SEGMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - CONTINUED
SUPPLEMENTAL CASH FLOW INFORMATION
DEPRECIATION AND AMORTIZATION EXPENSE GUARANTOR NONGUARANTOR
PERIOD ENDED SUBSIDIARIES SUBSIDIARIES TOTAL
------------ ------------ ------------
08/02/03 $ 34,347,893 $ 7,150,119 $ 41,498,012
------------ ------------ ------------
08/03/02 $ 28,916,684 $ 6,118,523 $ 35,035,207
============ ============ ============
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Management's discussion and analysis should be read in conjunction with the
consolidated financial statements and the accompanying notes. Please refer to
the "Risk Related to Our Business" section, in our Form 10-K for the year ended
November 2, 2002, for a summary of factors that could cause actual results to
differ materially from those projected in a forward-looking statement. As you
read the material below, we urge you to carefully consider our financial
statements and related information provided herein.
All statements other than statements of historical fact included in this
Form 10-Q, including statements regarding our future financial position,
economic performance and results of operations, as well as our business
strategy, budgets and projected costs and plans and objectives of management for
future operations are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe",
or "continue" or the negative thereof or variations thereon or similar
terminology. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations include, without
limitation, risks associated with our Brazilian operations, competition in our
product categories (including the impact of possible new technologies and the
impact of such competition on pricing, revenues and margins), our high degree of
leverage and substantial debt service obligations, the restrictive covenants
contained in instruments governing our indebtedness, our exposure to
fluctuations in resin and energy prices, our dependence on significant customers
and the risk that customers will not purchase our products in the amounts we
expect, our dependence on key management and our labor force and the material
adverse effect that could result from the loss of their services. All
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the cautionary statements set forth
in this paragraph.
OVERVIEW
Plastipak Holdings, Inc. ("Plastipak") is a privately held Michigan
corporation that was formed in 1998 to act as a holding company for several
related companies. On October 30, 1999, Plastipak acquired all of the equity
interests in Plastipak Packaging, Inc. ("Packaging"), Whiteline Express, Ltd.
("Whiteline"), Clean Tech, Inc. ("Clean Tech") and TABB Realty, LLC ("TABB"),
and a portion of the equity interests of Plastipak Packaging do Brasil, Ltda
("Plastipak Brasil"), through a reorganization (the "Reorganization").
Packaging, our principal operating company whose business commenced operations
in 1967, designs and manufactures rigid plastic containers, and was incorporated
in Delaware in 1982. Packaging also owns the remainder of Plastipak Brasil.
Whiteline is a trucking company serving our transportation and logistics needs,
and was incorporated in Delaware in 1982. Clean Tech, a plastics recycling
operation, provides a source of clean, high quality post-consumer recycled
plastic raw material, and was incorporated in Michigan in 1989. TABB owns real
estate and leases it to Packaging, Whiteline, and Clean Tech. Plastipak Brasil
produces injection-molded plastic preforms and blow molds rigid plastic
packaging in Paulinia and produces injection-molded plastic preforms in Manaus.
Plastipak Brasil also maintains a sales office in Buenos Aires, Argentina. Other
than Plastipak Brasil and its subsidiaries, all of the Plastipak group of
companies are headquartered in Plymouth, Michigan.
RESULTS OF OPERATIONS
We report our results of operations on the basis of a 52-53 week period. Our
fiscal year end is the closest Saturday to October 31 each year. The three
months ended August 2, 2003 and August 3, 2002 were 13 weeks long. The nine
months ended August 2, 2003 and August 3, 2002 were 39 weeks long.
21
Listed in the table below are our revenues and related percentages of
revenue for the three and nine months ended August 2, 2003 and August 3, 2002 in
each of our product categories.
CONSOLIDATED REVENUE BY PRODUCT CATEGORY
Three Months Ended August 2, 2003 Nine Months Ended August 2, 2003
and August 3, 2002 and August 3, 2002
2003 % 2002 % 2003 % 2002 %
------------------------------------------ ------------------------------------------
(dollar amounts in thousands)
Carbonated and non-
carbonated beverage revenue $110,175 46.5% $ 95,098 45.7% $295,113 44.4% $266,227 44.4%
Consumer cleaning revenue $ 70,734 29.8% $ 58,849 28.2% $205,732 31.0% $177,719 29.7%
Food and processed juice
revenue $ 29,305 12.3% $ 28,590 13.7% $ 87,681 13.2% $ 83,773 14.0%
Industrial, agricultural and
automotive revenue $ 11,498 4.8% $ 11,116 5.3% $ 36,240 5.5% $ 30,750 5.1%
Other revenue (a) $ 15,643 6.6% $ 14,706 7.1% $ 39,462 5.9% $ 40,787 6.8%
------------------------------------------ ------------------------------------------
Total revenue $237,355 100.0% $208,359 100.0% $664,228 100.0% $599,256 100.0%
(a) Other revenue includes Clean Tech (recycling), Whiteline
(transportation and logistics), health, personal care and
distilled spirits revenue and other miscellaneous sources of
revenue.
THREE MONTHS ENDED AUGUST 2, 2003 COMPARED TO THREE MONTHS ENDED AUGUST 3, 2002
REVENUE
Revenue increased 13.9% to $237.4 million for the three months ended August
2, 2003 with unit sales increasing 8.5%. Consistent performance in the U.S.
combined with significant gains in Brazil helped drive these results. In the
U.S., additional sales activity from our two new manufacturing sites in the
Southeast, combined with higher average resin pricing, helped push sales higher.
Resin prices (which represent a significant cost of the product) have increased
in the three-month period ended August 2, 2003 as compared to the three-month
period ended August 3, 2002. Using industry standard price data, we estimate
that higher resin prices resulted in approximately a $10.0 million increase in
revenues for the three months ended August 2, 2003.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
- Carbonated and non-carbonated beverage revenue increased 15.9% to $110.2
million while unit sales during the three-month period ended August 2,
2003 increased by 9.4% over the same period in 2002. This growth was a
result of strong preform sales in Brazil combined with the addition of
new customers at our two new manufacturing sites located in Alabama and
Florida. The difference between the revenue and unit volume increases
posted was largely attributable to higher average raw material prices
for the period that were passed through to customers in the form of
higher selling prices.
- Consumer cleaning revenue increased 20.2% to $70.7 million. Unit sales
during the three-month period ended August 2, 2003 increased 14.4% over
the three-month period ended August 3, 2002. The significant growth in
revenue during the period was attributable to primarily two factors:
higher HDPE material prices which converted into higher selling prices
and continued strength in our customer's cleaning business. As compared
to the prior period ending August 3, 2002, several new products began
shipping including items in the automatic dishwash and hard surface
cleaner area.
22
- Our food and processed juice category posted increases in both revenue
and unit volume for the third quarter of 2003. Food and processed juices
revenue increased 2.5% to $29.3 million. Unit sales during the
three-month period ended August 2, 2003 increased 6.2% over the
three-month period ended August 3, 2002. This performance was the result
of broad based activity across all customers combined with the start up
of several key initiatives, including a new edible multi-layer barrier
oil package.
- Industrial, agricultural and automotive revenue increased 3.4% to $11.5
million. Unit sales for the three-month period ended August 2, 2003
increased 0.5% from the three-month period ended August 3, 2002. These
increases were primarily driven from increased large bottle sales used in
the multi-quart oil market and anti-freeze market, along with higher HDPE
material prices which were passed through to customers in the form of
higher selling prices.
- Other revenue increased 6.4% to $15.6 million. The increase was primarily
attributable to increases in freight and other miscellaneous revenue. The
increase was offset by a decrease in the health, personal care and
distilled spirits category. The health, personal care and distilled
spirits category, a business which accounts for less than 1.0% of our
revenue, saw a decline in both revenue and sales units during the third
quarter.
GROSS PROFIT
Gross profit increased 6.7% to $29.4 million for the three-month period
ended August 2, 2003. The increase in gross profit is primarily attributable to
higher unit sales volume and improved operating performance related to our South
American operations. Customer price reductions implemented to extend customer
contracts and expand our business, however, offset the increase in gross profit.
We have not been able, through efficiencies in production to date, to offset
price reductions implemented. The collective impact of the price reductions was
approximately $2.4 million for the quarter. Gross profit as a percent of revenue
decreased to 12.4% as compared to 13.2% in the prior period. The erosion of
gross profit as a percentage of revenue was also due to higher resin costs that
increased revenue without increasing associated gross profit.
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, unaffected by these fluctuations. In general, industry practice and
contractual arrangements with our customers permit price changes to be passed
through to customers. As a result, we have in the past experienced revenue
changes without corresponding changes in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
August 2, 2003 increased 9.3% to $18.7 million. Increases in property taxes,
travel and professional services contributed approximately $0.7 million to the
increase. Compensation expense recorded for restricted stock options contributed
approximately $0.6 million to the increase. As a percentage of revenue, selling,
general and administrative expenses decreased to 7.9% for the three months ended
August 2, 2003 from 8.2% for the three months ended August 3, 2002.
INTEREST EXPENSE
Interest expense increased $0.4 million to $9.1 million for the three-month
period ended August 2, 2003, as compared to $8.7 million for the three-month
period ended August 3, 2002. The increase was primarily due to the sale, on
September 25, 2002, of $50.0 million of the 10.75% Senior Notes. The increase in
interest expense related to the Senior Notes was partially offset by a decrease
in interest rates and interest expense associated with our South American
operations.
23
OTHER (INCOME) AND EXPENSE
Other income decreased by $2.6 million to $0.4 million for the three-month
period ended August 2, 2003. The decrease was primarily attributable to a
decrease in foreign currency translation gains over the prior period.
INCOME TAX EXPENSE (BENEFIT)
Provision for income taxes was a $1.6 million expense for the three months
ended August 2, 2003 and for the three months ended August 3, 2002. Earnings
before taxes was $2.0 million in the third quarter of 2003 compared to $4.7
million of earnings in the third quarter of 2002. The effective rate was 79.7%
in the third quarter of 2003 compared to 34.7% in the third quarter of 2002. The
increase in the effective tax rate in the third quarter of 2003 was due to the
accounting of a change in estimate for prior year book and tax differences and
the settlement of prior period tax liabilities.
NET (LOSS) EARNINGS
Net earnings decreased by $2.6 million from net earnings of $3.1 million for
the three-month period ended August 3, 2002 to net earnings of $0.4 million for
the three-month period ended August 2, 2003. An increase in selling, general and
administrative expenses, a decrease in other (income) and expense and other
factors mentioned above resulted in a reduction in net earnings over the prior
period.
NINE MONTHS ENDED AUGUST 2, 2003 COMPARED TO NINE MONTHS ENDED AUGUST 3, 2002
REVENUE
Revenue increased 10.8% to $664.2 million for the nine months ended August
2, 2003 while unit sales increased for the period by 8.7%. Consistent
performance in the U.S. combined with significant gains in Brazil helped drive
these results. In the U.S., additional sales activity from our two new
manufacturing sites in the Southeast, combined with higher average resin
pricing, helped push sales higher. Resin prices (which represent a significant
cost of the product) have increased in the nine-month period ended August 2,
2003 as compared to the nine-month period ended August 3, 2002. Using industry
standard price data, we estimate that higher resin prices resulted in
approximately a $31.0 million increase in revenues for the nine months ended
August 2, 2003.
Revenue and unit sales increases and decreases by product category are
discussed more specifically below:
- Carbonated and non-carbonated beverage revenue increased 10.9% to $295.1
million while unit sales during the nine-month period ended August 2,
2003 increased by 9.4% over the same period in 2002. This growth was a
result of strong preform sales in Brazil combined with the addition of
new customers at our two new manufacturing sites located in Alabama and
Florida. The difference between the revenue and unit volume increases
posted was largely attributable to higher average raw material prices
for the period that were passed through to customers in the form of
higher selling prices.
- Consumer cleaning revenue increased 15.8% to $205.7 million. Unit sales
during the nine-month period ended August 2, 2003 increased 6.9% over
the nine-month period ended August 3, 2002. The significant growth in
revenue during the period was attributable to primarily two factors:
higher HDPE material prices which converted into higher selling prices
and continued strength in our customer's cleaning business. Several new
products began shipping during the period including items in the
automatic dishwash and hard surface cleaner area.
- Our food and processed juice category posted increases in both revenue
and unit volume for the nine month period ended August 2, 2003. Food and
processed juices revenue increased 4.7% to $87.7 million. Unit sales
during the nine-month period ended August 2, 2003 increased 10.8% over
the nine-month period ended August 3, 2002. This performance was the
result of broad based activity across all
24
customers combined with the start up of several key initiatives,
including a new edible multi-layer barrier oil package that began
shipping during the period.
- Industrial, agricultural and automotive revenue increased 17.9% to $36.2
million. Unit sales for the nine-month period ended August 2, 2003
increased 10.3% from the nine-month period ended August 3, 2002. These
increases were driven primarily from increased large bottle sales used
in the multi-quart oil market and anti-freeze market along with higher
HDPE material prices for the period which were passed through to
customers.
- Other revenue decreased 3.2% to $39.5 million. This decrease is
attributable mainly to a decrease in sales volume in the health,
personal care and distilled spirits revenue. The health, personal care
and distilled spirits category, a business which accounts for less than
1.0% of our revenues, saw a decline in both revenue and sales units
during the third quarter.
GROSS PROFIT
Gross profit increased 3.9% to $91.8 million for the nine-month period ended
August 2, 2003. The increase in gross profit is primarily attributable to higher
unit sales volume and improved operating performance related to our South
American operations, offset by increased operating costs associated with the
start-up of several new product lines, the addition of two new facilities and
the expansion of two existing facilities. Price reductions implemented to extend
customer contracts and expand our business, however, offset the increase in
gross profit. We have not been able, through efficiencies in production to date,
to offset price reductions implemented. The collective impact of the price
reductions was approximately $3.3 million for the nine-month period. Gross
profit as a percent of revenue decreased to 13.8% as compared to 14.7% in the
prior period. The erosion of gross profit as a percentage of revenue was also
due to higher resin costs that increased revenue without increasing associated
gross profit.
Our primary raw materials consist of PET and HDPE resins. Although our
revenue is affected by fluctuations in resin prices, our gross profit is, in
general, unaffected by these fluctuations. In general, industry practice and
contractual arrangements with our customers permit price changes to be passed
through to customers. As a result, we have in the past experienced revenue
changes without corresponding changes in gross profit.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended
August 2, 2003 increased 13.1% to $55.6 million. As a percentage of revenue,
selling, general and administrative expenses increased to 8.4% for the nine
months ended August 2, 2003 from 8.2% in the nine months ended August 3, 2002.
Increases in insurance, corporate labor, legal, depreciation, taxes, and
research and development expenses of approximately $4.7 million were the primary
factors contributing to the change. Compensation expense recorded for restricted
stock options of approximately $1.5 million contributed to the increase as well.
INTEREST EXPENSE
Interest expense increased 5.5% to $28.1 million. The increase was primarily
due to the sale, on September 25, 2002, of $50.0 million of the 10.75% Senior
Notes, which contributed to the approximately $53.6 million increase in our debt
level over the prior period ending August 3, 2002. The increase in interest
expense related to the Senior Notes was partially offset by a decrease in
interest rates and interest expense associated with our South American
operations.
25
OTHER (INCOME) AND EXPENSE
Other income decreased by $0.2 million to $0.8 million for the nine-month
period ended August 2, 2003. The decrease was mainly due to a decrease in
interest income and royalty income offset by an increase in sundry income.
INCOME TAX EXPENSE (BENEFIT)
Provision for income taxes was a $3.9 million expense for the nine months
ended August 2, 2003 as compared to a $4.3 million expense for the nine months
ended August 2, 2002. Earnings before taxes was $8.9 million for the first nine
months of 2003 compared to $13.6 million of earnings for the first nine months
of 2002. The effective rate was 43.6% for the first nine months of 2003 compared
to 31.9% for the first nine months of 2002. The increase in the effective tax
rate for the first nine months of 2003 is due to the accounting of a change in
estimate for prior year book and tax differences and the settlement of prior
period tax liabilities.
NET EARNINGS
Net earnings decreased by $4.2 million from net earnings of $9.2 million for
the nine-month period ended August 3, 2002 to net earnings of $5.0 million for
the nine-month period ended August 2, 2003. As previously discussed, start-up
costs associated with new product lines, the addition of two new facilities and
expansion of two existing facilities along with an increase in selling, general
and administrative expenses, an increase in interest expense and other factors
mentioned above resulted in a reduction in net earnings over the prior period.
FINANCIAL CONDITION
We intend to expand our business, both domestically and internationally. We
have a significant amount of financing capacity to fund the continued growth of
our business. Past expenditures have been used to maintain equipment and expand
capacity for revenue growth. These expenditures were funded with cash flow from
operations, bank debt and additional operating leases. Future capital
expenditures will be used in the same manner as past expenditures.
During the nine months ended August 2, 2003, we spent approximately $77.3
million to cover the capital requirements of our operations. We expect to incur
capital expenditures of approximately $125 million in fiscal 2003 and $90
million in 2004.
We are using technology that will allow us to pursue opportunities in the
condiment, sauce and beverage markets. South America provides significant
opportunities with our current customer base. Additionally, we are in the
process of opening two small facilities in Eastern Europe. Our 2004 capital
expenditure budget incorporates the opening of these two facilities.
We had positive cash flow from operating activities of $45.4 million, which
in part funded our capital expenditures of approximately $77.3 million. The
remaining balance of capital expenditures was covered by cash and cash
equivalents and by financing activities including the assumption of capital
lease obligations.
SEASONALITY
The carbonated soft drink (CSD) and, to a lesser extent, the other beverage
portions of our business are highly seasonal, with peak demand during warmer
summer months, and reduced demand during the winter. We normally add temporary
staff and build inventory of products for our CSD and water customers in
anticipation of seasonal demand in the quarter preceding the summer.
26
INFLATION
We use large quantities of plastic resins in manufacturing our products.
These resins accounted a major portion of our cost of goods sold in the
nine-month period ended August 2, 2003, and are subject to substantial price
fluctuations resulting from shortages in supply and changes in the prices of
natural gas, crude oil and other petrochemical products from which these resins
are produced. We generally enter into three-year agreements with our resin
suppliers, and our purchases of raw materials are subject to market prices and
inflation.
EFFECT OF CHANGES IN EXCHANGE RATES
In general, our results of operations are partially affected by changes in
foreign exchange rates. We invoice our Brazilian and Argentine customers in the
Brazilian Real and Argentine Peso, respectively. A portion of those invoices are
pegged to the U.S. exchange rate. As a result, subject to market conditions, a
decline in the value of the U.S. dollar relative to the Brazilian Real and to a
lesser extent the Argentine Peso can have a favorable effect on our
profitability. Conversely, an increase in the value of the dollar relative to
the Brazilian Real and to a lesser extent the Argentine Peso can have a negative
effect on our profitability. Exchange rate fluctuations resulted in a loss of
approximately $0.8 million for the nine months ended August 2, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities increased $12.1 million to $45.4
million for the nine months ended August 2, 2003 as compared to the nine months
ended August 3, 2002. The increase in cash was primarily the result of an
increase of $13.2 million in non-cash expenses that include items such as
depreciation and amortization, bad debt expense, deferred income tax expense,
and foreign currency translation. An increase in net working capital of $3.2
million was another factor contributing to the change in cash. The increase in
net working capital was due to a decrease in deposits and an increase in
accounts payable offset by an increase in accounts receivable, increased
spending on inventories and a decrease in other liabilities. The increase in
non-cash expenses and net working capital was offset by a decrease in operating
performance of $4.2 million.
Net cash used in investing activities was $72.2 million and $55.5 million
for the nine-month periods ending August 2, 2003 and August 3, 2002,
respectively. Investing activities were primarily attributable to the
acquisition of property and equipment. For the nine months ended August 2, 2003
and August 3, 2002, property and equipment acquisitions were $72.0 million and
$52.5 million, respectively. During the current period, cash used for the
acquisition of intangible assets was partially offset by proceeds from the sale
of equipment. For the period ended August 3, 2002, $3.0 million was used to
acquire intangible assets.
Net cash used in financing activities was $3.9 million and $4.9 million for
the nine-month periods ended August 2, 2003 and August 3, 2002, respectively. In
the nine months ended August 2, 2003 and August 3, 2002, net cash of $5.0
million and $6.3 million, respectively, was used to make principal payments on
long-term obligations. In the nine months ended August 2, 2003 and August 3,
2002, cash was provided from long-term obligations of $1.1 million and $1.8
million, respectively.
On August 20, 2001 and September 25, 2002, we sold an aggregate total
principal amount of $275 million and $50 million, respectively, of 10.75% Senior
Notes to qualified institutional buyers. The notes have a maturity date of
September 2011, and we have the option to redeem all or a portion of the notes
at any time on or after September 1, 2006. Interest under the notes is payable
on September 1 and March 1 of each year. The indenture under which the notes
were issued places restrictions on our ability to declare or pay dividends,
purchase or acquire equity interests of Plastipak, and retire indebtedness that
is subordinate to the notes. The notes also have covenants that place
restrictions on the incurrence of debt, the issuance of stock, and granting of
liens.
27
The proceeds from the Senior Notes sold on August 20, 2001 were used to pay
off existing debt. We continue to use the net proceeds from the September 25,
2002 sale of Senior Notes for general corporate purposes, including working
capital, capital expenditures and technology development.
On August 20, 2001, in conjunction with our first sale of Senior Notes, we
entered into an Amended Credit Agreement which allows us to borrow up to $150
million, subject to a borrowing base consisting of 85% of eligible domestic
accounts receivable, 65% of the value of eligible domestic inventory and 50% of
the value of domestic property, plant and equipment. The Amended Credit
Agreement has a five-year term. Interest under the Amended Credit Agreement is
payable at 200 to 350 basis points per annum over Eurodollar or at prime rates,
as we select. The Amended Credit Agreement is secured by substantially all of
our assets, including pledges of the stock of Plastipak and all of its material
foreign subsidiaries. Packaging, Whiteline, Clean Tech, and TABB are the
borrowers and guarantors under the Amended Credit Agreement and Plastipak
guarantees obligations under the Amended Credit Agreement. As of August 2, 2003,
$57.5 million in letters of credit were outstanding under the Amended Credit
Agreement and we had $92.5 million available for borrowing.
Under the Amended Credit Agreement we are required to calculate EBITDA
because covenants in our debt agreement are tied to ratios based on that
measure. For instance, the covenants under the Amended Credit Agreement
incorporate EBITDA for the most recent last four fiscal quarters (last twelve
months), as a component of the following ratios: debt service ratio (minimum
1.25 to 1), senior secured debt ratio (maximum 2.00 to 1), leverage ratio
(maximum 4.50 to 1) and interest coverage ratio (minimum 2.25 to 1). Our ability
to incur additional debt is tied to our bank covenants. As of August 2, 2003, we
are in compliance with our covenants. EBITDA should not be considered an
alternative measure of operating results or cash flows from operations (as
determined by generally accepted accounting principles), but is a widely
accepted financial indicator of a company's ability to incur and service debt.
While commonly used, however, EBITDA is not identically calculated by companies
presenting EBITDA and is, therefore, not necessarily an accurate means of
comparison and may not be comparable to similarly titled measures disclosed by
other companies.
Our Amended Credit Agreement defines EBITDA as net earnings (loss) plus
income tax expense, interest expense, depreciation and amortization. A
reconciliation between net earnings and EBITDA is calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ----------------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
2003 2002 2003 2002
Net earnings (per GAAP
basis) $ 410,650 $ 3,052,898 $ 5,011,044 $ 9,239,373
Income tax expense 1,608,000 1,621,000 3,866,000 4,321,000
Interest expense 9,118,594 8,763,959 28,138,198 26,667,365
Depreciation 12,643,294 11,210,602 36,578,183 32,339,132
Amortization 1,686,239 891,187 4,919,829 2,696,075
------------ ------------ ------------ -------------
EBITDA $ 25,466,777 $ 25,539,646 $ 78,513,254 $ 75,262,945
============ ============ ============ =============
YEARS ENDED LAST TWELVE MONTHS (LTM)
-------------------------------- ----------------------------------
NOVEMBER 2, NOVEMBER 3, AUGUST 2, AUGUST 3,
2002 2001 2003 2002
Net earnings (per GAAP
basis) $ 8,592,810 $ 7,147,376 $ 4,364,481 $ 9,616,356
Income tax expense 4,831,000 3,284,000 4,376,000 4,326,000
Interest expense 35,099,265 28,955,895 36,570,098 35,140,897
Depreciation 44,070,064 40,701,846 48,309,115 42,857,615
Amortization 3,947,529 4,009,775 6,171,283 4,336,597
------------ ------------ ------------ -------------
EBITDA $ 96,540,668 $ 84,098,892 $ 99,790,977 $ 96,277,465
============= ============ ============ =============
28
Looking forward, we have the following short-term and medium-term capital
needs. Our overall capital expenditure budget in fiscal 2003 is approximately
$125 million and $90 million in 2004, a majority of which is expected to be
discretionary capital expenditures. Our new sites in Florida and Alabama began
production in December 2002 and March 2003, respectively. In addition, we expect
to have a new site in Louisiana beginning production in mid to late fiscal 2004.
We expect to finance all of our capital expenditures with operating cash flows
and the net proceeds of the offering of $50.0 million principal amount of 10.75%
Senior Notes due 2011 that closed in September 2002, and to cover any shortfalls
with borrowings under the Amended Credit Agreement.
In negotiations with major customers for substantial new business and the
extension of current business, we agreed to price reductions. These price
reductions totaled approximately $2.4 million for the quarter ended August 2,
2003. We estimate that these price reductions will average approximately $4.3
million per quarter for the next three to five years. We believe we will be able
to partially or fully offset the negative effect on our margins of these price
reductions with the expansion of our business with these customers and making
our manufacturing process more efficient. We are currently opening up new
facilities with updated equipment, and updating existing facilities and
manufacturing processes to minimize the cost of producing our products. If we
are unable to offset the effects of these price reductions through the expansion
of our business with these customers and through making our products more
efficiently, or otherwise offset the effects of such price reductions, our
margins will likely be materially adversely affected.
Based on our current level of operations and anticipated cost savings and
operating improvements, we believe that cash flow from operations and available
cash, together with available borrowings under the Amended Credit Agreement,
will be adequate to meet our future liquidity needs for at least the next few
years. As of August 2, 2003, we had approximately $39.0 million in cash and cash
equivalents. It is possible, however, that our business will not generate
sufficient cash flow from operations, that anticipated revenue growth and
operating improvements will not be realized or that future borrowings will not
be available under the Amended Credit Agreement in an amount sufficient to
enable us to service our indebtedness, or to fund our other liquidity needs. In
addition, we may not be able to refinance any of our indebtedness, including the
Amended Credit Agreement or the 10.75% Senior Notes due 2011, on commercially
reasonable terms or at all.
CRITICAL ACCOUNTING POLICIES
Discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires that we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. The significant accounting policies are discussed in Note A of our
annual financial statements. These critical accounting policies are subject to
judgments and uncertainties, which affect the application of these policies. We
base our estimates on historical experience and on various other assumptions
believed to be reasonable under the circumstances. On an on-going basis, we
evaluate estimates. In the event estimates or assumptions prove to be different
from actual results, adjustments are made in subsequent periods to reflect more
current information. The material accounting policies that we believe are most
critical to the understanding of our financial position and results of
operations that require significant management estimates and judgments are
discussed below.
Losses on accounts receivable are based upon their current status,
historical experience and management's evaluation of existing economic
conditions. Significant changes in customer profitability or general economic
conditions may have a significant effect on our allowance for doubtful accounts.
Property, plant and equipment are recorded at cost. Depreciation is computed
principally using the straight-line method based upon estimated useful lives
ranging from 3 to 10 years for machinery and equipment and up to 39 years for
buildings. Amortization of leasehold improvements is provided over the terms of
the various
29
leases. These estimates require assumptions that are believed to be reasonable.
Long-lived assets are tested for impairment annually and when an event occurs
that indicates impairment may exist.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
On November 3, 2002, we adopted Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), Accounting for Goodwill and Other Intangibles, which
requires that goodwill and certain other intangible assets no longer be
amortized to earnings but instead be reviewed periodically for potential
impairment; Statement Financial Accounting Standards No. 144 ("SFAS 144"),
Accounting for the Impairment or Disposal of Long-Lived Assets which addresses
financial accounting and reporting for the impairment or disposal long-lived
assets. The Company determined that the intangible assets had finite lives and
there was no change in the lives, therefore, there is no pro forma disclosure
requirement. Statement of Financial Accounting Standards No. 148 ("SFAS 148"),
Accounting for Stock Based Compensation-Transition and Disclosure, which
addresses financial accounting and reporting for stock-based employee
compensation plans.
The adoption of these standards did not have a material impact on our
financial position or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46
clarifies the applications of Accounting Research Bulletin 51, Consolidated
Financial Statements, for certain entities that do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not have
the characteristics of a controlling financial interest ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. We are currently evaluating the impact, if any, from
this standard on our results of operations and financial position.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149
requires that contracts with comparable characteristics be accounted for
similarly. This Statement is effective for contracts entered into or modified
after June 30, 2003. All provisions of this Statement should be applied
prospectively, except as stated below and for hedging relationships designated
after June 30, 2003. The provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, should continue to be applied in accordance with
their respective effective dates. The adoption of this standard did not have a
material impact on our results of operations and financial position.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. We are currently evaluating the impact, if any,
from this standard on our results of operations and financial position.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE CONTRACTS
At August 2, 2003 we had no material foreign exchange contracts. We do not
enter into foreign exchange contracts for trading or speculative purposes.
SHORT-TERM AND LONG-TERM DEBT
We are exposed to interest rate risk primarily through our borrowing
activities. Our policy has been to utilize United States dollar denominated
borrowings to fund our working capital and investment needs. Short-term debt, if
required, is used to meet working capital requirements, while long-term debt is
generally used to finance long-term investments. There is inherent rollover risk
for borrowings as they mature and are renewed at current market rates. The
extent of this risk is not quantifiable or predictable because of the
variability of future interest rates and our future financing requirements.
On March 11, 2003, we entered into two interest rate swap agreements for an
8-year period ending September 1, 2011. In connection with the Senior Notes, we
exchanged fixed rate interest of 10.75% for variable rate interest. The interest
rate swap agreements have notional amounts of $50.0 million each. The variable
rates are equal to six month LIBOR plus 6.46% and 6.66%, respectively; except
for the initial period from March 11, 2003 to September 1, 2003, which will be
determined via linear interpolation. As of August 2, 2003, we recorded an
increase of $6,910,039 in other accrued expenses to recognize the decrease in
fair value of the swap and a $6,910,039 reduction in the Senior Notes to
recognize the difference between the carrying value and fair value of the
related hedge liability.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, after evaluating
the effectiveness of our controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) of the Securities and Exchange Act of 1934, as amended) as of the
end of the period covered by this report, have concluded that as of such date
the disclosure controls and procedures were adequate and effective in ensuring
that material information relating to Plastipak would be made known to them by
others in the company.
There were no significant changes in internal controls or other factors that
could significantly affect Plastipak's disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in Plastipak's internal controls. As a
result, no corrective actions were required or undertaken.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the fall of 1999, North American Container, Inc. ("NAC") filed suit in
the U.S. District Court for the Northern District of Texas (Civil Action No.
3-99CV1749-D), claiming damages in an unspecified amount against Plastipak and
41 other defendants for the alleged infringement of NAC U.S. Patent No.
5,072,841. On April 4, 2000 this patent reissued as patent RE 36,639, with 14
new claims. Plastipak is spending approximately $75,000 per month to vigorously
defend this suit for the alleged patent infringement of NAC's "plastic
container". The parties have filed summary judgment motions. The Special Master
has made recommendations that, if adopted by the court, would eliminate all but
a small number of bottles from the case. The proceedings have been stayed
pending the judge's ruling on the summary judgment motions. In the event
defendants fail on
31
their summary judgment motion, our cost of defending this action for a
protracted period of time could exceed $1.0 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 and
Securities and Exchange Commission Release 34-46427
31.2 Certification of Principal Financial Officer Pursuant
Section to 302 of the Sarbanes-Oxley Act of 2002 and
Securities and Exchange Commission Release 34-46427
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K
1. On May 20, 2003, Plastipak Holdings, Inc., filed a
Current Report on Form 8-K pursuant to Item 5. Other
Events and Required FD Disclosure concerning Plastipak's
obligation to pay an aggregate $10,000 of special
interest to holders of its Senior Notes trading under
CUSIP No. 72710AA5 pursuant to the Exchange and
Registration Rights Agreement dated September 25, 2002.
Plastipak paid the special interest on June 6, 2003.
2. On August 12, 2003, Plastipak Holdings, Inc., filed a
Current Report on Form 8-K pursuant to Item 5. Other
Events and Required FD Disclosure, regarding a press
release announcing the addition of a new facility
located in Pineville, Louisiana. The new facility
will supply Proctor and Gamble's Fabric and Home Care
Division with containers for their HDL (Heavy Duty
Liquid detergent) business.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLASTIPAK HOLDINGS, INC.
Dated: September 16, 2003 By: /s/ William C. Young
-------------------------------------
William C. Young
President and Chief Executive Officer
By: /s/ Michael J. Plotzke
-------------------------------------
Michael J. Plotzke,
Treasurer and Chief Financial Officer
33
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-31.1 Certification of Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 and Securities
and Exchange Commission Release 34-46427
EX-31.2 Certification of Principal Financial Officer Pursuant
Section to 302 of the Sarbanes-Oxley Act of 2002 and Securities
and Exchange Commission Release 34-46427
EX-32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
EX-32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
34